dYdX Chain, as a special case of transformation, announced to the public that Layer 2 and Rollup are not the only solutions to the problem.
dYdX has taken an interesting and unique development path. It started from Layer 1, moved to Layer 2, and eventually built its own chain called dYdX Chain, which is a fully decentralized blockchain. What advantages does an independent blockchain bring to dYdX?
How is dYdX Chain performing in the market?
Recently, dYdX Chain publicly disclosed data showing a total trading volume of $120 billion on its chain, with 20 million USDC allocated to staking users, demonstrating good performance.
dYdX, as a well-established decentralized derivatives trading platform with 7 years of development, initially deployed on the Ethereum mainnet, used third-party DEX, and did not even support perpetual contract trading.
dYdX can be traced back to 2017 when its founder, Antonio Juliano, saw a great opportunity in the cryptocurrency trading and derivatives field and realized that centralized exchanges and hedge funds in traditional financial markets were not suitable for the cryptocurrency world. Therefore, he decided to establish a decentralized trading platform and lending protocol to provide users with a more open, transparent, and secure trading environment.
After continuous research and development, dYdX was officially launched in 2019 and quickly attracted a wide range of users and community attention. At that time, dYdX was one of the largest DEX in terms of trading volume, accounting for about half of all DEX trading volume, which was quite impressive.
However, with the arrival of DeFi Summer in 2020, dYdX faced a dual crisis of market share and financial situation due to the competition with Uniswap and skyrocketing gas costs (dYdX has always borne the gas fees for users). As a result, dYdX decided to leave the Ethereum mainnet and built the familiar dYdX based on Ethereum Layer 2, utilizing Starkware’s scalable engine StarkEx.
With the help of cross-margin functionality and significantly improved scalability, dYdX successfully attracted more traders, and the trading volume increased fivefold, once again becoming one of the most notable projects in the market.
But behind the project’s revival, some issues gradually emerged, especially the fact that it became “less decentralized” (the order book and matching engine on Layer 2 dYdX operated in a centralized manner). dYdX founder Antonio Juliano has been considering how to differentiate dYdX from other centralized exchanges (CEX).
Can dYdX consider its pursuit of complete decentralization as a unique selling point? Among the many reasons for launching its own chain, one core goal that dYdX repeatedly emphasized is to achieve “comprehensive decentralization.” In addition to the need to further enhance data transaction capabilities and expand development environments, dYdX deviated from the trend of Rollup in 2023 and turned to building its own independent Layer 1 chain. In the released dYdX v4 version in October 2023, dYdX Chain officially went online.
Simply put, dYdX Chain is an independent public chain built on Cosmos, and its main selling point is that every part of the protocol is “completely decentralized,” including its consensus mechanism, order book, matching engine, and frontend. For example, the order book previously managed by dYdX Trading is now managed by 60 active validators spread across the world.
Supporters of Ethereum may question how it can be considered decentralized when it departs from the most decentralized Layer 1 network, Ethereum, to launch its own dedicated chain. However, considering that dYdX does not handle all aspects of its product on-chain, Ethereum’s decentralized advantages are not so crucial here. Perhaps Ethereum supporters and dYdX have different definitions of decentralization.
What dYdX is truly seeking is not to leverage a decentralized network to some extent but to handle every aspect of its product in a completely decentralized manner, which inevitably requires launching its own blockchain. This means that achieving execution solely on the most decentralized network does not automatically guarantee the complete decentralization of its product.
By launching its own blockchain, dYdX has successfully managed all aspects of its business, including the order book, in a decentralized manner. The operational entity of dYdX, dYdX Trading, is no longer involved in any business processes on the dYdX blockchain.
The advantages of dYdX Chain lie in three aspects: high throughput, bridging, and customizability. These include:
1. High Throughput:
Each dYdX Chain validator runs an in-memory order book that never reaches consensus (i.e., off-chain). Placing and canceling orders will be propagated through the network, similar to normal blockchain transactions, and the order books stored by each validator will eventually be consistent with each other. Orders will be matched together by the network in real-time and the generated transactions will be submitted to the chain of each block. This allows dYdX Chain to have extremely high order throughput while maintaining decentralization.
2. Bridging:
dYdX Chain will be governed by DYDX token holders and share on-chain trading revenue, which is a significant shift towards decentralized governance. A bridge user interface has been deployed on-chain, allowing anyone to bridge their DYDX tokens from Ethereum to dYdX Chain. By providing a simplified token exchange process, dYdX Chain encourages more ETH DYDX holders to convert their tokens to DYDX, enabling them to better participate in the dYdX ecosystem.
3. Customizability:
Built on Cosmos, dYdX Chain benefits from complete customizability in terms of blockchain functionality and validator tasks. It is an independent blockchain that can be fine-tuned for specific purposes. This allows builders to freely customize various aspects from the underlying protocol to the user interface.
Recently, dYdX also announced its 2024 roadmap, which includes the introduction of fully permissionless markets, allowing the addition and removal of trading pairs through on-chain governance. The goal is to add 500 markets by the end of 2024. Other goals include core trading and user experience upgrades.
dYdX Chain has surpassed the trading volume of dYdX v3 (5-10 billion USD daily) in just 2 months since its launch, and no major issues have occurred. The publicly available data from dYdX continues to accelerate.1. The total trading volume of dYdX Chain has exceeded $120 billion.
2. 14.9% of the DYDX tokens (150 million tokens) have been staked.
3. 75% of eth DYDX has been bridged to DYDX.
4. Over $20 million USDC has been allocated to 18,991 stakers.
5. Community members have initiated 55 governance proposals to date.
These data can be considered as an astonishing performance. From the data, it can be seen that the dYdX independent application chain is gradually realizing its original vision and becoming a super decentralized sustainable exchange. At least, dYdX has determined its ultimate form as an application chain and no longer needs to talk about chain expansion, performance, and other technical stories. It only needs to continue to operate user and transaction volume growth.
As early as the summer of 2021, the dYdX Foundation collaborated with StarkEx to launch the DYDX token, establishing its market position. As the governance token of dYdX, DYDX aims to allow the protocol to be community-driven and autonomously operated, while encouraging active participation from protocol users. Although there has been significant growth after transitioning to Layer 2, the launch of the token was an important step towards “consolidation” of development.
The distribution model of the DYDX token differs from other tokens, particularly in terms of retrospective mining, trading incentives, and liquidity incentives. For example, to maintain fairness to long-term users, dYdX introduced the so-called “retrospective mining” system, which rewards users with tokens who have conducted transactions on the platform in the past. As long as users have made deposits and at least one transaction in the past, they are eligible to receive tokens through retrospective mining. Such measures allow users to trust and support dYdX more firmly, in contrast to the dissatisfaction caused by some projects with users.
As mentioned earlier, the primary goal of the dYdX blockchain is “complete decentralization.” Previously, the governance scope of dYdX was limited, while on the dYdX chain, all aspects of the product will be determined by DYDX token holders. Another significant change is that in the past, all revenue generated by dYdX belonged to dYdX Trading, while on the dYdX chain, these revenues will be distributed to DYDX token holders. This is expected to increase the demand for DYDX tokens, as the development of the protocol will bring more income, leading to higher expected returns, increasing the attractiveness of the asset itself, and ultimately increasing market demand and asset value.
Recently, dYdX will also encourage users to provide liquidity and participate in governance through various incentives. The following are several user incentive methods currently provided by dYdX:
1. Staking Incentives: Earn USDC by staking DYDX. DYDX token holders can stake DYDX with any active validator (currently 60) through Keplr, and all fees on the dYdX Chain (recipient/producer fees) belong to validators and stakers, primarily in USDC. The specific incentive amount varies based on the daily trading situation. As dYdX transaction fees are the source of staking rewards, stakers do not have to worry about inflation of DYDX tokens.
2. Trading Incentives: ChaoIs Labs’ $20 million trading incentive program. This is a 6-month program with a total reward value of $20 million, targeting early adopters of the dYdX Chain. In the first quarter, $5 million worth of DYDX tokens were proposed to be distributed to 2,006 accounts. In the second quarter, Trade League (performance-based rewards) was introduced as a new initiative. Performance is measured by percentage returns, and the best performers of each season will receive a portion of the reward pool, with rewards given to traders after each successful trade on the protocol. Rewards are denominated in DYDX and automatically allocated to eligible dYdX Chain addresses according to blocks, without waiting or manual claiming.
3. Stride Liquidity Staking: DYDX token holders can use Stride to stake their DYDX as collateral and receive stDYDX, allowing them to continue earning staking rewards while maintaining the liquidity of their tokens. This allows users to flexibly earn staking rewards while using these tokens in decentralized financial protocols or immediately exit their positions without waiting for the 30-day unstaking period of dYdX.
It can be seen that staking incentives are currently the main incentive policy, as mentioned earlier, dYdX has already distributed over $20 million USDC to stakers. According to the weekly updated public data from dYdX, these incentive policies have further increased user activity and engagement, helping it to continue stable growth in a volatile market environment and consolidate its position within the competition.
Since 2023, the Layer 2 Rollup trend has swept the industry, with Rollup, Rollup as a Service (RaaS), and Rollup Software Development Kits (SDKs) being seen everywhere. Industry experts often recommend using Rollup to build products.
However, the article has already introduced several stages of dYdX’s product development journey: from launching on the Ethereum mainnet, transitioning to Layer 2, and ultimately launching its own independent blockchain. For dYdX, the project achieved true decentralization only after launching its own chain, which reflects that Layer 2 Rollup is not the only solution.
Some have criticized dYdX’s decision to launch its own chain as the “worst decision.” Although it is still too early to judge its success, we can see that dYdX has continued its excellent reputation developed over many years, gained the trust of a large number of traders on the chain, and continues to optimize its products, with impressive data performance.
In the current context where Rollup is the only solution being discussed, dYdX Chain, as a special transformation case, has declared to other projects that Layer 2 and Rollup are not the only solutions. In fact, the attention of many researchers has been drawn to the powerful narrative of Rollup, but they may overlook the fact that their products may be better suited for execution on an independent Layer 1. Therefore, if dYdX Chain ultimately becomes an outstanding “success case,” it will demonstrate the bright prospects of this path to many other projects.
However, such cases are difficult to replicate. As seen from the introduction of dYdX’s development process, each transformation has faced significant external pressure. Achieving progress through transformation also means giving up some favorable conditions and making necessary compromises after weighing the pros and cons. Therefore, if another project that is closely reliant on the Ethereum ecosystem tries to build its own independent chain, its departure from the Ethereum ecosystem would lead to a loss of significant composability liquidity, which would be tantamount to seeking a dead end for some projects.
The prudent approach is still to continuously optimize through stacking in Layer 1, Layer 2, Layer 3, and other layers. However, don’t forget that there is indeed another option available, with excellent cases to reference.
Related Reports
Why did dYdX choose to launch its own chain?
$500 million DYDX unlock this week on 12/1, is dYdX facing a major sell-off?
Reflections on dYdX price manipulation attack: How should the DeFi world respond?