dYdX: investigation into the 'anti-FTX'

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dYdX: investigation into the 'anti-FTX'

‍In just a few months, dYdX has made its mark on the crypto landscape. As its latest stratospheric figures show, the decentralised platform of American origin has benefited from the fall of FTX and the growing doubts surrounding centralised players. But is this the only explanation? We set out to find out 👀

Four letters: dYdX.

Since the FTX platform collapse, much of the crypto industry is all about this decentralised exchange platform ("DEX" in the jargon), considered one of the new stars of the sector ✨

In fact, dYdX's figures are impressive: In 2022, the platform recorded a trading volume of $466 billion (140% in one year) and recouped $138 million in fees. Not bad, for a project officially launched in 2021.

How do you explain such success? 🤔

The fall of FTX at the end of 2022 has obviously benefited the decentralised platform. "We've had a lot of new users," confirms Charles d'Haussy, the Frenchman at the head of the foundation based in Zug (Switzerland).

But that's obviously not the only explanation; dYdX has also benefited from the fact that, unlike centralised Exchanges, the platform is decentralised and therefore does not directly store its customers' cryptos.

At the origin of dYdX

dYdX was created in 2017 - its network has been available since 2021 - based on a simple principle: crypto traders, especially professionals, have exchange platforms at their disposal, but all of them are centralised.

No platform offers both complex products and the opportunity to hold assets yourself. This is precisely what dYdX offers 🤓

"The great advantage of decentralised finance, more than its decentralisation, is the transparency of exchanges," explains Pablo Veyrat, co-founder of the Angle protocol. "Unlike traditional finance, where you are forced to trust certain players, decentralised platforms allow you to monitor the funds yourself in real time on the blockchain. And dYdX is one of these new tools", he insists.

You are certainly familiar with Uniswap ($620 billion in volume by 2022), which allows cryptos to be exchanged directly between users? dYdX is in some ways its "professional" offshoot. It allows you to place buy or sell orders in anticipation of a future price, while offering leverage effects that can multiply gains or... losses!

In practical terms, it's like using Binance, but in a transparent way.

A token that takes off

The results are in: since the announcement of FTX's bankruptcy, the price of dYdX's governance token, DYDX, has grown quite enormously, even though the markets are not at their best. It has more than tripled and is now worth just over $3.2!

The fact remains that the platform has not yet reached the size of the centralised Exchanges, which have a significant advantage: liquidity. "It's the sinews of war", slips one investor. The more liquid a platform is, the more certain it is that its clients will be able to execute their orders on the terms stipulated and without a price differential 😅

"The success of an exchange is built on the level of its fees, its functionalities, its interface and the range of advanced tools it offers," says Cyril Gerbet, aka CryptOdin, head of consulting firm Genesis Partners. "But its liquidity is really the key. Who would want to trade with a tool with which you're not sure you're going to trade at the price you think you've validated?"

"Orders on large caps (BTC, ETH, AVAX, SOL, MATIC, LINK, ATOM) go through without a hitch," explains DocKov, a member of The Big Whale community who uses dYdX. "On the other hand, it's more complicated for cryptos where volumes are lower. stop-losses or take profits are sometimes cancelled due to a lack of liquidity in the order book", he adds.

"Compared with large centralised platforms such as Bybit or Binance, the user will inevitably be at a disadvantage", adds Cyril Gerbet.

But the protocol is still young and continues to improve. One of dYdX's major challenges will be to attract new users to increase its cash flow. And to achieve this, the platform is banking on particularly low fees 👀

The cheapest DEX on the market

dYdX does not charge commissions below $100,000 in monthly volume. Quite simply, it is the cheapest Exchange on the market for "small" investors.

Note that dYdX is also very competitive for larger investors, i.e. those with volumes in excess of $50 million per month. For them, fees are also non-existent.

Only "intermediate" investors pay fees.


GMX, the great adversary

dYdX's main competitor is GMX. Between them, the two platforms account for around 70% of revenues generated by all "DEX" (Perp, Kwenta, Metavault, Pika, Mycelium, Mux, etc.).

But their strategies are very different.

👉 Firstly on price: GMX is more expensive. The platform offers a fixed fee structure (0.1% to open or close a position + a small borrowing commission that accrues every hour), as well as a commission of between 0.2% and 0.5% if you buy or sell for cash.

Thanks to this approach, GMX generates higher daily revenues than dYdX, but the Exchange also takes the risk of losing market share as it goes along.


👉 Then on community remuneration: on the GMX side, each user who immobilises the GMX token in the protocol receives a share of the fees paid by all traders.

This system largely explains the insolent health of the GMX token (it has also tripled since the FTX crash). These rewards are paid out in ETH if you use the Arbitrum blockchain (a secondary layer of Ethereum) or in AVAX if you use Avalanche.

On the dYdX side, things are different. Trading fees are received in full by dYdX Trading, the US start-up behind the creation of the decentralised platform.

As for dYdX traders, they receive income, in the form of DYDX tokens. These come from the reserves of the dYdX foundation. Each trader is paid in proportion to the fees they spend: the more fees a trader pays, the more they are paid in DYDX tokens. 20% of the dYdX foundation's reserve is set aside for this remuneration 💰

But that's not likely to last very long...

A vote on better revenue sharing in favour of the dYdX community is in the pipeline. But to avoid the risk of being reclassified as an illegal financial security - which is hanging over GMX's head - the community could be leaning towards a "utility role" added to the governance token.

Meanwhile, other issues such as the quantity of dYdX tokens, will continue to drive debate. In December, the number of tokens available on the market will in fact increase sharply.

Why? Because the team, advisers and venture capital funds (Andreessen Horowitz, Paradigm, Hashkey, etc.) invested in the project will be allowed to resell their tokens.

This doesn't necessarily mean that they will (that would be a bad signal for the future), but this deadline could have a significant impact on the price.

Holders of dYdX can count themselves lucky, however: the start of 'vesting', i.e. the period when tokens can be sold freely, was originally scheduled for February and the foundation announced that it had postponed it until December a few weeks ago.


Migration to Cosmos in 2023

While the reason for the delay has not been made public, it is certainly timely, as dYdX is preparing to leave Ethereum, the blockchain on which it was built (and its StarkEx secondary layer solution), for the Cosmos ecosystem.

The migration is scheduled for around September 2023 🗓️

Officially, this "betrayal" of Ethereum (announced in the summer of 2022) is "technical". StarkWare, the Israeli start-up that develops StarkEx (find the interview with its co-founder), would not be able to develop all the tools requested by dYdX.

An example? StarkEx would not be able to keep up with dYdX's growth. Currently, the system processes around 10 transactions per second and 1,000 orders/cancellations per second, and the dYdX teams want to increase the rate.

"The problem with Ethereum and its various secondary layers is that applications like ours have to adapt to their mould," laments Charles d'Haussy, CEO of the dYdX foundation.

"These are great projects, but we needed a blockchain that allows total customisation. That's why we chose Cosmos, where each application can create its optimal blockchain", he insists.

Cosmos provides a development kit and programmers can let their imaginations run wild. In particular, Cosmos serves as the common technological foundation for the blockchains on the centralised exchange platforms of Binance, OKX, Cryptocom, Kucoin and the infamous Terra-Luna (originally a UST algorithmic stablecoin).

On the Ethereum community side, the departure of the nugget is being watched with some bitterness. "It's not very elegant to leave StarkWare in this way, especially as they had still developed a bespoke solution for them," says one project manager. "We can assume that Cosmos paid dYdX handsomely to induce them to choose their technology", he tackles.

A source close to the StarkWare ecosystem provides another explanation: "They need to be able to say that their Exchange is decentralised, yet in its current form, the StarkEx product is not, because the matching of orders is done on a server hosted at dYdX", she points out. "They want to decentralise this part to avoid being caught out by the regulators, but it's a very complicated technical challenge," she continues.

And Cosmos' choice is not without risks. Between now and the actual migration to Cosmos, dYdX will have to be able to ensure the security of its own blockchain itself...

The teams will also have to succeed in encouraging holders of the DYDX token to immobilise them in the future version of the protocol (via staking) and accumulate enough value not to expose themselves to an attack by a malicious actor. Hence the importance of having a close-knit community between now and then! This could explain why the team and the venture capital funds have postponed the launch of their tokens 😏

Because while dYdX is one of the most ambitious projects in the sector, it still has a long way to go. A successful transition will require a great deal of education and the development of economic incentives capable of creating a virtuous circle over the long term. Especially as its competitors (GMX and the future IDEX, which is about to be launched) are not short of ideas either. We'll be talking about it very soon!

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