DYDX Token: Determining the Future of dYdX DEX
The DYDX governance token has been launched by the dYdX Foundation, an organization based in Switzerland. Per the entity’s announcement, DYDX token holders will have voting rights on governance proposals.
The robust and innovative ecosystem of the dYdX protocol allows traders, partners and liquidity providers to come together and make the system more effective. The DYDX token will be a great option for crypto investors, considering ongoing developments widely anticipated to lead to future price appreciation. But first, let's dissect dYdX and look at how the platform works.
What is DYDX DEX?
Similar to popular cryptocurrency exchanges like Bybit, these platforms are used for margin trading with advanced derivatives products like leveraged tokens for more adventurous traders. However, the largest decentralized exchanges like Uniswap and SushiSwap do not offer the same capabilities. This is where dYdX comes in.
dYdX is a decentralized crypto derivatives exchange with a range of margin trading and perpetual options, that operates independently on a Layer 2 ZK-Rollup called Starkware. The exchange platform previously provided basic crypto margin trading capabilities with limited assets but has since implemented perpetual pairs for many cryptocurrencies.
Who Created DYDX?
Software engineer Antonio Juliano founded the dYdX foundation, headquartered in Zug, Switzerland, in 2017. The dYdX Foundation aims to foster decentralized governance and empower traders through transparent and open crypto products. Therefore, the foundation will help push the dYdX Layer 2 protocol toward development, community growth and sustainability.
Council members at the dYdX Foundation include Arthur Cheong, Rebecca Rettig and Markus Spillman. The token’s launch marks the first step in the dYdX Layer 2 protocol’s journey toward decentralization.
How does DYDX DEX work?
Crypto derivatives have traditionally relied on centralized exchanges for margin trading and perpetual contracts. Smart contracts have enabled decentralized liquidity pools among other features across protocols like Curve and Aave. dYdX allows users to open a leveraged trading position by depositing collateral and borrowing from a decentralized liquidity pool funded entirely by other traders.
dYdX is a non-custodial, decentralized margin platform that provides a synthetic exposure to crypto assets. Perpetual contracts are built on top of underlying assets - ERC-20 tokens. As a result, dYdX allows the creation of new asset classes, which derive their value from underlying assets. They offer a wide pool of assets including: BTC, ETH, SOL, AVAX, etc and allow up to 20x leverage on certain trading pairs.
How to use DYDX DEX?
The basic flow for trading on dYdX is straightforward.
- Open dYdX app
- Connect your wallet (MetaMask, Ledger, etc)
- Onboard and verify ownership
- Deposit funds using Vault ID and Stark Key
- Go to trade
- Select order type (Limit, Market, etc)
- Choose leverage, take profit and stop loss
- Open a long or short position
- Track PNL under portfolio
For withdrawals, dYdX supports two types: slow withdrawals and fast withdrawals.
Slow withdrawals must wait for Layer 2 batches to be proved once every few hours before allowing the user to send a Layer 1 Ethereum transaction and claim their funds.
Fast withdrawals are immediate and do not require users to wait as they go through a liquidity provider. A fee must be paid to the liquidity provider and the withdrawal amount is based on available liquidity.
Why Is My Account Blocked on DYDX?
dYdX recently blocked user accounts with tokens linked to Tornado Cash. Tornado cash is a token mixer sanctioned by the United States. This has led to accounts being flagged by dYdX's compliance provider due to potential associates with criminal acts. In a blog post by dYdX, they mentioned that users who think their accounts have been wrongly blocked should contact their compliance team.
What is the DYDX Token?
DYDX is a governance token issued to allow the dYdX community to govern its Layer 2 protocol. The shared control will allow participants, including partners, traders and liquidity providers, to work together and control the enhanced protocol.
The dYdX Foundation has opened a robust ecosystem with the primary focus on driving future growth and improving the scheme of reward, staking and governance. As a result, users will have a better experience throughout the ecosystem. The staking pool will ensure safety and liquidity, while the reward program will help to drive growth and adopt more traders and liquidity providers.
Per the dYdX official website, its foundation has achieved a strong community in the crypto world, with 64,000 unique traders and a cumulative trading volume of more than $670 billion. The platform has joined with StarkWare Industries Ltd. to initiate an improved Layer 2 scalability engine on the dYdX platform. The main aim of the collaboration is to lower trading fees and gas costs, allowing DYDX token holders to receive priority in discounts, voting rights, and trading & mining rewards.
DYDX Governance Token
DYDX token holders can participate in the governance process through the community , and propose changes to the Layer 2 protocol. Here are some of the voting rights of DYDX holders:
- Set Layer 2 protocol’s risk parameters.
- Define the safety staking pool payout in case of a loss.
- Vote on adding a new token listing in the Layer 2 protocol.
- Govern contracts.
- Vote on market makers to add to the liquidity staking pool
A maximum supply of 1 billion DYDX tokens will be handed over in the next five years in different stages, as shown below:
- The dYdX community will receive 50% of the total DXDY supply, particularly traders, stakeholders, liquidity providers and users, based on their completed milestones.
- Previously active users will receive 27.72% of DYDX tokens.
- 15.27% of tokens will be given to dYdX official members, founders, employees and others, proportionate to their involvement.
- The final 7% of the DYDX tokens are reserved for future employees who join the platform.
After 5 years, DYDX holders will be able to increase the token supply through governance. The perpetual inflation rate for the token is fixed at a maximum of 2% per year and new tokens will be released immediately.
Benefits of Holding DYDX
DYDX token holders will receive three benefits, as follows:
Retroactive Mining Reward
The mining reward is for users who trade on the Layer 2 protocol of the dYdX platform, and investors who use this platform for the long run. The reward amount will depend on users’ activity, which is based on several tiers. The retroactive mining reward is now available to claim, as the restriction on initial transfer is over.
The trading reward will encourage cryptocurrency traders to become involved in the dYdX Layer 2 protocol. Any trader under the dYdX Layer 2 protocol is eligible to receive the reward. However, the amount of reward depends on trading activity, volume and other factors. Active traders with more than 10,000 tokens will receive a 15% discount on all trading fees.
Liquidity Provider Rewards
The liquidity provider reward is available to active Ethereum address holders maintaining a minimum 5% maker volume in their previous epoch. Users will receive the reward after 25 days, and this process will remain valid for the next five years. The aim of offering this reward is to boost DYDX liquidity in the long run.
What Are Future DYDX Developments?
dYdX announced that V4 will be developed as a standalone blockchain on the Cosmos SDK. The team intends to transition from the current proof-of-work consensus on Starkware to the Tendermint-based mechanism, which the goal to provide users with a fully decentralized protocol. It will feature a decentralized, off-chain order book and matching engine capable of greatly scaling throughput.
The new chain is developed to suit the needs of the dYdX network. Traders will not need to pay gas fees for trading, but rather pay fees based on trades executed - taker and maker fees, similar to the current V3 platform. Unlike the current token model, V4 was designed such that fees collected on the platform would accrue value and be distributed to validators and stakers.
There is also an on-going proposal to launch a $5.5 million growth fund program to increase user adoption and bring awareness to the platform. The dYdX team plans to release V4 by the end of 2022, which will represent a large and critical improvement to the dYdX protocol. More information about V4 will be released in the future.
DYDX Price Analysis
As of August 2022, DYDX is currently trading at $2.28 with a massive daily market volume of $900 million. Since its launch, the DYDX token has decreased to its low of $1.01 with major cryptocurrencies facing price fluctuations from market volatility, including the entire crypto market facing bearish pressure since January 2022. In the meantime, DYDX is steadily trading between its $2.50 high and $1.80 low through the past month.
Since its launch at around $13–$14, DYDX has seen a massive plunge due to market conditions and supply inflation through trading and liquidity rewards. Taking this into account, the possibility of trading at its current range is highly possible until the release of dYdX V4. One thing which might attract investors to hold their positions is the stacking mechanism offered by the dYdX platform, which permits major investors to buy back and lock their tokens to earn rewards. As a result, success from HODLing is highly likely for this token with future price appreciation.
Despite the current markets, DYDX could be a good option for investment right now, as it’s influenced 62,000 historical users to focus on the decentralized derivatives industry. Overall, its value and volume are among the top few in the DeFi industry.
Is DYDX a Good Investment?
The cryptocurrency market continues to gain mainstream popularity, and global crypto adoption has risen exponentially in the last year. Most of the stability of the DeFi sector has come with the supply of stablecoins on the Ethereum blockchain.
The value of dYdX looks promising, as its decentralized engagement model is competitive. There are very few exchanges that allow perpetual contracts, and dYdX is one of them. Moreover, users can avoid potential risks of centralized exchanges, such as the possible misappropriation of clients’ funds. On the other hand, any transaction through the dYdX platform doesn’t require KYC. Only an Ethereum wallet is required to initiate a transaction, without any authentication steps.
Another beneficial factor for dYdX is its data lending service, which is impressive. The order book model for this platform is more sophisticated than traditional centralized exchanges. Users can find spot trading, margin trading and contract trading with several order types.
Overall, investing in DYDX tokens is an opportunity to benefit from an industry leader in decentralized exchange. Moreover, the platform has managed to capture 90% of the decentralized derivatives volume while user adoption and trading volume are increasing. In 2022, dYdX experienced a record trading volume, with cumulative trading volume peaking at $15 billion, up almost double from its previous high of $9 billion a year ago. Therefore, dYdX has a strong possibility of gaining market share from centralized exchanges.
The Bottom Line
Investment in decentralized finance is a great option for building a fruitful portfolio, but there are some risks that an investor can’t ignore. There are fewer tradable cryptos in the dYdX platform right now with a small centralized risk. While some of dYdX operations are still centralized, the team has plans to address them by building their own chain and focusing on decentralization.
Overall, the DYDX token looks promising for now. However, investors should consider the market’s volatility before investing money. Following any trading method using technical or fundamental indicators would be a smart option for making trading decisions.