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DYDX Explained

DYDX explained

Introduction 

DYDX is currently one of the most talked-about decentralized exchanges in the cryptocurrency space. This is because despite the platform’s native token $DYDX being ranked 132nd on the crypto market, DYDX has at times experienced the highest trading volume of any DEX. In fact, from September 27, 2021, to September 28, 2021, DYDX saw $18.6 billion USD in volume, over three times higher than Coinbase at $5.9 billion USD.

The result of this has been consistent with the speculation of a UNI flippening by DYDX and claims by the DYDX community that DYDX is the future of decentralized exchanges.  But is this possible? Can DYDX really be the future of decentralized exchanges? In this analysis piece, we will find out if DYDX lives up to the hype surrounding it. 

DYDX logo

The Founding of DYDX 

DYDX was founded in 2018 by former Coinbase and Uber employee Antonio Juliano. During the 2017 bull run, Juliano set out the seed round for DYDX. During the seed round, DYDX raised a total of $2,000,000 USD, with capital flowing in from Polychain capital, Brain Armstrong, and Andressen Horowitz. 

Juliano decided that he wanted to build a perpetual contract-focused platform on Ethereum. DYDX is built on the Ethereum blockchain (along with many decentralized exchanges). However, something which sets DYDX apart from other decentralized exchanges is its L2 scaling solution through the utilization of StarkWare L2 technology. 

StarkWare / DYDX

StarkWare has collaborated with DYDX. The DEX uses the StarkEx scalability engine, allowing for an L2 solution for the decentralized perpetual contracts exchange. DYDX utilizes the L2 scaling solution in order to reduce the following: 

  • Gas fees
  • Allow for decreased trade size
  • Lower trading fees

All of the above are typically the most prominent issues surrounding decentralized exchanges. Additionally, increasing scalability and speed often results in decreased security. However, StarkWave claims to maintain the current L1 security of Ethereum despite the upgrades provided by the layer-two solution. 

More on StarkWare

DYDX is not the only blockchain-related project to use StarkWare technology. The popular Sorare platform has migrated to Starkware. The migration took place due to current Ethereum scalability and gas issues. 

Figure on Rising gas fees – ETH

Why did DYDX use StarkWare over other L2 solutions? 

There are numerous L2 Ethereum scaling solutions available. Some notable L2 scaling solutions are: 

  • MATIC (Polygon)
  • Loopring (LRC)
  • OMG Network (OMG) 

The primary reason for switching to StarkWare is due to their focus on STARKs. 

STARKs

One of the current major weaknesses of blockchain technology is the vulnerability to potential quantum computational attacks. This has been highlighted for some time with American computer scientist David Chaum founding Elixxir (XX network), the first ‘quantum resistant’ cryptocurrency. 

STARKs are cryptographic proofs that also aim to be quantum secure with computational integrity, ensuring decentralized quantum-proof security. The insurance of computational integrity allows for mass usage of the L2 solution, enabling potential mass adoption. Importantly, STARKs are lightweight meaning that speed has not been compromised, rather it has been increased. Overall, this prevents the blockchain trilemma from rearing its ugly head. 

Figure two – Blockchain trilemma

These STARKs will eventually be rolled out on StarkNet, which aims to be permissionless, censorship-resistant, secure, and decentralized. 

The rollout of these promising STARKs appears to be the primary utlility of Starkware. Other potential reasons for using StarkNet instead of other solutions such as sidechains appear to be:

  • Sidechains require an increased level of trust from validators, subsequently decreasing censorship resistance. 
    • Sidechains run through a separate blockchain to the Ethereum mainnet in parallel. Subsequently, the subsequent blockchain (such as Binance Smart Chain) has its own PoS / BFT. Through running with a sidechain, DYDX would not have the security of Ethereum. Additionally, numerous side chains have not had the same time development period, and are not the primary focus of crucial Ethereum organizations such as the EEA.
      • Sidechain validator nodes have increased centralization in comparison to the majorly decentralized Ethereum. This subsequently results in an increased likelihood of a blockchain attack. Additionally, the decreased computational power of sidechains means an increased likelihood of 51% attacks, further weakening the blockchains’ defense against quantum computational attacks or from that of potentially a nation-state.
  • Private sidechains lack the openness which DYDX aims to facilitate. 
  • Other new L1 blockchains have separate issues away from gas fees. 
    • For example, Solana has extremely impressive speed and low fees. However, it is still within its beta stage, having suffered a 17-hour outage in September. After witnessing extreme translation load, the network suffered an outage. This subsequently resulted in the Solana team effectively `closing` the Solana network as they looked to resolve the issue. Later on, this resulted in questions surrounding the centralization of the project. The outage was a stark reminder that ‘new ETH killers’ are still very much in their infancy. 

DYDX is not the only DEX built on Ethereum. Here is a list of other DEX’s built on the Ethereum blockchain:

  • 1inch
  • Uniswap 
  • SushiSwap
  • Balancer
  • PlasmaSwap

Each of the decentralized exchanges above is built on Ethereum. Each is comparable in numerous aspects and have their own respective cryptocurrencies, as shown below. 

Figure three – DEX native tokens

However, the most decentralized exchange that is comparable to DYDX is Uniswap. They are both built on Ethereum and are not cross-chain compatible. Their tokens UNI / DYDX were both distributed in the form of an airdrop. Finally, they both have similar volumes of approximately $2 billion USD per day. 

DYDX vs Uniswap (v3)

Tokens

Both UNI and DYDX tokens were distributed through an airdrop. In mid-2020, Uniswap conducted an airdrop, distributing their UNI token. The airdrop was consistent, airdropping 400 UNI tokens to each user who had previously traded on the DEX. Upon initial trading, UNI was valued between the $2 – $4 USD mark, approximately a $1,200 USD airdrop from Uniswap. During this period, Uniswap was one of the top decentralized exchanges leveraged by cryptocurrency users across the globe. The favourability of Uniswap over DYDX is clearly depicted when observing the number of global web searches of Uniswap vs DYDX. 

Points scored

Figure four – Interest in Uniswap vs DYDX

Even after being listed on various exchanges, DYDX’s search volume was still less compared to that of Uniswap. From a user perspective, Uniswap is at the forefront of decentralized exchanges. However, the same cannot be said for DYDX. 

In comparison, during the DYDX airdrop / token release, the platform was struggling. In July 2021, it was confirmed that DYDX would be releasing its own native token. During that month, the decentralized exchange had seen its volume decrease by -44.67% and platform users fall by -50.29%. Unlike the Uniswap airdrop, it would not be the same for all users. Rather, users would have an increased airdrop amount dependent on the transaction volume conducted during a set period. With 50% of the cryptocurrencies’ total allocation airdropped to users, some DYDX whales benefitted considerably from the airdrop amounts. Users online were talking about airdrops of over $100,000 USD. However, from analysis, it is now clear to see one of the main reasons for the DYDX airdrop. 

DYDX revived

There are numerous DEXes now available, with many of them built on Ethereum. When DYDX was launched in 2017, the space was not as saturated as it currently is. At the time of writing, CoinGecko recognizes 147 decentralized exchanges. Furthermore, this number does not include various cryptocurrency platforms with decentralized exchange features, such as Step Finance. Since 2017, we have seen the emergence of many new DEXes such as Orca, Mango Markets, Raydium, PancakeSwap, Serum, Balancer, Compound, and more. Many of these DEXes offer the following: 

  • Permissionless platform
    • Cryptocurrency Farms
    • Liquidity Providers
    • Token Listings
  • Improved performance
    • Low cost
    • Ultra-low fees
    • High speed

Without the token offering, DYDX would likely have continued to bleed customers, with a decreasing volume, therefore leading to decreasing total revenue. 

Airdrop

During the build-up to the airdrop, DYDX saw an increase in volume, social activity, and users. However, these metrics were artificial, as shown in the weeks following the airdrops. Upon the DYDX airdrop, DYDX was listed on some of the largest exchanges worldwide including Binance, Crypto.com, Gate.io, AAX, OKEx, FTX, Huobi, Kucoin, and MEXC. 

The airdrop itself was distributed on August 3, 2021. However, trading began on 09/09/21. The token saw an initial hyperbolic rally, with DYDX currently in a gradual decline. From an on-chain perspective, we can see that the same is currently occurring, as shown below. 

  • Users over past 90 days 
    • 2.68K 
      • Down 39.19%
  • Volume over past 90 days 
    • $23.85 billion USD
      • Down 59.04% 
  • Transactions over past 90 days
    • 14.25K
      • Down 30.32%

Will DYDX challenge Uniswap? 

Current trends suggest that DYDX will not reach the heights of Uniswap. Despite having an extremely high volume, this metric alone does not display organic platform growth. Exchanges have liquidity and arbitrage bots, with each exchange seeing varying degrees of interest. The volume metric itself is extremely distorted, as shown with the Coinbase / DYDX comparison made earlier. In terms of users, DYDX does not even come close to Uniswap. In August, 64,000 users received an airdrop from DYDX. In comparison, during the same time period, Uniswap had approximately 2,500,000 users. As shown in the figure below, Uniswap dwarfs DYDX in terms of user base.  

Points scored

Figure five – Uniswap vs DYDX


Uniswap is a decentralized exchange giant. Despite the positive StarkWare solution implemented by DYDX, the platform is currently not a giant killer. Rather, it appears that DYDX popularity may be threatened by the appearance of new decentralized exchanges. One seeming threat is Mango Markets. 

Mango Markets logo

Both DYDX and Mango Markets offer similar products. However, Mango Markets is a part of the rapidly expanding Solana ecosystem. Currently, it has close to zero fees, is permissionless, and is extremely fast. The platform offers up to 5X leverage on the most popular trading pairs such as BTC/USD and ETH/USD, rather than just Solana products. 

Conclusion 

In conclusion, DYDX has the foundations for excellence with its StarkWare implementation. However, with the current permissionless nature of DEXes and demand for increased performance, the position of DYDX in relation to other exchanges in the space may be under threat. 

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