Investment Summary
Investment Summary
The futures DEX track will be further developed. With the further improvement of product experience and innovation of product situation, the total transaction data will continue to enlarge, and it is expected to gradually undertake the transaction volume that originally existed in the centralized derivatives exchange in the next few years. As the current The track leader will undoubtedly develop further in terms of data. What needs to be paid attention to is whether other projects can obtain the same amount of transaction volume with a more decentralized product structure and operation method.
dYdX carries the expectation of the explosive growth of futures DEX and even the entire derivatives decentralized trading market. During its first transaction mining cycle in August, traders who mined generated $9.8 billion in transaction volume.
From the perspective of transaction organization, it adopts an order book system, with professional market makers making the market, and LPs providing part of the market-making funds.
The dYdX product experience is good. It adopts the transaction engine StarkEx developed by Starkware, the second-layer network project of Ethereum, which realizes the self-custody of decentralized assets (users transfer funds from the wallet to the smart contract for custody), and realizes low Gas and High transaction speed.
dYdX attracted a large amount of liquidity by introducing multiple liquidity providers as investors in its C round of financing, designing transaction mining and liquidity provider reward rules, and quickly created a large number of transactions after the transaction was officially launched The trading volume in a week reaches billions of dollars, and the average daily trading volume is more than 300 million US dollars. However, during the six months between the launch of the testnet in February and the removal of whitelist restrictions, and the start of transaction mining in early August, although its products are consistent with the dYdX experience after the start of transaction mining, the daily transaction volume is only at the level of tens of millions of dollars.
The underlying technical architecture of dYdX is decentralized, and its operating model is closer to that of a centralized exchange than other DEXs. It can be expected that if dYdX wants to become a long-term leader in decentralized derivatives DEX, after a wave of rapid growth in data, dYdX needs to move towards a more decentralized operation and product model - change the entire model, not just the company Power of the entity transferred to the Foundation. Obviously, the realization of decentralization should not rely on the deep binding between the project party and the liquidity market maker.
Since the capital and the team currently have the largest number of voting tokens (the capital accounts for 27.7% of the total tokens and 15% of the teams tokens are locked but can vote), the team and the capital can basically decide the projects decision at the current stage. Direction of development. The dYdX project partys plan for 2022 is to continue to decentralize the project, and its specific plan can be closely watched.
The ownership of dYdX’s transaction fees has not yet been clarified. The information on the official website indicates that this part is owned by the project party. Its token dYdX may not capture this part of the value, but this problem may be resolved through community proposals.
Project Description
Basic profile
Project Description
Basic Information
Basic Information
team
team
Since its establishment, dYdX has received a large amount of funding and support from famous capital, because its team is largely based on the entrepreneurial background of former employees of well-known companies such as Coinbase. According to LinkedIn, the current dYdX team has at least 23 people, 8 of whom are software engineers.
Antonio Juliano, the founder of dYdX, graduated from Princeton University in 2015 with a major in computer science and a Bachelor of Science degree. Before graduation, he practiced at MongoDB. After graduation, his first job was as a software engineer at Coinbase. After working for one year, he joined Uber to continue his work as a software engineer , In 2017, he founded a search component in a decentralized network called Weipoint, and in August 2017, he founded dYdX.
Brendan Chou, software engineer and designer, the founders classmate in Princeton, graduated from Princeton in 2015, Bachelor of Science, professional computing, first job as a software engineer at Bloomberg (Bloomberg), and later worked as an engineer at Google, in early 2018 Join dYdX so far.
Achal Srinivasan, a product designer, graduated from Rice University in 2020 with a major in computer science. He worked as an intern at Coinbase and then worked as a freelancer (design engineer) for several years. He joined dYdX in 2020.
Vijay Chetty, director of business development, graduated from Princeton University, majoring in economics, worked as an analyst and investment assistant at Hanergy Group and Blackstone Investment from 2010 to 2015, and engaged in business development/corporate cooperation at Ripple from 2015 to 2018 Work and join dYdX in 2020.
funds
funds
image description
Table 2-1 dYdX financing situation
A total of US$87 million was raised in four rounds of financing, and the investment list includes Paradigm, Polychain Capital, Andreessen Horowitz (A16Z), Three Arrows Capital and other well-known institutions in the industry, as well as Wintermute, one of the largest liquidity providers on dYdX, etc. Each round has the support of well-known investors in the industry, with a strong lineup of investors and sufficient funds for project development. According to its token allocation plan, 27.73% of the tokens, that is, 277 million tokens are owned by investors, with an average valuation of about 300 million US dollars. The average cost of dYdX for investors is 0.31 US dollars. Considering the difference in valuation between previous and subsequent rounds , the cost of the last round of $65 million investment could be higher than $0.31. Part of the market attention that dYdX has received comes from its strong capital background, and at the same time, this is also part of its current leading position on the track.
image description
the code
Figure 2-1 Code submission volume of dYdX from May 2017 to the end of August 2021
image description
Figure 2-2 The number of code contributors of dYdX from May 2017 to the end of August 2021
product
product
dYdX currently has five products: perpetual contracts, margin trading, leveraged trading, spot trading, and lending.
Among them, the V2 version of the perpetual contract is a new product built on the second-layer network. The three products of margin trading, leveraged trading, spot trading and lending are the three products described in the white paper, and they are built on Layer 1, which is the main network of Ethereum.
image description
Figure 2-3 ETH perpetual contract trading interface on dYdX test network
As shown in Figure 2-3, the perpetual contract interface of dYdX has most of the functions of the centralized contract interface. The details of its perpetual contract products are as follows:
Leverage ratio: dYdX perpetual contract products provide up to 25 times the long-short transaction function, and the minimum leverage ratio change is 0.01.
Order book/AMM: From the perspective of transaction settlement form, dYdX perpetual contract is in the form of order book, and liquidity is provided by market makers (Note: the same is true for other dYdX products, so I won’t repeat them here). From the product interface, it has a market interface similar to that of centralized futures exchanges, which can display red and green price candle charts, but the minimum time unit displayed is hours, that is, 15 minutes/1 minute and time-sharing trading prices cannot be provided yet.
image description
Figure 2-4 Left: Limit order function of perpetual contract trading, Right: Stop loss function of perpetual contract trading
Positions: It can display the number of positions, leverage ratio, realized profit and loss, unrealized profit and loss, forced liquidation price and other data on the product interface.
Margin: For BTC and ETH trading pairs, the maximum leverage is 25 times, so the initial margin requirement is 4%, and the maintenance margin requirement is 3%. Other trading pairs have different margin requirements according to their maximum leverage ratio.
Liquidation Price/Liquidation Price: The mark price used for liquidation is the index price fed by Chainlinks Layer 2 price.
Deposit/withdrawal: The upper left corner of Figure 2-3 shows the account balance (Account), and there are two buttons for deposit (Deposit) and withdrawal (Withdraw). Since the product is built on the second-tier network StarkWare, dYdX perpetual contract products To trade, you need to deposit funds and trade within the balance range. After closing the position, the funds will return to the dYdX account, and you need to withdraw them to return to the traders Ethereum wallet.
Mobile dapp version: dYdX has implemented the mobile dapp version, which can use the mobile wallet to log in and trade, and the interface basically has the functions of the computer web page.
Funding rate (1-hour rate): Like other perpetual contracts, dYdX perpetual contract products have a funding fee design, charged every 8 hours, but the funding rate is expressed as a 1-hour rate, every 8 hours The 1-hour rate is charged once (do not multiply the 1-hour rate by 8), and the specific calculation method of the funding rate is:
Funding Fee (Premium) = (Max (0, Bid Impact Impact Bit Price-Index Price)-Max (0, Index Price-Ask Price Impact Impact Ask Price))/Index Price
Transaction fees: Maker (order maker) and Taker (order taker) fees on dYdX are different, and the fee rate decreases as the transaction volume increases. Makers fee rate ranges from 0.05% to 0, and the fee rate is 0 after the transaction volume reaches 10,000,000 US dollars ; Taker fees range from 0.2% to 0.05%, and 0.05% after the transaction volume reaches $200,000,000.
Gas fee: Since it runs on the two-layer network Starkware, the transaction does not need to pay Gas fee, but it needs to pay Gas during the deposit/withdrawal process.
margin trading
margin trading
image description
Figure 2-7 dYdX margin trading interface
Note that all steps occur in a transaction set (Bundle), that is to say, either the above processes succeed together or fail together. Therefore, there will be no situation where the margin is locked or transferred but the position cannot be opened.
image description
Figure 2-8 Spot Trading Market Interface
image description
borrow money
Figure 2-9 Loan market interface
Lending is one of the earliest products/functions implemented by dYdX. It was launched in 2019, so that for a long time, the outside world even included it in the loan track project.
The product details are as follows:
dYdX lending uses the lending pool model, which is the peer-to-pool model, and both lenders and borrowers interact with the lending pool. Each asset has a lending pool, all managed by smart contracts. When a user deposits an asset on dYdX, the asset is deposited into its corresponding lending pool, from which borrowers can borrow the same asset. Borrowers and lenders on dYdX can deposit and withdraw assets at any time.
Perpetual contracts
technology
Perpetual contracts
Since the Ethereum mainnet cannot meet the requirements of high performance and low Gas fees, the decentralized futures products on Ethereum are basically launched with a standard second-tier network. Currently, dYdX chooses StarkWare on the second-tier.
Starkware is one of several layer-2 network projects with strong competitiveness. The differences between each layer-2 network solution can be roughly divided into the differences in transaction and data storage methods and state transition synchronization methods. There are two ways of transaction and data storage. Simply put, it is whether transaction data should be uploaded to the chain or not. Starkware actually has both (StarkNet and StarkEx belong to these two types respectively), and the StarkEx product used by dYdX uses data The scheme that does not go to the chain; the state transition synchronization method is divided into two types: fraud proof and validity proof. The common solution of the project is to adopt zero-knowledge proof. Starkware uses validity proof-this data not on-chain + validity proof scheme is called Validium (different from the data on-chain Rollup scheme, such as Arbitrum, another well-known project).
Validium enables users to self-custody funds, that is, funds are escrowed, but not in a centralized institution, but in a decentralized StarkEx, which is called decentralized self-custody. The custody process is as follows: the user transfers the currency from the wallet to StarkEx, which is actually transferred to a smart contract (Stark Contract). After the StarkEx contract accepts funds, it can be used on the second layer (off-chain). Transactions on dYdX use funds off-chain, and users do not need to re-sign, which improves the dYdX transaction experience.
If the user wants to transfer funds out of the contract, each transfer needs to be authorized, a request is sent off-chain, and then the request is sent on-chain.
Since the user needs to sign for each transfer, the users funds are relatively safe.
dYdX is not only built on the second-tier network, but uses StarkEx developed by the Starkware project party as the transaction engine for V2 perpetual contract products.
StarkEx: A scalability engine consisting of multiple components.
Components: including StarkEx Service (Stark transaction service), SHARP, Stark Verifier (Stark verifier) and Stark Contract (Stark contract), etc.
image description
Figure 2-6 Schematic diagram of StarkEx components and processes
Principle: First, dApp defines its own business logic (such as dYdXs perpetual contract logic) and runs it on StarkEx Service. After the user sends an interactive command, StarkEx Service packages the users transaction and sends the package to the SHARP component; SHARP is responsible for generating a certificate, and then sends the certificate to Stark Verifier for verification; if the Stark verifier verifies that the certificate is valid, Then the Stark validator sends a status update transaction to the chain (Ethereum main network) to the Stark contract.
Oracle machine performance: Since dYdX needs to use index prices in the calculation of funding rates and liquidation prices, it needs an oracle machine to feed prices. Prices on StarkWare are fed by the oracle Chainlink on the second layer, verified using STARK-compatible signatures, allowing prices to be used immediately after signing, rather than waiting for a transaction block on the first layer. This significantly reduces the latency of oracle price updates, from a few minutes on the Ethereum L1 chain to fractions of a second on StarkEx.
Through the above components, dYdX V2 realizes the advantages of decentralized order book-style perpetual contracts, decentralized asset custody, smooth transactions, and no need for multiple signatures in transactions.
Limit order (implementation method): The limit order is signed by the user to authorize dYdX to match on the Stark Service, so this process is off-chain, and its security is also determined by the StarkEx engine.
Margin trading, spot trading, lending
These three products essentially adopt the following spot leveraged trading logic, and these products are also classified into the leveraged trading category on the dYdX homepage.
Leveraged transaction logic: A trader borrows an asset, then trades (buys/sells) it into another asset, and starts accruing interest at the same time, which is opening a position. When the position is closed, the position is sold and the borrowed asset is returned to the lender (creditor) together with the interest. Short selling (shorting with leverage) and long with leverage are the above processes.
Since dYdX is an order book transaction, it does not need to obtain external off-market prices or index prices. As long as there is a corresponding order, it can be traded without an oracle machine for quotation.
dYdX margin trading is implemented by three contracts, namely: Margin Contract, Agency Contract and Vault Contract.
Proxy contract (Proxy): used to transfer user funds.
Margin contract: Provides the function of using margin trading.
Vault: Lock funds/tokens in positions.
The above three contracts cooperate with each other to realize the margin transaction formed by borrowing/returning + buying and selling spot.
In this process, there are 3 participating roles:
Traders: those who use dYdX for margin trading;
Lender: a person who lends tokens to traders;
Buyer: After the trader borrows the currency and conducts the transaction, the counterparty of the transaction.
The process of opening a position is as follows:
The three protocols help traders issue instructions to borrow the required currency from the lender, and then trade on the exchange (such as 0x) to obtain the currency that the trader wants, such as borrowing ETH from A to sell, and then get the corresponding USDC— —Then the margin and the sold coins will be transferred to the vault and locked by the agency agreement to become a position.
The liquidation process is roughly similar, that is, the trader sends an instruction—the agency agreement helps to sell the position in exchange for the tokens that need to be returned—and returns the tokens together with the interest to the lender’s address.
Spot trading and lending trading products are also implemented using some of the technologies in the above three contracts.
dYdXs margin trading is actually a spot leveraged trade, which is also a form of realization of a futures contract. It is a form of realizing futures contracts with high hopes, but in the end, the amount of data has been too small to explode. The reason is that this model requires enough LPs to be willing to lend large amounts of coins or funds to traders, which affects liquidity. The requirements are extremely high, and it is very difficult to guide liquidity. The current perpetual contract is actually a kind of Swap. The counterparty plays the role of the counterparty and holds the counterpartys position in order to earn funding fees (the funding rate is much higher than the lending rate), which makes liquidity especially The demand for specific currencies is greatly reduced, and the difficulty of guiding liquidity is greatly reduced.
image description
develop
history
status quo
status quo
Transaction mining (transaction rewards)
From August 3rd, dYdX entered the first round of transaction mining, and it will end on August 31st. Since rewards are distributed based on transaction fees + holdings, a large number of liquidity providers and individual investors have been involved in transaction mining. After the end of the first Epoch, the data disclosed by the project party shows that,
Liquidity provider mining (market maker rewards)
While dYdX introduced a large number of professional market makers and conducted transaction mining, it also carried out liquidity provider mining. The time and cycle (Epoch) settings were the same as transaction mining, and the reward for each Epoch was 1.15 million.
dYdX also has Liquidity Provider Reward and Liquidity Staked Mining. Liquid Provider Reward refers to the rewards for market makers. The reward threshold is required by a single market maker. Achieving more than 5% of all market maker volume, incentive criteria include uptime, two-sided depth, bid-ask spreads, and number of trading pairs supported, among others. In the first Epoch, a total of 5 market makers reached the threshold, and 1.15 million DYDX were allocated according to a formula.
image description
Figure 3-1 Liquidity staking page, the amount of staking has been stable at around 120 million USD in the past two weeks
This part of the total distribution of tokens is 25 million, about one-third of the liquidity mining, and each Epoch is 380,000.
The rule is that LP (Liquid Provider, liquidity provider) pledges USDC to the liquidity pool of dYdX to obtain DYDX token rewards; this part of the pledged USDC is lent by a professional market maker (Maker) approved by the project party , used for market making on dYdX, is a supplement to liquidity besides market makers.
If the market maker suffers a capital loss when using this part of USDC for market making and cannot repay the loan (the market maker cannot lend more USDC at this time), the liquidity pool (that is, all LP funds) needs to bear the loss together.
At present, the pledged funds are 124 million US dollars. Calculated on the basis of one Epoch every 28 days and 13 Epochs per year, the annual liquidity mining reward is about 4.94 million DYDX. If calculated based on the current Epoch mining cost of about $2.26, the annualized The rate of return (APY) is about 9%. If calculated based on the DYDX price of $5, the APY is about 20%, which is far lower than the 100% or even higher annualization rate common to other DeFi. Possibility of liquidity support for stakeholders.
dYdX also has an insurance fund pool for staking mining, but it has not yet been launched.
V2 Operational Data
According to the data disclosed by the project party, the first Epoch, from August 3 to August 31, totaled 28 days, with a total transaction volume of 9.8 billion US dollars. The average trading volume in a single day was 350 million US dollars, and the highest peak occurred on August 30.
image description
Figure 3-2 The 24-hour transaction and position data of dYdX on September 6 displayed by Coingecko
This phenomenon is closely related to its transaction mining rules: Since the rewards distributed by each Epoch are 3.8 million DYDX tokens, and two or three days before the end of each Epoch, the average transaction mining cost of the Epoch is relatively determined ( For example, the final cost of the first Epoch is about $2.26), so if the market’s expected cost is less than the market price (such as the first Epoch, reflecting the market’s bet that the secondary market price of DYDX will be higher than $2.26), such as a certain round If the price of DYDX tokens is 4 dollars and the transaction mining cost is about 3 dollars, traders can easily obtain DYDX token rewards in the way of flush volume. The early stage of an Epoch decreased significantly (compared to the end of the last Epoch), and the transaction volume increased rapidly near the end of the Epoch. The transaction volume at the end of the Epoch and the total transaction volume of a single Epoch are related to the DYDX market price - the total mined DYDX at the end of the current period The mining cost is closer to the DYDX market price (but the price change caused by the selling pressure may be included in the long-term game, that is, if the secondary market price is $10, the mining cost is only close to $7 or $8).
image description
Figure 3-1 The total trading volume chart officially provided by dYdX, as of September 6, of which the trading volume on September 5 was 245 million US dollars
image description
Figure 3-2 The official weekly trading volume chart provided by dYdX
In the four weeks after August 3rd, the number of wallets actually deposited into wallets (the number of quality wallet interactions) increased from 26,000 to 36,000, especially in the first week of August, when more than 7,000 wallets interacted. The impact of transaction mining and retroactive airdrops is explained.
image description
Figure 3-3 Chart of weekly deposit wallets and cumulative deposit wallets officially provided by dYdX
As shown in Figure 3-4, starting from August 3, dYdX’s single-week income exceeded 1 million US dollars, and the four-week revenues were 1.2 million, 1.8 million, 1.7 million US dollars and 2.9 million US dollars, and 5.1 million in the last week of the first Epoch. Dollar. (This part cannot be captured by dYdX, it is owned by the company behind dYdX)
image description
transaction mining
future
transaction mining
dYdX has set up a total of 60 Epochs mining activities, which will last for 5 years.
After the end of the first Epoch at the end of August, 59 cycles will continue. This activity will continue to provide dYdX with transaction volume and fee income at least in the initial stage. The subsequent support for transaction volume and fee will depend on the currency Prices, quotations and the natural growth of the decentralized derivatives market, especially the perpetual contract market.
The latest data is: after the end of the first Epoch on August 30, the data shows that the transaction volume in the fourth week was 10 billion US dollars, and the average daily transaction volume was 700 million US dollars. According to different data website sources, August 29-30 The trading volume of dYdX may exceed US$1 billion or even US$2 billion. But the data on the last day is of little significance, it can only show the popularity (fanaticism) of the first round of “trading mining” activities.
The total transaction fee of its first Epoch is about 8.6 million US dollars (the actual total transaction amount is 11.6 million US dollars, and the team judges 80 addresses as wash transactions, that is, the wash volume, which is 8.6 million US dollars after excluding this part of the transaction volume). The number of DYDX reward tokens issued is 3.8 million, and the acquisition cost of DYDX tokens is $2.26.
image description
text
Summary: Transaction mining was first launched by the former domestic exchange Fcoin in 2018 and became popular (even if it was not the first launch, Fcoin was also the first project that made transaction mining popular and involved a lot of money)
The format itself has proven to be a good channel for liquidity.
Taking Fcoin as an example, after the launch of Fcoins transaction mining, the exchange became the worlds largest exchange in a very short period of time, surpassing Coinbase and the Big Three in China at that time.
However, because Fcoin does not set a cap for each short-term mining reward (only a hard cap for total mining rewards is set), but adopts the rule setting of transaction fees are returned in platform currency in a fixed proportion, As a result, the greater the transaction volume, the more platform tokens will be returned. The platform tokens are under extreme selling pressure, the model is unsustainable and collapses, and Fcoin itself also fails.
There are several differences in the setting of dYdX’s transaction mining rules: 1) dYdX itself is the leader of the track, which gathers the expectations of the entire track and the capital voting of multiple top investors, and the project itself has strong expectations; 2) Its financing amount has reached 87 million US dollars and the average token cost (DYDX acquisition cost) is about 0.3 US dollars, and it needs to be released linearly 18 months after the token goes online. A large number of users go to trade to obtain DYDX tokens. The mining cost of this flushing amount is only 2.26 US dollars (calculated based on the total fee), and the acquisition cost is not high, and it can be collected and traded on September 8, which is equivalent to a first generation similar to IXO. Token issuance activity - this is the essence of this round of transaction mining on dYdX. Before the official launch of DYDX, the tokens issued for the first time will be obtained by entering the market and paying handling fees. The average price of US$2.26 paid by the market is similar to an auction pricing, which reflects the expectations of investors for the price of DYDX under the condition of taking certain risks. The market has entered a highly liquid secondary market, and investors who trade mining expect that they will receive a certain liquidity premium. 3) Since the tokens of real investment institutions, teams and consultants will be locked for 18 months, the amount of initially released tokens is mainly the community part that is not locked, which is actually airdrop + transaction mining (see 4 Economic Model content), so the selling pressure is not large (the first phase is up to 75 million airdrops + 3.8 million transaction mining + 1 million liquidity provider rewards, about 80 million, according to the project side It was disclosed that only 8.11% of the tokens were in circulation on September 8, which is 81.1 million pieces), and the circulating market value was only 240 million US dollars based on 3 US dollars, and 810 million US dollars based on 1 billion US dollars.
Also because the first transaction mining has a strong ICO nature, its 24-hour transaction volume of 2 billion U.S. dollars and 14-day transaction volume of 10 billion U.S. dollars can only reflect the strong confidence of the primary market and its liquidity. The strong ability to guide, but it cannot represent its real huge transaction volume.
However, the subsequent 59 periods of transaction mining, continuous liquidity rewards, token unlocking, and market changes will always make the transaction volume and transaction mining shift from the support of volume brushers and Makers to the support of real traders. The real appeal of this process to individual traders and institutional traders will gradually be reflected.
For exchanges with poor fundamentals, transaction mining is a game similar to capital markets. For dYdX, which has good product, capital, and liquidity provider support, it is an investment + strong publicity + strong attraction of liquidity Sexual activities are also a strong subsidy for the market during the market growth period.
This rule itself is worthy of affirmation, but its future data development needs to be closely watched because of the madness of this round of transaction mining.
In addition, in the currently operating DEX, the projects that have carried out transaction mining also include dFuture, ZKSwap and other projects, but there is no phenomenon that the average daily transaction volume has soared from 300 million US dollars to 2 billion US dollars within two weeks.
supply
economic model
supply
DYDX is the token of the dYdX project. It is not yet online, and it can be collected and circulated on September 8.
dYdX announced the launch of the governance token DYDX on the evening of August 3, 2021, Beijing time, although the team has previously claimed that there is no plan to issue coins.
The total amount of DYDX is 1 billion, and DYDX will be distributed within 5 years. After 5 years, an annual inflation of up to 2% will be initiated through the governance mechanism. The implementation of inflation must be carried out through governance proposals. Starting from July 14, 2026, community governance can determine the DYDX minting cap and the annual maximum inflation rate.
The team stated in the document that although the token distribution rules are certain, DYDX holders can modify the rules through the community governance mechanism (proposal-voting).
image description
Table 4-1 DYDX distribution ratio
DYDX has locked the tokens that will be allocated to investors, existing teams and future employees, and consultants, and will unlock them according to the schedule, see Table 1-2 for details. But during the lock-up period, the above-mentioned currency holders can use the locked tokens to make proposals, entrust voting or voting.
image description
Table 4-2 dYdX investor and team unlock schedule
DYDX tokens will begin to circulate on September 8, 2021 after the end of Epoch 0. The token supply within 5 years is shown in Figure 1-3.
image description
Figure 4-1 Schematic diagram of the circulation of DYDX within 5 years
Although the non-reward part of the community is not locked, according to the data of only 8.11% in circulation on September 8 and the usage rules displayed on the official website, the 50 million coins in the community treasury will not enter circulation immediately.
According to the disclosure of the project party in early September, the total amount of retroactive airdrops is 75 million. In fact, only 55 million have been qualified to receive (20,000 addresses), and the other 20 million have not been qualified to receive (have not been claimed). This part will be included in Community vault.
need
need
After DYDX goes online, the main project needs come from transaction fee discounts and community governance voting.
Transaction fee discount
image description
Figure 4-2 Fee discount rules, traders who hold more than 100 DYDX can get a 3%-50% fee discount
transaction fee income
Currently, the protocol income is owned by the dYdX project company, and DYDX token holders cannot obtain this part of the income. In the future, this part of the rules can be modified through community governance.
Community Governance Vote
overview
compete
industry
overview
dYdX belongs to the futures exchange (futures DEX) in the Defi-derivatives track, and belongs to the order book futures DEX. Currently, the order book projects in decentralized futures exchanges include dYdX, DerivaDEX (not listed), Injective Protocol (not listed), Vega Protocol (not listed), etc. AMM-style futures DEXs include Perpetual Protocol, McDEX (just launched on August 31), dFuture, and more.
status quo
status quo
image description
Figure 5-1 2019Q4-2020Q4 futures trading volume in the whole market, source: TokenInsight
However, the main trading volume of cryptocurrency futures is currently still in centralized futures exchanges, mainly including Binance, FTX, Bybit, BitMex, OKEx, etc. The latter two used to be the main battlefield of futures trading, but with the outbreak of regulatory issues , and the huge growth achieved by the former two in 2020, the situation has changed, but the above-mentioned and other centralized exchanges still account for more than 90% of futures trading.
However, there is a clear trend: in the next few years, traders will continue to migrate from centralized exchanges with centralized risks to decentralized exchanges. The continuous improvement of the product experience to be improved and the wealth effect (surge) drive of various targets, or the combined use drive of the Defi protocol (such as the need to put the currency in the wallet for Staking or wait for airdrops), and the event drive of the centralized exchange ( security, regulation, etc.).
At the same time, the variety of perpetual contracts was pioneered by the cryptocurrency exchange Bitmex in the cryptocurrency market. Although this form exists in a small amount in the traditional financial world, it is not a mainstream trading variety. In the cryptocurrency market, perpetual contracts Contracts are one of the mainstream trading varieties.
At present, there have been several seed players in the decentralized futures exchange track, but they have not yet developed on a large scale (large-scale development refers to the daily trading volume of the entire track breaking through 1 billion US dollars and continuing to grow at a relatively rapid rate ), currently the project with the largest trading volume is dYdX, whose daily trading volume in the last two weeks of August was about 700 million US dollars, but it is currently in the transaction mining period (refer to the previous Transaction Mining section), and needs to wait for the transaction mining The frenzied period of high-profit mining does not have reference value until its data volume is stable.
However, it is obvious that the popularity of dYdX trading mining has played a role in guiding liquidity and attracting the attention of the industry, and it can also enhance the trust of real professional traders in the security of decentralized derivatives exchanges.
The development of decentralized futures exchanges can refer to the development process of spot DEX, such as Uniswap, Sushiswap, Bancor and other exchanges.
image description
Figure 5-2 DEX trading volume chart, showing the changes in trading volume from January 2019 to the present, it is very obvious that it has exploded since May 2020
It can be seen that the decentralized contract exchange still has great potential for development, and it is possible to develop from the current daily trading volume of the entire track at the level of hundreds of millions of dollars to the level of tens of billions of dollars per day (that is, to 3.6 trillion U.S. dollars in transactions per year) Volume), reaching a certain proportion (such as 10%-20%) close to the trading volume of the central futures exchange.
Competitive product overview
Perpetual Protocol
Perpetual Protocol is an AMM-type futures DEX that provides perpetual contract products. It continues to develop the vAMM pricing method in the form of AMM. In the V1 version, Perp separates pricing and settlement, and removes market makers (that is, in AMM). Liquidity provider, LP) role, realized a simple market structure with only two parties playing games between long and short sides. As of August 25, the average daily trading volume within 7 days was 110 million US dollars. Track second.
In the V2 version announced at the end of June, Perp will be coupled with Uniswap V3. Perp V2 will be directly set up on Uniswap V3, introduce the role of Maker (market maker), and use the Uniswap V3-style aggregated liquidity method to make the market. The default market-making strategy lowers the market-making threshold for ordinary LPs. In addition, V2 will implement the permission-free market creation mechanism, which is the classic free currency listing mechanism of Uniswap. At the same time, Perp set up the V2 version on the second-tier network Arbitrum.
Compare items
core business logic
dYdX: Adopt Starkware’s StarkEx engine matching and on-chain settlement methods to realize asset self-custody. The transaction organization method is point-to-point matching, mainly by professional market makers to provide liquidity. The use of StarkEx trading engine can realize decentralization Asset self-custody (that is, deposit/recharge on the second-tier network StarkWare). According to the official introduction of StarkWare and dYdX, its self-hosting security is good. This business logic is close to that of a centralized exchange, and it implements a decentralized version similar to a centralized point-to-point transaction in a technical way.
One thing that needs to be mentioned in particular is that the entity behind dYdX is a company, and its business model is similar to that of Binance: they make profits by charging transaction fees, that is, the transaction fees paid by traders in the transaction (excluding the perpetual contract) Funding fees) may be owned by corporate entities and may not be distributed in the community. (Usually the protocol only gets part of the fee, and part of the fee will be allocated to the token holders community).
Perp: The V2 version is traded through the vAMM coupled with Uniswap V3, and LPs provide liquidity to conduct aggregated liquidity market-making similar to Uniswap V3, and since the default market-making strategy (connected to other protocols) will be introduced, it is expected that most LPs will Passive market making will be maintained, and a small number of large-scale LPs will be large-scale market makers, and their type is still active market-making AMM futures DEX. At the end of August, Perp announced that it will organize free market creation in the community in the form of DAO (in short, it is the coin listing of trading pairs). Since Uniswap is used as the basis for erection, Perp V2 is on Arbitrum.
image description
Table 5-1 Comparison of the second-layer/side chain schemes used by the two versions of dYdX and Perp
It can be seen from Table 5-1 that StarkEx adopts zero-knowledge proof in the validity proof link, which only needs to be calculated and does not depend on the goodwill of the majority. The problem is that it may require a large amount of computing resources; there is a small Probabilistic evil problem; Arbitrums fraud proof is considered to be an incentive mechanism that can effectively avoid the evil problem. From this comparison, the security of funds in Perp V1 is slightly weaker.
The security of StarkEx and Arbitrum are both very safe in terms of settings, but they cannot be said to be very safe. They need to continue to accept the test of the market and time to see whether they can perform safely in the long run and withstand various attacks. And extreme market conditions can prevent failures and accidents.
dYdX is equivalent to a centralized exchange that realizes self-custody of assets, avoiding centralized risks such as exchanges running away, exchanges using user assets to manipulate the market, and exchange assets misappropriating after funds are transferred to Cex. At the same time, its concept is based on StarkEx High-performance and high-quality products to simulate a centralized trading experience, and currently the main focus is on top varieties such as BTC, ETH, etc. Therefore, there is no open and free market creation, and the market is mainly made by professional market makers. Its founders also stated that what they hope to compete for is exactly what centralized exchanges such as Binance and FTX compete for customers, especially professional customers (usually referring to high-volume professional traders and institutional traders).
From the perspective of trading varieties and trading concept positioning, Perp points more to long-tail currency transactions, and its coupling with Uniswap also points to this point, and Perp adopts the DAO method of coin listing, etc., all pointing to encryption-native player. Since dYdX stated that it will not consider free currency listing until next year and will focus on top varieties, the two have avoided competition in some aspects.
After the community operation is very important became the consensus of several derivatives DEXs, it actually admitted that futures DEXs are more dependent on operations than spot DEXs like Uniswap. In terms of volume, before the track grows to at least 5-10 billion transactions, community operations and operating strategies will be an important factor, so the development of the track can continue to be observed.
The following comparison and analysis will be part of the expansion of the above summary.
Pricing Method/ Liquidity Attraction
Since the pricing method is closely coupled with the liquidity attraction method, they are compared together.
Pricing method:
Perp: V1 is a vAMM (virtual AMM), and V2 is a collective liquidity AMM very similar to Uniswap. (See Perpetual Protocol Research Report for details)
dYdX: Order book transactions, market games, market makers place pending orders, and market makers have certain pricing power in the short term.
The final pricing power of the entire market depends on which exchange has the deepest trading depth, that is, the ability to attract liquidity, which may be a centralized futures exchange (Cex) or a decentralized futures exchange (DEX ).
Liquidity attracts:
Perp V1: There is no liquidity provision in the precise sense. Everyone trades with the pool. The arbitrage robot provides automatic arbitrage to smooth out the price difference. As long as there is a price difference, there is liquidity, and there is no need for special attraction. From a perspective, it is a good design;
Perp V2: Similar to Uniswap V3, it will be carried out in the way of Staking (the scheme has not been determined, there may be other ways).
dYdX: Transaction mining created a daily transaction volume of 2 billion US dollars on August 30. However, it should be noted that dYdX adopted the strategy of a typical centralized exchange and introduced as many as 8 liquidity providers in the C round of financing Providers, including QCP Capital, CMS Holdings, CMT Digital, Finlink Capital, Sixtant, Menai Financial Group, MGNR, Kronos Research, etc., and, in the B round of financing, dYdX has accepted one of the largest liquidity providers in the current market A Wintermute investment.
dYdX uses market makers to make markets and trading engines to match orders for buyers and sellers. Strictly speaking, there is no pricing. Real-time prices are generated by market games, and market makers smooth out the price difference with other exchanges.
The comparison in this section actually includes two completely different pricing models and liquidity attraction models. In fact, it is a comparison between the operating logic of a quasi-centralized exchange and a decentralized operating logic exchange.
The operating logic of a quasi-centralized exchange, pricing and attracting liquidity are basically the same thing - the trading depth of an exchange determines whether it has pricing power, and the trading depth is created by the depth provided by market makers and traders At the current stage, dYdX has established a very considerable market maker scale through accepting liquidity provider investment in the early stage and cooperating with market makers starting from the V1 version. Market makers and liquidity theoretically have no loyalty, because the robot always automatically chooses the best profit-making plan, but the capital liquidity provider bound to the project party will obviously be different.
The operation logic of the decentralized exchange, as mentioned in the Core Business Logic above, Perp is priced through vAMM (according to the method of Uniswap V3), while McDEX and dFuture are based on the index price fed by the external oracle machine. The formula processing adjusts the price to form a quotation. What needs to be added is that Perp V1 needs to use the index price when calculating the funding rate, and it also needs to use the index price to calculate the liquidation price when the market price fluctuates violently.
Another important point is that the market price formed by the vAMM method has a certain degree of independent pricing ability. After the trading volume is deposited in the exchange, it can obtain a certain degree of pricing power on the market. From the current competitive landscape Looking at it, it is possible to achieve a certain pricing power in the transaction of long-tail currencies.
It can also be seen from the above analysis that the pricing mechanism of various AMMs is actually similar to that of the order book-style dYdX. Who has the pricing power does not depend on the mechanism between the two, but depends on the entire market of a certain currency. On which exchange the maximum trade depth occurs. Taking the spot market as an example, the maximum depth of some currencies is in Uniswap, and some are in Sushiswap, so in these currencies, Uniswap and Sushiswap respectively have the pricing power.
One of the operating mechanisms: active market making VS passive market making
dYdX: Professional market makers take the initiative to make the market, and even a large market maker can dominate in some cases. According to public reports, the market maker WinterMute once accounted for 40% of its trading volume[21]. The business mechanism is the closest to the DEX of the centralized futures exchange.
Perp: Active market-making can be carried out on Perp V2, or the default market-making strategy (protocol) introduced by the project party from the outside can be adopted, that is, both passive LP and active market-making can be used. According to the proportion of passive market-making on Uniswap V3[ 20], in the future, it is expected that most of Perp V2 will choose the default strategy of passive market-making LPs, plus a small number of large-scale professional market makers.
In this regard, we mainly compare the designs of various companies in terms of capital demand, capital utilization and capital risk:
LP (liquidity provider) income: There are liquidity providers in dYdX similar to those in AMM. Liquidity providers pledge 100 million USDC, and the income is 1 million dYdX tokens that can be distributed every Epoch (28 days). Bear the risk of loss (analysis below). dYdX is issued proportionally to LPs, that is to say, if the liquidity you provide remains the same but the overall liquidity increases, the dYdX you get will decrease, which is consistent with the AMM majority LP reward rules. This part of liquidity is used for market making by market makers (mostly centralized market makers), which can be regarded as a supplement to liquidity - market makers obviously need to use a large amount of funds for market making. Market makers can only use the USDC of these LPs for market making but cannot transfer them away. Note that the design of this part of the rules is slightly centralized.
LP in Perp V2 earns handling fees (details have not yet been announced), there is no LP in V1, arbitrageurs can earn arbitrage profits, because arbitrageurs are a group of characters who drive project robots or write their own strategies for arbitrage , there is a probability of turning into a Maker in V2, so it can be said that arbitrageurs in V1 will switch from obtaining arbitrage profits to obtaining handling fees.
Impermanence loss: If the USDC pledged by LP in dYdX suffers a loss during the market-making process of the market maker, the loss will be borne by the liquidity pool (LP). However, it is the market makers (centralized market makers screened by dYdX) who make the market here, and the LPs who provide funds, and the dYdX project party and the secondary market (reward dYdX) to subsidize potential capital losses. The liquidity of this part of LPs was US$140 million as of August 31, which does not pose too much moral hazard. However, if the amount is extremely large in the future, market maker moral hazard or other financial risks need to be considered.
In Perp V2, since the market is made in the Uniswap V3 pool, it will suffer similar unpaid losses as in V3.
LP market-making method: LPs in dYdX do not take the initiative to make markets, which can be said to be a kind of inert liquidity and lazy LP, but inert generally means that LPs rely on certain codes or rules for market making , such as AMM, but dYdX relies on professional market makers.
The LPs of Perp V2 are active market-makers. Like the LPs on Uniswap V2, there is a high probability that they will use strategies to make markets-non-professional LPs may use certain market-making tools to make markets, otherwise they will suffer greater losses. Since the strategic market-making agreement that the Perp project parties will cooperate with has not yet been determined, it is still too early to discuss whether active or passive rebalancing strategies are used for market-making on Perp.
From this perspective, both are basically professional market makers with professional strategies for market making. Ordinary non-professional LPs are still earning income from providing funds without active operation capabilities. The difference is that the two The sources of professional market-making capabilities relied on are different: professional market makers, decentralized products for market making.
The degree of centralization between the two is obviously different on this point, but it may have little impact on small and medium LPs in the early stage.
Fund utilization rate and slippage: Since dYdX uses professional market makers to make the market, its actual market-making fund utilization rate can be expected to be relatively high, but since this part is more LP capital utilization rate, its LP Fund utilization is only related to a few indicators: the first is how much funds are provided by all LPs, and the second is what is the price of dYdX. How much USDC the dYdX reward is worth has nothing to do with its actual market capital utilization rate.
On the issue of slippage, this is a problem that professional market makers care about. Different slippage determines what kind of strategy market makers need to use for market making, and also determines which exchange they go to for market making. It can be used to determine the liquidity of professional market makers, but this is not decisive in dYdX and will not be expanded here.
Thanks to the high capital efficiency design of Uniswap V2, the slippage of Perp V2 for aggregated liquidity market making will obviously be significantly lower than that of V1. The slippage problem of V1 is because its slippage depends on the K value, and once a certain large order amount If it is large and has a great impact on the market price, the opening/closing process will easily cause slippage. In V2, the liquidity will be concentrated around the price. When the liquidity is relatively sufficient, the slippage will be significantly reduced.
Since dYdX is similar to the market-making settings of centralized exchanges, capital utilization and slippage have little impact on LPs. The most important thing is whether the actual rate of return it provides can outperform the annualized rate of return (APY) of other Defi .
Perp V2 sets the rules for active market making. The advantages that can be obtained are naturally smaller slippage and market making with a high capital efficiency. The disadvantage is that it needs to bear certain free losses and needs to use strategies to carry out market making. Active market making.
The second operating mechanism: whether to create a market without permission
dYdX: dYdX is currently adding trading pairs by the project side. The community votes to add a trading pair every two weeks, and the founder said that he will not consider creating a free market before next year (2022), which is relatively close to the centralized exchange. Way.
Perp: V2 From the perspective of creating a market/trading pair, Perp is the project side’s self-built pool and trading pair first, and it also allows the community to create a market without permission. The way to create a market is relatively simple, and theoretically, it is enough to place liquidity, similar to Uniswap Create a pool on the Internet (actual details need to wait for more documents or products in the V2 version), basically only need to comply with the project partys limit on the maximum K value. This setting does not have high requirements for the creator of the pool, but at the same time, complex parameter settings cannot be performed. V2 will use DAO to create a market. Although the current proposal has not been passed, according to the understanding of the first class warehouse, the probability of passing is extremely high.
Although the setting of dYdX is not free, if its strategy is to focus on the trading of the top varieties—the top varieties may concentrate most of the liquidity, this will not hinder its short-term development, but in the long run it can Continue to observe, whether technical decentralization superimposed operational decentralization is a high-quality solution?
From the perspective of Perp creating a market, Perp is more like a self-built market for large currency holders or even traders with large amounts of funds. From a traditional point of view, even from a security point of view, setting the market is of course the job of professionals, not a game for novices-this point of view has been applied to the logic of synthetic asset projects like UMA and Synthetix: professional The technical team creates the infrastructure, and the professional market operators create the market. But Uniswap V1 broke this stereotype and succeeded-providing a place where it is very easy to create a market. However, the advantages and disadvantages of these two settings (specialization/low threshold) should be observed in the futures market, after all, futures fluctuate more violently.
dYdX adopts the classic (traditional) professional market maker method, which has the same advantages as centralized exchanges and a better experience in normal conditions. From the perspective of creating a market, as in the above analysis, it is better for the project side to directly review and add trading pairs, which is better from the perspective of security and prudence, but from the perspective of decentralization and degree of freedom, imitating centralized way will be slightly weaker.
This dimension may be the most important dimension in the comparison of competing products, because when the product is gradually perfected, the operational battle in the dimension of the operating mechanism and the actual operation mode of the team may be the main point that gradually emerges in the next stage, which is closer to The mature and centralized method is obviously better in terms of experience, so dYdX still has a high probability of continuing to be the leader of the track.
What Perp is exploring is another path: how to organize the entire futures trading market in a more decentralized way, whether it is applicable to large currencies and small currencies (in terms of overall market depth and trading volume) The mechanism is different, whether it is possible to have a community-driven free futures market.
image description
Operational data
Figure 5-3 Comparison of trading volume data between Perp and dYdX in 2021
Figure 5-3 is a comparison of the operating data of perpetual contract products collected by The Block website. It can be clearly seen that after the launch of Perp, its trading volume has been ahead of dYdX by a large margin, including after dYdX launched the testnet in February (The function of its test network is almost the same as that of the current product, and it can conduct real transactions.) However, after dYdX announced the start of transaction mining in early August, the transaction volume on dYdX showed a rocket-like growth and a substantial overtake.
Details are as follows:
dYdX: The recent average daily transaction volume is 700 million US dollars. On August 30, due to the expected end of the first phase of transaction mining and the expected launch of dYdX tokens within 10 days, 1 billion/2 billion US dollars (different data and market conditions) The data on the website varies greatly), and the official website shows that it is 1.3 billion US dollars.
image description
Figure 5-4 The number of weekly active traders displayed on the official website. After the peak period of completing the trading volume task in the first two weeks of August, the number of people dropped significantly
Perp: At present, the average daily transaction volume is about 110 million US dollars, the total transaction volume exceeds 25 billion US dollars, the agreement revenue exceeds 25 million US dollars, and there are 2,885 active traders.
The number of active traders on Perp is close to the number of active traders before dYdX trade mining started.
Summary: From the perspectives of the attraction of current liquidity providers, the transaction volume during transaction mining, and the user experience of products, dYdX is currently the leader, and it is mainly focusing on the top varieties. Part of its advantage is Starkware and its own technical capabilities, part is the blessing of top capital and liquidity providers, and part is the design of the transaction mining mechanism.
Even, partly because it currently operates similar to centralized exchanges such as Binance and Bybit, making it easier for liquidity providers and professional traders to migrate.
But in the long run, Perp may establish an advantage in the long-tail market, its V3 launch may also have new improvements in mechanism and operation, and the successive launch of protocols such as Vega Protocol may also bring changes in market share.
Whether dYdXs current high market share and high transaction volume can continue, and whether other protocols and projects can explode in the next exponential growth in the futures DEXs entire track still needs to be observed.
risk
risk
1) Safety and failure risks: Due to the dark forest nature of the Defi world and the nature of the software itself, both dYdX itself and the second-tier network it erects may have safety and failure risks, including but not limited to: the risk of loss of custody funds, exchanges or The risk of StarkEx being attacked on the second-tier network, the risk of transaction loss caused by the failure of the second-tier network, the security risk and failure risk of the dYdX product protocol itself, such as pin insertion, bugs, front-end crashes, etc.
2) Risk of less than expected development: The futures DEX track is developing rapidly, with many competing products, and its leading position may be challenged; before dYdX went online, due to the boom in trading and mining activities, its projects were extremely popular, and there may be project data after the launch. Anticipated risks (for example, if the dYdX price pulls back, it will in turn affect the enthusiasm for trading and mining).
3) Risk of dYdX token value capture ability: The ownership of transaction fees has not been determined, and there may be a risk that the protocol cannot capture transaction fees.
4) Quasi-centralization risk: dYdXs operations are decentralized, and there may be related similar centralization risks in operation. First of all, market makers are mainly centralized market makers, and many market makers are investors of the project party. During the market-making process, if the market makers cannot return the loan in the liquid pledge pool in time, it may cause liquidity pledgers (LP) losses, and there is the possibility of manipulating market prices, fixed-point liquidation, and other common risks of market makers in centralized exchanges. Secondly, at present, the dYdX token allocation is determined by the project party in a centralized manner to determine which are clean transactions and cancel transaction mining rewards, which may lead to losses in mining costs for traders. As such, there may be other centralization risks that are not exposed.
Members who subscribe to the first-class warehouse with an annual fee can obtain timely analysis of popular projects and major events in the industry, as well as analysis of potential tracks from time to time. The first-class warehouse regularly selects projects from major ranking lists and information channels, and conducts multi-dimensional research and judgment to ensure comprehensive coverage of block innovation hotspots.
click on websitehttps://first.vipReferences
References
u Panoramic interpretation of the development status of decentralized exchanges: AMM, order book and aggregator
https://www.chainnews.com/articles/906891466719.htm
u Popular Science | Design Space of Validium and Layer 2
