Perpetual contracts (perps) can be said to be the lifeblood of encrypted transactions. Perps accounted for two-thirds of transaction volume, while spot transactions accounted for only one-third. dYdX is the most popular decentralized exchange (DEX) for trading perps. With the release of dYdX v4, they will soon be moving to the Cosmos chain.
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Market structure
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dYdX has a lot of daily revenue, but has always lagged behind rival GMX, another perp protocol. GMX utilizes liquidity pools to trade with traders, rather than dYdXs order book model. This model has the advantage of lower slippage, but usually results in lower liquidity. GMX is limited by the number of currency pairs it offers and has limits on the liquidity of specific currency pairs based on the risk of the pool.
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Spot trading provides GMX with an additional source of income. Fees range from 0.2% to over 0.5% and help the protocol add hundreds of thousands of dollars in profits every day. GMX has replaced the popular Curve platform, although it only offers trading for a handful of assets.
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dYdX Token Economics
The DYDX token supply schedule has been a looming issue for the protocol since its inception. The upcoming token unlock, scheduled for early February, has brought this issue back into the spotlight. dYdX was originally scheduled to unlock most of it for early investors on February 2nd. Vested tokens will be primarily available to investors, contributors and advisors. The composition of unlocked tokens may have created some near-term selling pressure as many of these people would have been sitting on huge gains - at least 2x. As mentioned earlier, this distribution is particularly noteworthy since only roughly 23% of the token supply is in circulation. With the February unlock, the token supply almost doubled overnight.
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potential solution
The adjusted vesting timeline merely postpones the inevitable and does not address the broader underlying problems facing the protocol. Increasing the attractiveness of tokens to investors is critical as most of the token supply has not yet been released. Why should the protocol care about token value? As dYdX migrates to its own Cosmos chain, token value becomes an integral part of network security. DYDX market cap becomes part of the cost of attacking the network.
dYdX has taken the first and most meaningful step towards improving token economics, announcing that it will redirect accrued revenue to validators and stakers instead of dYdX Trading Inc. It’s a fantastic first step, but it could be moved forward with some potential solutions that should further increase its appeal to potential token holders and proponents of decentralization.
Adjust the fee structure
Trading on dYdX is already about 5 times cheaper than trading on GMX, and about 4 times cheaper than Gains Network and MUX. Even doubling the fees would still leave a huge gap for new revenue. The existing maker-taker fee structure makes implementing fee adjustments between existing tiers simple. Taker fees may increase just to further incentivize deep liquidity. dYdX has a better depth of trading pairs than its competitors, and already has a group of large market makers on the platform. Increased liquidity will continue to attract institutional-level trading, rather than retail investors.
Nonetheless, dYdX is not competing with other DEXs in a vacuum. CEXs such as Binance are the biggest competitors. Today, dYdX and Binance have essentially the same fees. Adding fees would make it less competitive with Binance, but there are reasons to allow some decentralization premium here. GMX proves this point, although the fee is orders of magnitude higher, users are still using it. A slight increase in fees is unlikely to drive users towards CEX.
increase transparency
The dYdX team should improve communication about protocol development, especially how funds are allocated. Its not clear what dYdX Trading Inc. is doing with the nearly $400 million it has amassed since its founding. Token holders will benefit from having a clear understanding of how to allocate this capital to grow the business. Transparency in the use of funds will help improve investor sentiment.
Expand the scope of services
GMX has proven that spot trading is popular with users, and it would be convenient to have this functionality built into the platform. GMX spot trading is not the cheapest, but it is easy for traders to use. On average, GMX earns around $200,000 per day just from spot. Metamask also demonstrates this use case, making millions of dollars per day through token conversions despite being much more expensive than competing options. Outsourcing this to an aggregator while charging volume fees is another option, especially for users concerned about slippage.
Changes to Token Unlock Schedule
Teams can adjust to gradually unlocking tokens on a monthly or even daily basis, eliminating the need for a lot of upcoming unlocks. There is no reason to have a lot of new liquidity flooding the market in one day. Investors can unlock their amount within 180 or 365 days. The challenge will be a coordination issue - off-chain legal agreements must be changed. A recent vesting cliff change shows that this can be done.
Create a new demand pool
Summarize
Summarize
dYdX is a top-notch platform, but a series of issues with the associated tokens have made investor addition slower than it should have been. By adopting the proposed solution, DYDX will become an even more attractive investment, increasing the security of new networks. The good news is that the hard part is done: dYdX is the most popular DEX. Now is the time to unlock the value that the underlying protocol provides to token holders.
