Robert Steinadler, 2 months ago

What is dYdX? A decentralized exchange explained

Decentralized finance is not only about providing liquidity and generating revenue. Trading has become one of the major use cases of the constantly evolving industry. But how to bring an exchange with features like order books and even futures trading right on the blockchain? Several projects are working on solutions that provide full fledge decentralized exchanges.

dYdX is one of the technologies that is, in fact, a decentralized crypto exchange that focuses on trading perpetuals. In this article, we will explore its features and functions as well as its token.

dYdX is a decentralized exchange

At the time of writing, dYdX offers 37 trading pairs, and each coin or token is paired with the US-Dollar. From a technical standpoint, dYdX is a second-layer protocol based on the Ethereum blockchain's security. Its architecture is not limiting trading options, and dYdX also offers to trade crypto assets that are native to different blockchains such as Bitcoin (BTC) or Monero (XMR).

The success of the platform is somewhat impressive. It was founded in August 2017 by Antonio Juliano, an ex-Coinbase engineer and initially offered lending, borrowing, and margin trading on Ethereum’s layer-1. Four years later, the exchange started a new product, offering cross-margin perpetual trading, which means that traders can use all assets deposited to dYdX as collateral for their trading positions. Today, the platform offers up to 20x leverage.

Kindly note that cross-margin carries specific risks, e.g., if the value of your collateral drops below a certain threshold, leveraged positions are at risk of facing liquidation. Only Ethereum (ETH), USDC and the stablecoin DAI are currently supported for cross-margin.

The protocol was built using smart contracts and STARK, which are zero-knowledge rollups developed by Starkware. Over the last few years, dYdX has improved its service constantly and expanded as well as decentralized the protocol with several upgrades. With the current version of dYdX being the third iteration of the platform. Until this day, dYdX remains the largest protocol of its kind based on the number of users of the decentralized exchange.

Perpetual contracts and spot trading

dYdX offers spot trading just as any other DEX like Uniswap or 1Inch to name two examples. Unlike other protocols, dYdX is also offering perpetual contracts trading. Perpetual contracts are derivatives. Meaning that you place a bet on whether the underlying asset is going to appreciate or decrease in price. Traditional futures work in a very similar way, but they have an expiry date. This is different with perpetual contracts since they don’t expire, hence the name perpetuals.

Another difference that distinct dYdX from other decentralized exchanges is the fact that it uses an order book with a matching model and not an AMM protocol. The order book is an important feature in derivatives trading since it allows low slippage that is needed when trading sizeable positions. However, liquidity is still pooled and provided by traders depositing crypto assets.

The dYdX token – Governance and staking

Since the decentralized exchange is a DeFi product at its core, there is also a token that powers its ecosystem known under the same name and the ticker DYDX. The most significant feature is staking since it provides additional returns on the investment for token holders who are using this particular feature.

Other essential use-cases for the token are rebates and rewards. Meaning that traders can receive discounts on trading fees when holding the token. A trading rewards program also offers 25% rewards paid out in DYDX to encourage new traders to use the protocol.

Finally, there is governance. The dYdX protocol has been changed several times throughout the years and there is still a lot of development going on. Token holders can decide in which direction a protocol is developed, what kind of new projects are funded and how the fees and rewards are structured with the exchange.

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