dYdX is a decentralized derivatives trading protocol deployed on the Ethereum network, developed by Antoni Juliano in 2017 Created in August. dYdX’s core team consists of software engineers from well-known cryptocurrency companies such as Coinbase.

$DYDX is the native governance token of dYdX. In addition to voting rights in governance, token holders receive discounts on transaction fees based on the size of their holdings. Additionally, holders can stake $DYDX to the security pool to receive rewards.

What is the mechanism of dYdX?

dYdX uses the familiar order book model of traditional market makers to execute trades, providing traders with a variety of order products and liquidity. Currently, dYdX’s trading products are mainly perpetual contracts, which support perpetual contract transactions with leverage up to 20 times and customizable slippage.

Due to the order book approach, dYdX is essentially more biased towards traditional centralized exchanges. Under this mechanism, trading users are counterparties to each other, and the protocol itself only functions as a platform. However, it is definitely not enough to rely solely on ordinary users to provide liquidity. Therefore, from its launch until now, dYdX has designated several institutional market makers to provide liquidity in the protocol. dYdX also reserves a certain percentage of $DYDX as an incentive for these designated market makers.

The implementation of dYdX’s on-chain order book relies on its establishment on the second-layer network. The order book is different from AMM in that it lowers the barriers for users and market makers to participate in transactions, and at the same time can continuously provide liquidity for a long time. It is also an established model that traditional market makers are familiar with. dYdX has therefore attracted a large number of institutional investors to trade on the platform.

If you want to learn more about Layer 2 networks, please click to read this entry "What is Layer 2 Network".

If you want to learn more about AMM, please click to read this entry "What is AMM".

What is the fee structure of dYdX?

dYdX uses the Maker-Taker price model to determine transaction fees. Makers will be charged 0-2bps, while Takers will be charged 2-5bps, based on transaction volume over the past 30 days. It is worth noting that trading fees will not be charged when the trading volume in the past 30 days is less than $100,000. This move is to encourage retail investors to participate in trading, and fees will only be charged for orders that have been filled.

In addition, depending on the number of $DYDX and $stkDYDX tokens held by users, they can also enjoy up to 50 % discount on transaction fees. Unlike other protocols, all fees collected belong to the dYdX Foundation and will not be distributed to token holders. Although they can enjoy certain transaction discounts, most token holders actually prefer to obtain direct transaction fee income, so dYdX does not do enough in terms of user incentives.

What is the next step for dYdX?

dYdX’s trading and matching engine is hosted through Amazon Web Services (AWS). It is precisely because of this feature that dYdX cannot be strictly regarded as a fully decentralized derivatives exchange. The order book and trade matching engine are still centralized.

In order to improve these problems, dYdX is actively developing v4, which is expected to be launched in the second half of 2023. In this plan, dYdX is preparing to transition from Starkware to its own developed native Cosmos-based blockchain, dYdX Chain, to establish a fully decentralized perpetual contract exchange. It will have a fully decentralized order book and matching engine and achieve extremely high order book throughput.