What is dYdX?

What is dYdX?

What is dYdX?

…and how do you make money on it?

Dapps & Protocols

·

10 min

What is dYdX?

…and how do you make money on it?

Dapps & Protocols

·

10 min

What is dYdX?

…and how do you make money on it?

Dapps & Protocols

·

10 min

What is dYdX?

…and how do you make money on it?

Dapps & Protocols

·

10 min

What is dYdX?

When people think about DeFi their first thought goes to AMMs like Uniswap. dYdX is different. The protocol offers perpetual swap contracts across 80 different crypto tokens with 0% fees. You heard that right. Power DeFi users can finally put in practice their wildest strategies without having to pay for placing orders.

The story of dYdX starts in August 2017, when the exchange offered crypto margin trading, lending and borrowing services on Ethereum. In the following years, dYdX started offering cross-margin perpetual trading. It was an experimental feature, which is why advanced traders were the first to use dYdX. In a nutshell, cross-margin perpetual trading allows traders to use profits from one position to cover losses on another. This is a highly risky strategy, as the margin needs to be maintained across all positions to avoid major losses.

dYdX has undergone many iterations to where it is today. Most components of the dYdX v3 platform are decentralized – however, the company relies on centralized systems for the orderbook and the matching engine. Running as a hybrid DEX has allowed dYdX to scale to tens of millions of orders placed per day with sub-second latency, and has enabled dYdX to grow to well over a billion dollars a day in trading volume.


With the launch of v4, dYdX plans to become completely decentralized. This means decentralizing the orderbook and matching engine – while still offering the best trading experience with zero gas fees, low latency, high throughput (similar to a centralized exchange) and deep liquidity. 

The launch of v4 is expected to happen in September 23, 2023. Out of the blue, dYdX has decided to launch the fully decentralized version on Cosmos network. The team motivated its decision saying that Cosmos is better suited to scale their protocol. As a result, dYdX will have its own blockchain network, called Zone, gravitating in the Cosmos ecosystem.

To this day, dYdX maintains a perfect reputation – the protocol has never been hacked. There is, however one concern regarding censorship. On April 10, 2022, Canadians have been restricted access to the protocol because dYdX is not registered as a derivatives trading firm. Due to its decentralized nature, dYdX doesn’t require KYC. The restriction only applies to the official dYdX interface. Its smart contracts can still be accessed by technical Canadian users – at the risk of legal consequences. 

Overall, dYdX represents an innovative project in DeFi. When v4 of the protocol launches, it will bring in even more liquidity to crypto. Next up, we will explain how dYdX works. 

How does dYdX work?

dYdX is a decentralized derivatives exchange that allows users to trade crypto in a trustless manner. It is mainly known for cross-margined perpetuals and future trading.

As a pure trading platform, dYdX is quite limited. dYdX is unique because it allows derivatives trading in a completely open, trustless, and non-custodial manner. Pulling off such an amazing feat happened in stages, which is why we will only address v3. With v4 planned for the end of 2023, traders shouldn’t notice any major difference in the user experience, except for increased scalability.


That being said, let’s explore each feature offered on dYdX!

Perpetual Contracts

Perpetual futures are one of the most popular trading products in the crypto space. Initially offered by centralized platforms like BitMEX, Binance, or Bybit, they are now also making they way into DeFi. 

Perps allow for gaining exposure to a price of a particular crypto asset without holding the underlying asset. In contrast to standard future contracts, perpetual futures don't have an expiry date, hence they can be held and traded for an indefinite amount of time. Not having a settlement date can be beneficial for traders, as they don't have to deal with multiple contracts as the settlement date approaches. The contract's price is tightly linked to the spot price of the underlying asset through a mechanism called a funding rate.

The funding rate is a mechanism that ensures the perpetual contract price stays close to the spot price of the underlying asset. It is periodically paid between traders based on the difference between the contract price and the spot price. If the contract price is higher than the spot price, long traders pay short traders, and vice versa.

Leverage is a crucial feature of perpetual contracts on dYdX. Traders can choose the leverage they want to apply to their position, which allows them to amplify their exposure to the underlying asset. Higher leverage can increase potential profits, but it also carries higher risk as losses can be magnified. dYdX offers varying levels of leverage, depending on the asset and market conditions.

To trade perpetual contracts on dYdX, users need to have sufficient collateral in their dYdX account. Collateral is used to support the positions and ensure traders can fulfill their obligations. If the position moves against a trader and their account balance falls below the required collateral level, it may result in liquidation, where their position is automatically closed to prevent further losses.

How to make money on dYdX?

Earning interest on dYdX is as simple as depositing funds. Why? Because your balance is always earning interest.

The interest rate is always changing depending on market demand. The more borrowers there are the higher the rate, the more lenders the lower the rate.  The interest is paid continually with no lock-up period on your funds.

Let's say you want to trade perpetuals on dYdX after noticing an opportunity to go long on ETH. The first step is to deposit the desired amount of collateral, such as ETH or USDC, into your trading account.


Next, choose the leverage level you want to apply to your trade. Let's say you decide to use 5x leverage for this example, which means that for every 1 ETH you deposit, you can trade with the equivalent of 5 ETH.

Based on your market analysis, decide whether you want to open a long (buy) or short (sell) position on the ETH perpetual contract. If you believe the price of ETH will increase, you would open a long position. 

It is crucial to monitor your position in order to avoid liquidation. If the price of ETH goes your way, you will make money. If you placed a long position and the market goes against you, there is a risk of having your collateral liquidated.

In perpetual trading, you have the option to fund your position to avoid liquidation. Funding is a mechanism employed by perpetual contract platforms, like dYdX, to ensure that the perpetual contract price stays closely aligned with the underlying spot market price.When you hold a position in a perpetual contract, you will either pay or receive funding periodically based on the funding rate. The funding rate is a mechanism that aims to keep the contract's price in line with the underlying asset's price. If the perpetual contract's price is trading at a premium to the spot price, long positions will pay funding to short positions, and vice versa.Now, let's consider a scenario where you have a long position in an ETH perpetual contract on dYdX, and the funding rate is positive. This means that you will need to pay funding to the short positions periodically.To avoid liquidation, you can fund your position by maintaining a sufficient balance in your trading account. When you pay funding, it will be deducted from your account balance. By ensuring that you have enough funds to cover the periodic funding payments, you can maintain your position and avoid liquidation.Funding payments should occur periodically, typically every few hours, and can vary in frequency and amount based on market conditions and the funding rate. It's essential to monitor your funding costs and manage your account balance accordingly to avoid any liquidation risks.Perpetuals is an advanced trading method. Always make sure to familiarize yourself with the specific funding mechanics and rules of the platform you are using for perpetual trading, as they may differ across different platforms.

Price Prediction for dYdX — Can it hit $1000?

Buying and hodling DYDX — the native token of dYdX— is one way of potentially making money on dYdX.

By looking at its current price, it’s natural to think about the chance of DYDX hitting $1000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.

Let’s examine the potential growth of the DYDX token by analyzing its tokenomics. DYDX’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} DYDX tokens being in circulation today, that means a price of {PRICE} per DYDX.

How did we come to that calculation? It’s quite easy, the price of a DYDX token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each DYDX coin. 

By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of DYDX at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for DYDX to hit that price.

At a price of $1000 per token, that means the current market cap of DYDX would equal ${{CIRCULATING_SUPPLY} * 1000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1000.

Now let’s shift our attention to the fully diluted market cap.

Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.

The fully diluted market cap represents the total value of a coin if all tokens were in circulation. DYDX’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} DYDX which means that no more coins above that number will ever be created.

These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.

How does this impact the price of DYDX? Taking into account the current price of a DYDX token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. DYDX coins that have been burned are not taken into consideration because they have been permanently removed from circulation.

Whether it seems gigantic or not, the number we came to above only takes into account the current price of a DYDX token. Doing the same calculation but with a price of $1000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1000} for the DYDX protocol fully diluted market cap.

These are all crucial details to know when calculating if DYDX can reach the price of $1000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.

The future of DYDX depends solely on its growth as a network used by tens and hundreds of millions of users.

If you’re looking to add some DYDX to your portfolio, the most trusted places to get some are Binance and Coinbase.


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