This article is centered around dYdX, a decentralized crypto trading platform. It contains everything you need to know about the platform. So, here’s your beginner’s guide to dYdX:
What is dYdX?
dYdX is a decentralized exchange (DEX) platform that offers perpetual trading options for over 35 popular cryptocurrencies including Bitcoin (BTC), Ether (ETH), Dogecoin (DOGE), and Cardano (ADA). With respect to trading activity and customer base, it ranks among the largest decentralized exchanges in the world.
The most well-known decentralized exchange at the moment that enables perpetual trading is dYdX. Users may conduct transactions directly with one another thanks to dYdX’s usage of smart contracts on the Ethereum blockchain.
Through well-known platforms like MakerDAO and Compound, decentralized borrowing and lending are already possible in DeFi, but dYdX is concentrating on developing more sophisticated trading capabilities for the Ethereum blockchain. The dYdX protocol is open source, just like other DeFi technologies, and uses smart contracts rather than individuals to handle user assets.
In August 2017, California-based entrepreneur Antonio Juliano launched dYdX. The exchange first provided crypto margin trading, lending, and borrowing services through Ethereum layer-1 when it was debuted in July 2017.
With the help of dYdX, traders may short-sell tokens, gain exposure by longing with leverage, or move swiftly by earning interest on deposited tokens. The platform also provides dealers with off-chain order books with on-chain settlements. In order to combine the clarity and reliability of a decentralized exchange with the efficiency and accessibility of a centralized exchange, dYdX uses StarkWare’s Layer 2 to do away with the need to trust a centralized exchange when trading.
The dYdX exchange began providing cross-margin perpetual trading in August 2021. Cross-margin trading is a common technique to avoid liquidations during periods of extreme volatility. Users can reconfigure their available credit on the platform to give liquidity to current contracts.
The dYdX protocol was developed using STARK (zero-knowledge) Rollups supported by Starkware and Ethereum smart contracts. The platform introduced three versions of its offerings to decentralise its components after beginning its career in the cryptosphere by providing spot trading. The majority of the dYdX exchange is constructed on trust – free protocols, which are openly extendable without any authorization, in order to decentralise the exchange.
What makes dYdX the chant of the town?
Trades in non-term contracts and leverage up to 10x (value of assets) will be supported in margin trading (Perpetuals). dYdX is very constrained as a trading-only platform, but it is among the most cutting-edge in terms of a totally open, trustworthy, and non-custodial financial protocol. The platform reduces the dangers if the exchange “plays a game” while also not relying on any middlemen. Utilizing the dYdX Options Protocol, anybody may construct trading on any ERC-20 token, and such transactions always provide simple trading.
The platform now only offers three simple trading pairs (ETH, DAI, and USDC), the ability to lend assets and get interest, and two forms of margin trading (isolated margin trading and cross margin trading). Although these are straightforward tools for seasoned traders, they represent a significant advancement for the developing DeFi industry. Users may borrow money directly from lenders on the marketplace, or lenders can make deposits to store their crypto assets and earn interest.
How does dYdX work?
Everyone engages in one “global lending pool” rather than making and accepting loan proposals from separate borrowers and lenders. Loan, borrowing, and withdrawal are all possible at any time without waiting for matches or enough funds since each commodity does have its own lending pool that is governed by smart contracts. The relationship between lenders and borrowers—demand and supply—determines how much each asset’s interest rate will fluctuate.
Users and investors can place a purchase or sell order at a predetermined price indefinitely—that is, without an expiration date—through the use of perpetual futures contracts, sometimes known as simply perpetual contracts. This is distinct from spot trading, which entails instantly purchasing or selling cryptocurrencies depending on market rate. Traditional futures contracts, on the other hand, include a time restriction on each order, and the order automatically collapses after the period has passed. The layer-1 and layer-2 cross-margined perpetuals are available on the Ethereum layer-1 blockchain, as well as spot and margin trading, on the decentralized exchange dYdX, which specializes in perpetual markets.
Margin Trading on dYdX
In essence, margin trading is borrowing money to place larger wagers. Cryptocurrency traders stake bets on the direction of a crypto asset’s price movement, either up or down. Margin trading gives individuals the opportunity to boost both their potential gains if they are correct and their potential losses if they are incorrect.
Over the Ethereum layer-1 blockchain technology, dYdX provides spot and margin trading services. On November 1, 2021, the exchange discontinued its layer-1 offering and switched to supplying layer-2 everlasting items, boosting its ambition to establish itself as a genuinely decentralized exchange. Ethereum smart contracts are used by the dYdX exchange to leverage spot and margin deals. dYdX provides trading tools including stop-loss and limit orders, much as other controlled and decentralized exchanges.
Margin trading gives individuals the opportunity to boost their potential for profit if they are correct while also maximizing their losses if their prediction proves to be incorrect. In essence, traders utilize margin to boost their prospective profits and leverage their current market holdings.
Initial margin is the least amount a trader must deposit to begin a leveraged position on a platform like Huobi, Kraken, or Binance, for example. As an illustration, a trader may purchase 10 ETH using a 1 ETH beginning margin and 10x leverage. As collateral for the deal, the trader’s first margin would thus be equal to 10% of the total order.
dYdX Governance Token
The decentralized trading system dYdX announced the release of its DYDX governance token, which is based on Ethereum, on August 3rd, 2021. The dYdX community can effectively control the dYdX Layer 2 Protocol (also known as “the protocol” thanks to the governance token DYDX). Trading participants, liquidity providers, and dYdX partners may collaborate to improve the protocol thanks to DYDX’s shared control feature.
Users can stake their current cryptocurrency holdings on the community section of the dYdX exchange to receive return in DYDX, the exchange’s own governance token. Users can risk USD Coin (USDC) and receive incentives for adding to the liquidity of the dYdX exchange by participating in one of the two pools offered by the exchange: the liquidity pool.
Additionally, stakeholder voting and administration efforts on the site may be carried out using DYDX tokens. Users can vote on community suggestions for different module enhancements, restorations, and grants using their DYDX reserves. The community can also be supported by purchasing DYDX tokens on well-known cryptocurrency platforms like Kraken and Coinbase. By allowing token holders to vote on requests to add new functionalities to the system, the DYDX governance token will be used to shape the project’s governance model and help define the future course of the decentralised trading protocol.
When dYdX received $10 million in a Series B round, principally headed by Three Arrows Capital, DeFiance Capital, a16z, Scalar Capital, and Polychain Capital in late January 2021, it raised hints about the potential introduction of a governance token.
dYdX Margin And Borrowing Collateralization
Most decentralized borrowing involves collateral since identification solutions and trustworthy credit checks are not commonly available on the blockchain. The bare minimum required to obtain and return a loan is collateral. You can borrow more money if you put down more collateral. The foundation of decentralized lending and borrowing protocols is collateral. Almost all DeFi systems demand collateral as evidence of money and to be solvent because identification solutions and trustworthy credit checks have yet to be implemented into blockchain.
Users are permitted to employ up to 5x leverage on the dYdX margin trading protocol, but they must over-collateralize existing loans in order to unlock leveraged positions and borrow assets. This involves submitting more than 100% of the loan amount and is fairly popular among DEXes in the market. Users on dYdX must bank 125% of the loan balance before borrowing, which is less than other DEXes, since most want 155%. Additionally, if a 115 percent collateralization ratio is not kept, liquidations may happen.
Naturally, these ratios are not randomly chosen, but they are employed to safeguard lenders against borrowers engaging in dangerous lending or trading practises. Therefore, the borrower’s position is liquidated anytime a loan reaches or falls below the 115 percent ratio in order to safeguard the lender.
Future of dXdY
The goal for dYdX has always been to provide more sophisticated trading capabilities alongside their core margin trading products, such as options and derivatives. The project has included “stop-loss” features to enable traders to curb any losses. The company also has ambitions to go beyond the present platform’s three core crypto assets. By making their platform more sophisticated, dYdX is also making the larger DeFi ecosystem more complex, which is a symptom of a burgeoning market.
The corporation, dYdX Trading Inc., will lose control with the release of dYdX v4, and as a result, it will no longer be able to make money from the trading fees. If the community approves, the associated centralized systems will also be unable to generate income. Since there are presently very few decentralized protocols that enable derivatives or margin trading, none of which have any major usage, it is clear how crucial dYdX is and will remain to be for democratization in the sector. The stakes are high for dYdX overall, but the company’s recent $10 million Series B financing and the introduction of its DYDX governance token all point to a very successful, liquid, and fruitful future roadmap.