What is dYdX
dYdX is a decentralized derivatives trading protocol deployed on the Ethereum network as a layer2 rollup and powered by ZK StarkEx, founded by Antoni Juliano in August 2017. dYdX's core team consists of software engineers from well-known cryptocurrency companies such as Coinbase.
$DYDX is dYdX's native governance token. In addition to governance voting, holders of $DYDX can receive discounts on trading fees based on the size of their holding positions. Moreover, $DYDX holders can stake their tokens to the security pool to receive rewards.
What is the mechanism of dYdX?
dYdX adopts the order book mechanism familiar to traditional market makers to execute trades, providing traders with a wide variety of orders and ample liquidity during trades. As for now, dYdX's trading products are primarily perpetual contracts. dYdX supports perpetual contract trading with up to 20x leverage and slippage tolerance setting.
Using the orderbook method as the core mechanism, dYdX is therefore more inclined to traditional centralized exchanges. Traders are counterparties to each other, and the protocol itself only provides functions as a platform. However, it is definitely not enough to rely on ordinary users to provide liquidity. Therefore, dYdX has designated several institutional market makers to provide liquidity since its launch. dYdX also reserves a certain percentage of $DYDX as an incentive for these designated market makers.
The implementation of dYdX’s on-chain orderbook relies on its construction on Layer2. The orderbook is different from AMM in that it reduces the barriers for users and market makers to participate in transactions, and can provide continuous liquidity over time. It is also an established model familiar to traditional market makers. As a result, dYdX has attracted a large number of institutional investors to the platform for trading.
If you want to know more about Layer2, please read this term: “What is Layer2”
If you want to know more about AMM, please read this term: “What is AMM”
What is the fee structure and allocation of dYdX?
Due to the orderbook mechanism, dYdX uses the Maker-Taker price model to determine transaction fees. Depending on the volume traded in the previous 30 days, Maker is charged 0-2bps, while Taker is charged 2-5bps. It is worth noting that no transaction fee will be charged when the transaction volume in the past 30 days is less than $100,000. This is to encourage individual investors to participate in the transaction, and the fee will only be charged for orders that have been filled.
Additionally, depending on the amount of DYDX and $stkDYDX tokens held by users, there will also be discounts of up to 50% on transaction fees. Unlike other protocols, all fees collected belong to the dYdX Foundation and will not be distributed to token holders.
What is the next step of dYdX?
dYdX hosts its trading and matching engine through Amazon Web Services (AWS). Notably, dYdX is not strictly a fully decentralized derivatives exchange, as its orderbook and the trading matching engine is still centralized. But dYdX is actively developing v4, expected to be launched in the second half of 2023, which will feature a fully decentralized orderbook and matching engine, and achieve extremely high throughput.
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