Several centralized exchanges have been victims of hacks since 2013. This has made spot traders and margin traders to seek a safer option for trading their digital assets.
Even though exchanges like FTX and Bitfinex allow margin traders to trade crypto with an advanced derivatives product like leveraged tokens, not all traders are comfortable with trading derivative products on such exchanges.
Hence, there has been a great need for a decentralized exchange for trading leveraged tokens and perpetual contracts.
This is why dYdX was created.to serve as a decentralized crypto derivatives exchange that offers various margin trading and perpetual options for traders in a more secure way.
If you have always wondered what the fuss about dYdX is and what gives the token value, this article is the right article to read to have a robust understanding of the dYdX token and its ecosystem.
What Is DYDX?
dYdX is a decentralized exchange that is deployed on the Ethereum network that allows traders to trade perpetual contracts, margin and spot trading. It also allows users to engage in lending and borrowing.
dYdX allows traders to trade with off-chain order books and to settle trades on-chain. Users can also short-sell tokens, go long on trades with leverage, or earn interest on deposited tokens. dYdX makes use of StarkWare’s Layer 2 solution to allow users trade without trusting a central authority.
This integration also aims to lower trading fees and gas costs, and allow token holders to receive priority in discounts, voting rights, and trading rewards.
With this, dYdX combines the security and transparency of a decentralized exchange, with the speed and usability of a centralized exchange.
During the launch of the token, the dYdX Foundation was also established. It was created to help design an infrastructure towards truly open markets. The dYdX Foundation seeks to serve as a bridge between decentralized governance and the development of the dYdX protocol.
dYdX is a governance token that is allocated to community members to govern its Layer 2 protocol. The distributed control will allow partners, traders and liquidity providers, to work together to control the thriving protocol.
According to dYdX official website, it boasts of a strong community, about 64,000 unique traders, and a total trading volume of more than $11 billion.
dYdX Use Case: Staking Pools
dYdX token is used by its holders to partake in staking in the dYdX platform. There are two types of staking pools offered by the dYdX platform.
Users who stake dYdX earn rewards for contributing to dYdX exchange safety. The safety pool distributes rewards to users in proportion to their staked tokens in the pool. If a user wants to unstake from the pool, they must wait for 14 days and also submit a request before the current epoch ends.
dYdX holders who deposit and stake their dYdX into the Safety Staking Pool will receive a tokenized position (stkDYDX). stkDYDX is minted when a user stakes dYdX, and is burned when a user withdraws their dYdX from the safety pool.
The existence of decentralized liquidity is the crucial component that sustains dYdX.
Users who provide liquidity in the form of USDC to dYdX, dYdX liquidity staking pools reward such a user with dYdX tokens. 2.5% of the total token supply of dYdX is given out by the liquidity pool.
When a user deposits USDC to the protocol, they will receive stkUSDC. Then, the user must mark the token as active to add it to the usable liquidity pool. Only then does the deposited USDC start earning dYdX tokens and a share of trading fees.
dYdX Use Case: Governance
dYdX grants holders the right to propose and vote on changes to the Layer 2 protocol. dYdX governance mirrors the AAVE governance contracts and supports voting in proportion to token holdings.
dYdX tokens can be used to make or vote on governance proposals, or be assigned to other Ethereum addresses. Some of what dYdX holders can vote on include:
- Specifying safety staking pool payouts if a loss happens
- Establishing risk parameters for the Layer 2 protocol
- Vote on the inclusion of new token listings on the Layer 2 protocol
- Govern contracts
- Vote on market makers that will be added to the liquidity staking pool, among other functions.
There are two powers associated with each dYdX token: The proposing power and the voting power. The processing power gives access to developing and maintaining a proposal. While the voting power is used to vote for or against existing proposals.
dYdX Use Case: Rewards for DYDX Holders
The retroactive mining rewards are allocated among dYdX users who trade on the dYdX’s Layer 2 protocol and those traders who have been using the platform for a long time. The amount of rewards that a user earns depends on their overall activity and the tier they belong to.
Trading rewards in the form of dYdX tokens are distributed to crypto traders to use the dYdX layer-2 Protocol. These rewards are given in order to grow the popularity of dYdX and speed up the market liquidity process.
Any trader who is trading on the dYdX layer-2 protocol is eligible to earn dYdX trading rewards. The amount of rewards depends on several factors, but the main factors are trading activity and volume.
Liquidity Provider Rewards
dYdX tokens are given as rewards to users who have an active Ethereum address and they can gain liquidy provider rewards when they maintain a minimum maker volume of 5% in the previous epoch (28 days).
The dYdX tokens will be rewarded to liquidity providers after a period of 28 days and this process will run for five years. The main purpose of offering these rewards is to increase the market liquidity of dYdX in the long run.
dYdX Use Case: Discounts on Trading Fee
dYdX token holders who hold at least 100 dYdX tokens and beyond will receive trading fee discounts based on the number of tokens that they hold in their wallets.
For instance, if a user holds ≥100 tokens, they will receive a 3% discount on trading fees, if they hold ≥1000 tokens, they will receive a 5% discount on trading fees, and so on. The lowest trading discount level of fees a user can have is 0.06% for takers and 0.00% for makers.
The Future of dYdX
The goal of dYdX continually remains to offer a more variety of effective trading features such as options and derivatives along with its unique margin trading features for traders. In light of this, it’s involved in so many plans to make this a reality.
The team plans to add more crypto assets to the three basic crypto assets currently available on the platform.
Furthermore, dYdX currently has average interest rates for its lending and borrowing activities. For instance, its DAI lending interest rate is only 4.4% compared to the 5% from Aave, while its DAI borrowing interest rate is higher at 9.62% compared to Compound’s 4.27%. dYdX’s interest rates are expected to become more competitive as more users use its lending and borrowing services in the future.