dYdX Doubles Down on Decentralization

In 2017 dYdX was launched by Antonio Juliano as a decentralized exchange protocol with funding from some of the top investment firms in crypto including Paradigm, Polychain and Andreessen Horowitz. Fast forward to 2023 and dYdX has reached over 1T in total trading volume and commands a TVL of over $300m. As of October 24th, 2023, the protocol has taken perhaps its most ambitious step yet, with the release of the dYdX Chain open-source software.

The upgrade to dYdX Chain, presents plenty of moving parts for both new and existing members of the dYdX community to review, consider and understand. The move to a standalone app chain offers greater speed, scalability, customizability, and of course, decentralization. All of which will continue to further dYdX’s rapid modernization and optimize the user experience.

dYdX Chain - What is it and Why?

Originally announced in June 2022, dYdX Chain represents dYdX v4, and the protocol’s shift to a standalone open-source blockchain software built on the Cosmos SDK. dYdX Chain features a fully decentralized off-chain orderbook with a focus on maximum throughput.

By developing a blockchain solely dedicated to the native protocol, dYdX was able to have full customizability over the chain and validatorsduring private testnet. With this capability, the team built an orderbook system to meet institutional and pro-trader’s demands, while also maintaining low latency and increased throughput for high transaction volumes, without compromising decentralization.

subDAOs and Future Developments

After 16-months of build-out, the software has been fully released leaving product development and governance in the hands of the respective subDAOs, validators, DYDX stakers, and community members contributing to its future development.

All of these groups obtain their voting power through holding and staking DYDX tokens, and consequently make up the dYdX DAO. Within the DAO, multiple subDAOs have been formed to focus on specific functions in the ecosystem, and certain contributors have been assigned to them based on their skill sets. These are currently split into the Operations subDAO and the Grants subDAO, with several expansions expected in the future. The Operations subDAO was given a mandate through dYdX governance to host a deployment of the open-source front-end and indexer software and hire 3 full-time contributors, as well as monitor general chain activity. The Grants subDAO facilitates grants that will contribute to the growth of the entire ecosystem.

Post Genesis - Alpha Stage

The genesis timeline of dYdX Chain has been broken down into a few periods labeled by the Operations subDAO. These reference the first block of the new chain, otherwise known as the “Genesis” block.

Pre Genesis, which refers to all activity leading up to the completion of the Genesis file. Genesis, which is when all validators agree on the contents of the Genesis file, thus producing the first block within dYdX Chain. And Post Genesis which pertains to all activity occurring after the Genesis block. Since dYdX Chain went live on October 26th, the chain is now in what's referred to as its “Post Genesis - Alpha” Stage.

There is no active trading functionality during the Post Genesis - Alpha Stage, and the primary goal of this stage is the stability and security of the network. These are both achieved and increased through the amount of DYDX tokens that get staked to dYdX Chain's validators. The Operations subDAO monitors chain performance, and when security and stability expectations are sufficiently met, the dYdX governance community may vote to move from Post Genesis - Alpha, and into Post Genesis - Beta.

The Beta Stage begins to test trading functions by introducing limited trading capabilities. Similar to the Alpha Stage, the Operations subDAO, amongst other dYdX contributors, will be monitoring general performance benchmarks to determine the state of the dYdX Chain in its current phase. Upon reaching said benchmarks, the dYdX governance community may decide to vote in favor of progression from the Beta Stage to Full Trading. This final stage will feature full trading functionality as well as incentive and rewards programs, with an estimated launch of November/December 2023.

Governance and Staking

The move to an open-source chain also opens up new developments in governance and staking across the network. This means that dYdX Chain has more utility than previous iterations, and rewards productive protocol behavior.

Specifically, there are a few important differences in governance as opposed to dYdX v3:

• Only staked dYdX Chain DYDX can participate in dYdX Chain governance.
• Proposing power is not required to create a vote. dYdX Chain requires a minimum deposit to be met instead. The minimum initial deposit is 2,000 DYDX, and minimum total deposit is 10,000 DYDX with a required quorum of 33.4%. Once the deposit requirement is met, votes will go live, with a minimum required threshold of 50% yes votes to pass.
• Validators now inherit the voting weight of their stakers (unless the staker decides to vote themselves).
• The Cosmos SDK x/gov module also allows stakers to submit and vote on proposals
• The voting period on dYdX Chain is 4 days, and introduces new voting options. Within that period participants can either vote “Yes”, “No”, “Abstain”, or “NoWithVeto”.

Staking is paramount to the security and stability of the chain which is needed for it to progress. As more DYDX is staked amongst network validators the chain becomes more resilient to any malicious attacks on consensus.

Stakers and validators are then rewarded by receiving all protocol fees, which will presumably be predominantly in USDC resulting from trading fees, and being able to participate in governance. In 2022 alone, dYdX v3 brought in approximately USDC 120M in fees.

How to Bridge to dYdX Chain

In order to begin staking, ethDYDX must be bridged to dYdX Chain. Before dYdX Chain, there was only one DYDX token, but with the launch of dYdX Chain, an L1 token was needed. DYDX became the obvious choice, and the dYdX governance community voted in support of DYDX as the L1 token of the dYdX Chain, requiring the migration of the Ethereum native DYDX (“ethDYDX”) across to the dYdX Chain as a result.

Users can begin the bridging process by visiting an applicable bridge user interface. If bridging via a user interface, an Ethereum wallet holding DYDX (ethDYDX) must connect to the relevant site, which will then automatically generate a dYdX Chain address that is linked to that Ethereum wallet.

Next users are prompted to enter the amount of ethDYDX to migrate, and to choose a recipient address on dYdX Chain to migrate to. The auto-generated dYdX Chain address will initially be selected, with the option to choose a different address manually if desired.

Once all values and destinations are filled in appropriately the “Preview Migration” tab becomes eligible to be selected. After previewing the migration request the user will be prompted to confirm the migration with an Ethereum wallet signature.

After these steps are done, migrations can be checked on at any point until arrival. For security purposes, once the ethDYDX is bridged it will take roughly 40 hours to receive DYDX on the dYdX Chain.

Once the DYDX is received on the dYdX Chain from the bridge, users may stake to help the network get one step closer to its full production stage.

How to Stake on dYdX Chain

Staking on dYdX Chain can be done through the Keplr wallet interface. For those that are new to Keplr, their wallet generation and browser extension downloads can be obtained here.

Once Keplr is installed, users can import their dYdX Chain wallet that was generated during bridging.

After selecting “Import an existing wallet” users can import their secret recovery phrase by clicking on “Use recovery phrase or private key”

The option to export a dYdX Chain wallet’s secret phrase can then be found in the top right hand of the bridge interface page, if bridging through bridge.dydx.trade.

Once safely exported the dYdX Chain 24-word secret phrase can be imported back into the Keplr import page.

Upon clicking “Import” the “Set Up Your Wallet” page will be opened, where users can name their wallets and set passwords for access. After doing so just use the search bar to find dYdX Chain, where the previously bridged DYDX should be waiting.

Armed with a successfully integrated Keplr wallet, users can navigate to the dYdX Keplr Dashboard or any other suitable staking dashboard or solution. If on Keplr, to begin staking simply select the “Staking” tab.

After doing so a full list of active validators on the chain will be available to choose from. The dYdX Foundation has published a small informational article on choosing validators which can be found here.

Users can opt to allocate up to 100% of their DYDX tokens to a single validator once they have chosen one successfully. Alternatively, they have the option to spread their stake across multiple validators to improve decentralization. DYDX tokens that are unstaked will typically undergo a 30-day unbonding period unless they are redelegated. It's important to note that redelegation can be performed only once without being subject to the 30-day unbonding period. Any additional redelegations will be subject to the 30-day unbonding period. More information on unstaking can be found here. Once “Approve” has been clicked and the transaction is confirmed on the network, the DYDX will officially be staked.

Following successful staking, the dYdX Keplr Dashboard will show all information related to the stake including voting power, total amount staked, and pending rewards.

Lastly, users can claim the rewards they are eligible for by clicking “Claim” under the Claimable Rewards tab in the top right of the interface. Once rewards have been claimed the available balance on the dashboard will update. Rewards will be paid out in USDC and can be utilized as in any way the user sees fit.

Summary

The dYdX Chain represents the next step in decentralization within the DeFi Derivatives space. The versatility, efficiency, and security that comes with dYdX’s v4 upgrade aims to set a new standard for users and competitors alike.

Currently in the Post Genesis - Alpha phase, dYdX Chain is in the process of increasing network security and stability through staking. This staking can be done by anyone that has bridged their ethDYDX over to the dYdX Chain. Limited trading functionality will launch with the Post Genesis - Beta phase, after sufficient security and stability benchmarks are met and following the relevant governance decisions.

With new fully fleshed-out governance and staking models, dYdX Chain users are actively incentivized and rewarded for their participation in the growth of the network. By moving far and beyond previous iterations of dYdX, dYdX Chain presents a stellar trading and DeFi hub for casual participants, and institutional-level traders alike.