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dYdX is Latest Major DeFi Project to Move to L2

Screen Shot 2021 02 24 at 2.40.10 PM

Trading Ethereum-based assets is about to get cheaper. Decentralized exchange dYdX is moving its perpetual derivatives trading off the Ethereum main chain to a Layer 2 scaling solution. 

dYdX, the 7th largest DEX by volume, is moving its cross-margined perpetuals contracts to a Layer 2 protocol built over the past seven months together with StarkWare, which uses ZK-Rollup technology. The solution, which launched on mainnet today, will be initially closed to some users and have limited deposits. The platform will be open “in a few weeks, once the stability of the system has been thoroughly tested,” the announcement post said.

The move should be seen as an encouraging sign that scaling solutions for Ethereum are mature enough to be relied on by some of the space’s largest projects. Ethereum has struggled to handle the surging demand for DeFi applications built on the network, which is making transaction costs prohibitively expensive for some traders. Layer 2 solutions enable faster and cheaper transactions, which are ultimately confirmed to the Ethereum main chain. 

“Traders can now trade with zero gas costs, and in turn, lower trading fees and reduced minimum trade sizes,” according to the post.

Zero Fees 

Layer 2 will enable dYdX users to trade without having to pay gas fees –the protocol’s maker fees range from 0% to 0.05% and taker fees range from 0.15% to 0.05% depending on volume. It will also allow the DEX to reduce trade sizes to 0.001BTC, 0.01ETH and 1 LINK and enable cross-margin trading, meaning users will be able to deposit almost any Ethereum token as margin, and it will be converted to USDC to be traded across all markets. 

Cross-margin trading will in turn allow the DEX to offer more trading pairs, though BTC-USD, ETH-USD, and LINK-USD are the ones offered during this alpha launch. Other improvements include instant trade settlement, faster price oracles (based Chainlink), higher leverage and lower liquidation penalties and greater privacy, thanks to the ZK-rollup technology, where not all transaction details are published on-chain.

Due Diligence

dYdX reviewed different Layer 2 solutions and also other blockchains as it weighed how to scale its DEX from Ethereum’s 15 transactions per second, and concluded that StarkWare would be able to provide the best user experience at the shortest amount of time.

“Other Layer 1s do not yet have the collateral base and building blocks, such as wallets and developer tools, that have made Ethereum successful,” according to the post. “While other Layer 2 solutions, such as optimistic rollups, are potentially promising, they are not as battle-tested, don’t offer quite the same product experience (very long withdrawal times), and cannot offer the same level of decentralization and cryptographic guarantees as ZK-Rollups.”

dYdX is the latest of a few other Ethereum projects moving to Layer 2. Most notably, Synthetix moved staking of its SNX tokens to Optimistic Rollups last monthx, The Graph said it’s collaborating with State Channels. Loopring is a DEX built on ZK-Rollups.

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