After rigorous testing and numerous iterations, dYdX is soon making its transformational shift to the Cosmos ecosystem, unveiling its fourth and latest version as a standalone blockchain known as dYdX Chain, built using the Cosmos SDK. We’re proud to be joining the network as a genesis validator, enabling staking for dYdX's token, DYDX.
Since its inception, dYdX has been instrumental in facilitating over $1 billion in daily trading volume, achieving a remarkable milestone by surpassing $1 trillion in total trading volume through smart contracts on the Ethereum blockchain. Looking ahead, the exchange will implement a unique off-chain, in-memory order book trading system that will be overseen by a network of validators.
This article delves deeper into what this entails for stakers and offers insights into the workings of dYdX v4.
dYdX stands out as the leading decentralized exchange (DEX), specializing in the trading of derivative products known as "perpetuals." Perpetuals allow users to take leveraged long or short positions on crypto assets. In contrast to Uniswap and other DEXs, dYdX distinguishes itself by not relying on an automated market maker (AMM) to facilitate trading. Instead, it employs a traditional orderbook and matching model to cater to the needs and expectations of sophisticated traders and institutions. We've explored the key distinctions between AMMs and order book trading here.
In its initial launch in 2017, dYdX was introduced as an Ethereum Layer 1 application. However, the chain's limited scalability became evident, with users facing exorbitant gas fees for even simple trades.
To enhance scalability, dYdX transitioned to an Ethereum-based Layer 2 solution employing StarkX/StarkNet technology. This shift significantly reduced gas fees, vastly improving the user experience. Yet, it led to a higher degree of centralization within dYdX.
To address this centralization concern and advance decentralization, dYdX made the strategic choice to transition to its blockchain, built using the Cosmos SDK. This imminent transition, on the verge of completion and soon to go live, represents the DEX’s fourth and latest version, known as the dYdX Chain and will feature a decentralized, off-chain order book capable of seamlessly scaling with the platform’s growth.
As part of the Cosmos ecosystem, dYdX stands to gain the full advantage of decentralization, along with an array of unique features such as extensive customizability and scalability. We’ve delved into the specific reasons behind dYdX’s choice of Cosmos in the following section.
dYdX's decision to migrate from Ethereum to Cosmos stems from a strategic choice to utilize the unique capabilities of Cosmos technology, which offers a distinct advantage in building new layer-1 blockchains. Cosmos' Tendermint proof-of-stake consensus engine provides the foundation to develop a standalone, application specific blockchain with cross-chain capabilities, and makes it possible to fully customize how the chain functions.
Unlike Ethereum, where network congestion can be a concern, Cosmos’ app-specific chains function independently, and each Cosmos chain operates with its network of validators and token. This move permits blockchains to have faster transaction processing while maintaining decentralization, thus positioning Cosmos as the ideal choice for dYdX’s requirements, which demand high throughput - roughly, 10 operations per second and 1,000 orders/cancellations per second. Currently, Cosmos can process up to 10,000 transactions per second, or TPS, compared to Ethereum's 15-25 TPS.
A recent twitter thread by dYdX succinctly described the key separators between Layer 2s/Roll ups and standalone app-chains, and reiterated their decision to choose the latter. Read it here.
While on-chain orderbook DEXs offers a high level of transparency and decentralization, it comes at the cost of potentially higher transaction fees and slower transaction speeds. With each transaction requiring on-chain validation, the underlying network’s throughput can become a bottleneck, thus affecting the overall network efficiency.
In contrast, on dYdX v4, each validator will maintain an off-chain in-memory order book. When a new order is placed, it is initially routed to a validator that is randomly chosen. Subsequently, this validator disseminates the transaction to other validators to ensure the order book remains up to date. This alleviates the pressure on the network, allowing the chain to achieve significantly higher throughput for the order book while retaining decentralization.
The transaction flow roughly looks this -
Total supply: 1,000,000,000 DYDX tokens
50% of tokens go to the dYdX community which will comprise liquidity providers, traders, stakeholders, and users who complete trading milestones. A portion of this share goes to the community treasury.
27.73% of the tokens go to investors.
15.27% of tokens are allocated to the official team members of dYdX including founders, advisors, employees, and others.
7% of the tokens are reserved for consultants and employees who will join the platform in the future.
We’ve had extensive involvement with dydX v4 since inception as well as the Cosmos ecosystem in general. We received a grant from dYdX to write an in-depth research report (available here) that examines the implications of Maximum Extractable Value (MEV) within the context of dYdX v4 from a validator's perspective. Additionally, we were on all three testnets and actively contributed through debugging and sharing validator best practices.
dYdX occupies a unique position as a decentralized solution that directly competes with centralized exchanges in terms of its order book model, trading volume, and user experience aligns with our vision for the future of decentralized finance. Furthermore, we share dYdX's philosophy of prioritizing the creation of the best possible product, making our support for their forward-looking vision a natural choice.
Chorus One has been more than just a player in the Cosmos space. With our $30M venture arm, Chorus Ventures, we have actively invested in promising projects such as Celestia, Osmosis, Agoric and more, which keeps us well-connected to the ecosystem. We're also deeply engaged with the community, publish research reports, and extensively cover Cosmos in our blog.
Chorus One is the only node operator with a dedicated in-house quant team focussing on MEV. MEV refers to the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by including, excluding, and changing the order of transactions in a block.
Because of our MEV expertise, we were provided a grant by dYdX to work on a research paper that goes into the territories of cross-chain arbitrage and also explores the subject of negating MEV externalities in a fully decentralized, validator-driven order book.
The report entails comprehensive insights on MEV’s impact on the new chain and trading, cross-chain MEV opportunities, user welfare, and centralization risks, ultimately providing practical solutions for mitigating validator-driven MEV risks. Read the report here.
Chorus One is the most active node operator on Cosmos where on-chain governance is enabled.
We have published a detailed research report last year on Cosmos’ governance, which elaborates on Cosmos’ validator participation, voting trends, controversial proposals, and why Chorus One is one of the most active node operators in the Cosmos ecosystem.
In the report, we conducted a governance performance comparison against the top 5 validators by stake on 13 chains from April 2022 to November 2022, which includes Akash, Axelar, Cosmos Hub, Evmos, injective, Juno, Kava, Osmosis, Persistence, Regen, Secret, Sommelier, Stargaze.
As illustrated in the chart below, our voting activity exceeded that of the average top 5 validators by 30%. However, it's crucial to note that the top 5 validators can vary significantly on each chain.
Out of the 13 networks studied, we achieved a 100% voting record in two networks, and in one network, Kava, we surpassed the average by approximately 90%, as demonstrated in the graph below. We consistently exceeded the average participation rates of the Top 5 validators on 11 out of 13 networks
*Since DYDX inflation goes to traders, dYdX stakers, in contrast, will receive 100% of the trading fees that are paid out in USDC.
To learn more about staking DYDX with Chorus One, don’t hesitate to reach out to us at staking@chorus.one. For any support queries, visit here.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 45+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures.
