The bulk of dYdX crypto margin trading products reside atop the Ethereum blockchain. However, the exchange recently rolled out on Layer 2 for instantly settled, inexpensive trades.
Hype around dYdX has intensified because the exchange finally presents a clear decentralized alternative to perpetuals exchanges BitMex, FTX, and Bitfinex. But the hype isn’t just about the product — it’s also about the DYDX airdrop. For some users, the airdrop’s value surpassed an astounding $100K.
Should you be trading on dYdX? This beginner’s guide to dYdX will help you understand what the exchange is, how its products work, and what the deal is with DYDX token.
What is dYdX crypto exchange?
Cryptocurrency exchanges like Coinbase, Binance, Kraken, and Huobi are all pretty similar. They’re centralized crypto exchanges for spot trading — meaning you buy and sell digital assets directly. A handful of decentralized exchanges like Uniswap, Sushi, Curve, and 1inch offer traders the same capabilities without intermediaries.
However, exchanges like FTX and Bitfinex allow you to margin trade crypto with advanced derivatives products like leveraged tokens for more adventurous traders. There’s a massive market for crypto derivatives, as evidenced by the daily $50 billion derivatives trading volume on Binance.
But what if you don’t want to trade on a centralized exchange? That’s where dYdX comes in.
dYdX is a brilliantly executed decentralized crypto derivatives exchange with a plethora of margin trading and perpetuals options for everyone. Besides having a clever name (dy/dx refers to Leibniz’s Notation in mathematics), dYdX has filled a compelling niche within the crypto trading realm.
Founded in 2017 by former Coinbase engineer Antonio Juliano, dYdX garnered immediate investor interest to the tune of $87 million in funding. That significant capital runway allowed the project’s developers to build the trading platform to painstakingly high standards.
Early iterations of the dYdX exchange platform allowed traders basic crypto margin trading capabilities with limited assets. Now, dYdX upped its game by rolling out margin and perpetuals for many cryptocurrencies. It also added lending and borrowing services to decentralize the entire trading experience altogether.
This is an excellent place to pause and quickly explain crypto margin trading and perpetual contracts to the new people in the room. If you already understand these concepts, feel free to skip ahead.
Crypto margin trading explained
Margin trading with cryptocurrencies is when you borrow crypto to bet more on your trading position. In margin trading, you can take two positions: margin long or short. Long means you think the asset’s price will go up; short means you believe its price will go down.
So, the margin part of margin trading means you use your funds as collateral to borrow more, thus allowing you to trade with a larger stack of assets. The more collateral you deposit, the more you can borrow.
Crypto margin trading entails using different powers of leverage, usually denoted as 5x, 10x, 25x, and so on. Using higher leverage lets you capture more significant gains and entails greater risk since you also capture more downside.
Crypto perpetual contracts explained
Crypto perpetual contracts are a type of derivative trading similar to trading products like BTC futures. The way Bitcoin futures contracts work is straightforward — a buyer and a seller agree to trade BTC at a specific price on a fixed date. If BTC is higher than the agreed price when that date arrives, the buyer wins, and the seller loses.
A crypto perpetual contract is similar, except there is no fixed date specified for the exchange. In other words, you can hold a perpetual contract indefinitely (hence perpetual 😉). The main advantage of trading perpetuals over futures is you aren’t stuck with a loss if the trade goes against you. Instead, you can keep riding the position by funding it, allowing for a potential reversal of fortunes later.
Crypto derivatives exchanges have traditionally relied on centralization to organize lending and borrowing for trading on margin and perpetual contracts. However, smart contracts have enabled decentralized liquidity pools, collateralization, and lending across popular protocols like Uniswap, Compound, and Sushi.
dYdX combines the best decentralized financial technologies for a first-of-its-kind crypto derivatives exchange using crowdsourced liquidity only. In practice, this means that when you deposit collateral to open a leveraged trading position, you’re borrowing from a decentralized liquidity pool funded entirely by other traders.
The basic flow for trading crypto perpetual contracts on dYdX is straightforward.
Connect your wallet (MetaMask, Ledger, Coinbase, etc.)
Deposit funds, then select trade.
Open a position with selected leverage (if any) & limits.
Track P&L and fund your position as needed.
However, there are two different versions of dYdX, so your mileage may vary. dYdX offers traders two experiences: Layer 1 dYdX (on Ethereum) and Layer 2 dYdX (on StarkWare).
Let’s take a look at the differences and what each offers.
dYdX on Layer 1
The Layer 1 version of dYdX is a highly liquid decentralized exchange for crypto margin and spot trading. Here, you can use leverage up to 5x on assets like BTC and ETH paired with stablecoins (USDC & DAI).
Borrowing to fund your positions is quickly done with funds deposited directly to your wallet as long as you collateralize appropriately. Currently, the collateralization minimum is 125%, meaning you must deposit well over the amount you intend to borrow. Over-collateralization protects lenders in the event you’re liquidated.
Despite Layer 1 dYdX’s sizable liquidity, the exchange plans to eventually phase out both margin and spot trading as it increases its exclusive focus on perpetuals. Also, because this version is built directly on Ethereum, transaction fees and speed are dependent on Ethereum network activity.
dYdX on Layer 2
Until Ethereum gets its act together (i.e., Ethereum 2.0), Layer 2 scaling solutions are the next best home for high-volume DeFi apps like dYdX. That’s why dYdX on Layer 2 features the exchange’s flagship products. Layer 2 dYdX is fast, seamless, inexpensive to use, and feels just like trading on a centralized exchange like Binance.
Layer 2 dYdX offers crypto perpetual contract trading for a wide assortment of digital assets. BTC, ETH, SOL, DOT, AAVE, LINK, UNI, SUSHI, MATIC, and LTC are some of the USD-paired cryptocurrencies available for trading. In terms of leverage, you can use up to 25x, which represents a hefty step up from Layer 1 dYdX.
Additionally, Layer 2 dYdX offers unique features like:
Fast withdrawal: A special withdrawal liquidity provider sends funds immediately when this option is selected. No wait time for withdrawal equals speedier trading.
USDC collateral: dYdX accepts USDC collateral only, providing a clear, stable, and widely available quote asset for all traders.
Non-custodial: Layer 2 dYdX is built on StarkWare and features fully on-chain liquidity backed by StarkEx technology. Allows real-time yet secure decentralized trading.
In a nutshell, the difference between Layer 1 and Layer 2 dYdX is the former is the legacy version, and the latter is the future of dYdX. To sum up the differences, here’s a helpful table provided by the dYdX team.
Who is dYdX built for?
All of this talk about crypto margin, spot, and perpetuals trading misses a key point about the intended audience of those trading products. What kind of crypto trader uses dYdX? It’s difficult to figure that out easily because the simple dYdX UI looks similar to Coinbase Pro.
Even though you can perform simple crypto spot trades on Layer 1 dYdX, that’s not its intended use. In fact, the spot trading function looks built-in just to generate an early revenue stream for the platform but will be phased out later.
Besides, the dYdX team understands the crypto spot trading business is full of competition amongst very established names. That’s why the team is entirely focused on crypto derivatives like perpetual contracts.
Crypto derivatives trading is usually reserved for experienced traders who have honed their craft over time and understand the risks, rewards, and strategies involved. For example, BTC perpetual contracts trading involves many moving parts and can’t be done with a hands-off approach. Failing to fund an account over time adequately can lead to liquidation, i.e., the loss of your entire position.
The DYDX token is hugely responsible for the trading platform’s success because it’s primarily used for generous rewards. Earning rewards on dYdX isn’t as difficult as you might think — you just need to participate in the protocol. Here’s how (finger pointing)
dYdX liquidity staking pools
Decentralized liquidity is the crucial component dYdX needs for success. Without funds deposited by liquidity providers, the exchange simply doesn’t have the means to support demand and compete with centralized derivatives exchanges.
To incentivize liquidity providers, dYdX liquidity staking pools reward anyone who deposits USDC in the pool with DYDX tokens. 25 million DYDX tokens are up for grabs as part of the program — a number that accounts for 2.5% of the total token supply.
After you deposit USDC to the protocol, you stake it in the pool to receive stkUSDC. Then, you mark your token as active to add it to the usable liquidity pool. That’s when your USDC deposit starts earning DYDX tokens and a share of trading fees.
dYdX trading rewards
If you’re not ready to provide liquidity, there’s another way to earn DYDX tokens by simply trading on the platform. Yes, it’s as simple as it sounds!
As you trade, the platform rewards you in DYDX tokens from a 250 million DYDX token stash. That’s a whopping 25% of the total token supply which shows serious dedication to dYdX users.
Discounted trading fees
If you’re trading on dYdX, it doesn’t hurt to save on trading fees. In a way, that increases your P&L — so it’s fair to chalk that up as a reward!
To get discounts on trading fees, you need to hold DYDX tokens in your wallet. Discounts range from 3% to 50% off trading fees for the largest DYDX holders.
DYDX governance token
This part isn’t directly about earning rewards, but it can definitely lead to earning them. DYDX token is also used for governing the protocol, which means you can vote for measures that directly benefit you and other traders and/or liquidity providers.
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