dYdX is a decentralised exchange (DEX) founded in 2017 by Antonio Juliano, former Coinbase and Uber software engineer. dYdX allows users to trade cryptocurrencies with leverage, meaning users are able to borrow funds to increase the potential return on their investments. It is built on Ethereum and employs smart contracts to enable trading, lending and borrowing of cryptocurrencies.
As a decentralised exchange, dYdX operates without a central authority or intermediary, allowing users to trade while maintaining full control of their funds. dYdX utilises layer-2 (L2) scaling solutions like StarkEx to increase transaction throughput and efficiency, reducing congestion and gas fees on Ethereum.
The name dYdX is inspired by a mathematical concept called derivatives, which show how a variable changes when certain inputs are used. In conventional finance, derivatives trading involves contracts between parties based on the future price movements of underlying assets. This allows traders to trade without owning the underlying assets.
How does dYdX work?
Perpetual futures contracts
The primary way that dYdX enables traders to trade using leverage is through perpetual futures contracts, also known as perpetual swaps. These contracts or swaps are agreements between traders to buy or sell a particular cryptocurrency in the future without owning them outright. For example, a trader could enter into a perpetual swap to sell Bitcoin at a specified price in the future without actually owning the Bitcoin at the time of the agreement.
Unlike traditional futures contracts, perpetual swaps do not have a predetermined expiration date, making them perpetual. Similar to how derivatives are utilised in traditional finance, perpetual swaps on dYdX allow traders to leverage their positions by borrowing funds to increase their market exposure. This mechanism allows them to potentially increase their profits by taking advantage of market movements, but also exposes them to higher risks due to leverage.
StarkEx
DYdX transactions are settled using StarkEx, developed by StarkWare, which is a layer 2 (L2) scalability solution built on top of the Ethereum blockchain. Layer 2 refers to a secondary framework built on top of an existing blockchain network, such as Ethereum. In this case, Ethereum acts as the foundational level and is referred to as a layer 1 (L1) blockchain.
StarkEx’s aim is to enhance transaction throughput and efficiency by processing and batching transactions, which are later settled on the Ethereum network. This significantly reduces congestion and Ethereum gas fees while maintaining security.
What is the cryptocurrency of DYDX?
The cryptocurrency of DYDX is called dYdX. It has several purposes within the ecosystem, including governance, fee payment and incentivising liquidity providers. Holders of dYdX can participate in the governance of the platform by voting on proposals related to protocol upgrades, fee changes and other matters affecting the ecosystem. It is also used to pay trading fees on the platform and liquidity providers are rewarded with dYdX for providing liquidity to the exchange.
Tip
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This information is not intended to be nor does it constitute financial, tax, legal, investment or other advice; nor is it a call to trade. The information is intended as general market commentary for information purposes only. Before making any decision or taking any action regarding your finances, you should consult a qualified Financial Advisor.