dYdX is currently built on Ethereum and powered by scalability solution, StarkWare. The exchange focuses on the trading of perpetual contracts or ‘perps’. Perps are derivative trading products that function in a similar way to futures contracts, allowing the trader to gain long or short exposure to a crypto asset.
Derivatives markets are likely to be a growing use case as more sophisticated investors enter the crypto sector, but the niche arguably hasn’t been captured any one application or company so far.
Achieving full decentralization
In its announcement dYdX stated that its rationale for the move is to achieve full decentralization. Currently, the exchange’s orderbook and matching engine are centralized and managed by dYdX Trading, Inc. - the developers of the platform.
Throughput has also been a major obstacle. On Twitter, dYdX stated that “the issue with every L1 and L2 is that none can handle the throughput needed to run a first class orderbook and matching engine”.
In its current form, the exchange processes 10 trades per second and 1,000 order placements/cancellations per second. However, this doesn’t allow it to scale up to orders of magnitude higher as required. The platform developers believe that a standalone Cosmos-based blockchain will facilitate much greater throughput as a consequence of it being fully customizable.
Once up and running, dYdX outlined that V4 will mean no gas fees will be incurred when trading. No centralized party will have the ability to receive trading fees on V4, and a percentage-based trading fee structure similar to other exchanges will be applied. Fees will accrue to validators and their stakers.
A blow to Ethereum L2
This development is likely to be seen as a major shot in the arm for Cosmos and a blow for Ethereum Layer 2 (L2) solutions - and Ethereum generally. dYdX is a top tier L2 app. and one of the top 20 protocols in crypto. ShapeShift CEO and founder, Eric Voorhees took to Twitter to remark that the switch is “a big deal”.
The Ethereum community has been encouraged by the development of StarkWare’s L2 application as a way forward for Ethereum-centric applications. However, with several advantages provided by a Cosmos-based blockchain, this decision by dYdX may send a message to other builders in the crypto space that Cosmos provides a better way forward. That said, the way forward is still unclear. Alex Gluchowski, co-founder of Ethereum L2 scaling solution Zksync maintains that although he understands the rationale for dYdXs move to Cosmos, he believes that L1 will ultimately prove to be unsustainable and that dYdX will eventually return to Ethereum L2. Watch this space as the technology continues to evolve and get built out.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.