Introduction
In this article, we will explore the details of dYdX, a cutting-edge decentralized exchange (DEX) for trading perpetuals, with a mission to democratize access to financial opportunity. We will examine the platform's ultimate goal of full decentralization and why it lies at the heart of its mission. Whether you are new to crypto or an experienced trader, this guide will give you the information you need to start trading on dYdX.
What is dYdX?
dYdX is a leading decentralized exchange for trading perpetual contracts of digital assets. Trading perpetual contracts enable traders to profit from price movements without actually owning the underlying asset and without the limitations of contract expiration. For more information on perpetual trading, read our article on perpetual contracts.
The dYdX protocol is built on the Ethereum blockchain and utilizes smart contracts through a Starkware Layer 2 technology known as StarkEx. This technology enables fast transaction processing on the platform. However, dYdX aims to fully decentralize the order book and matching engine by migrating the protocol to its standalone Cosmos-based blockchain in its V4 upgrade.
dYdX is recognized for its user-friendly interface, low fees, efficient transaction processing, and the ability to offer up to 20x leverage on positions. These features, among others, have established dYdX as the top choice for a decentralized alternative to centralized exchanges (CEXs).
A brief history of dYdX
dYdX was established in 2017 by Antonio Juliano, a talented engineer who previously worked at a digital asset exchange. Aiming to build practical applications on Ethereum, Antonio and his team set out to create a decentralized margin trading platform based on derivatives.
In 2018, dYdX launched Expo, a simple trading app for buying leveraged tokens built on top of the initial version of the margin protocol. In 2019, after improving the V1 protocol, the team released an exchange product targeting experienced traders. Catered explicitly for sophisticated traders, the V2 protocol offered a more powerful pool-based lending approach. To improve the trading experience, dYdX implemented its own order book system.
In 2020, dYdX became the first decentralized exchange to offer perpetual contracts. The Bitcoin perpetual contract launched in April 2020. This marked a significant milestone in the evolution of dYdX, shifting its focus towards pioneering decentralized perpetual trading and establishing itself as a product leader.
During the “DeFi summer” of 2021, Ethereum gas fees saw a significant surge, emphasizing the need for changes to the product. In response, dYdX made the shift to the layer 2 Starkware platform. This change brought about a substantial improvement in throughput and introduced cross-margining, leading to an expansion of trading markets and an increase in liquidity. Later in the summer, dYdX furthered its commitment to decentralization by launching the DYDX token, an Ethereum-based token that grants governance rights on the dYdX protocol. With the support of the dYdX Foundation, the team empowered the community to take ownership of protocol parameters and to drive community-led initiatives.
In 2022, work commenced on V4, the fully decentralized version of dYdX. With an expected launch at the end of 2023, V4 will be based on a standalone Cosmos chain. V4 is driven by a clear mission and the potential to fulfill dYdX's goal of becoming the leading crypto exchange.
Why does decentralization matter?
Decentralization is a priority at dYdX, but why is it crucial for crypto trading platforms?
The objective of dYdX is to establish the world's leading crypto trading platform in DEX and CEX categories. Decentralization represents a significant advancement over centralized financial platforms. In the long term, most financial transactions will occur on decentralized networks.
One of the key benefits of decentralization is transparency. For the first time, users have visibility into the financial system. With Decentralized Finance (DeFi), users can trust code instead of corporations. dYdX V4 will be open source and audited by industry experts, ensuring that the platform is transparent and trustworthy. Decentralization also gives users true control of financial platforms, leading to increased fairness, community alignment, and equality of opportunity.
The dYdX Foundation has set the community on this path with the launch of dYdX governance, and with dYdX V4, the platform will be fully community controlled. The future of dYdX will be in the hands of the community, ensuring that the platform is aligned with the interests of its users.
Getting started
In this section, we will guide you through the process of onboarding to dYdX and executing your first trade! Before proceeding, please note that there may be eligibility restrictions for using dYdX, such as geographic location. You can review the official terms of use on the dYdX website for more information.
To get started, you will need to create an account on dYdX. This can be done by clicking the “Connect wallet” button on the exchange website and linking your personal wallet. You will be prompted to connect a web browser wallet to the platform through the StarkEx network. Once you have linked your wallet, you can provide a username and link an email address to receive notifications.
After linking your wallet, you can deposit funds and start trading. To do this, simply click the “Deposit” button and transfer funds from the connected web browser wallet to a StarkEx key linked with the same wallet. Keep in mind that you retain control of the funds. They are simply being transferred to a different layer for fast transactions.
Once you have funds in your account, you are ready to trade on the “Trade” tab of the platform. All trades on dYdX are executed using the USDC stablecoin as collateral. The USDC collateral is used to reflect profits, losses, position sizes, funding payments, and margin requirements. It's important to note that on dYdX, you will be trading perpetual contracts on the underlying asset, not the asset itself.
Getting started on dYdX is straightforward, but taking the time to educate yourself about important concepts and the dYdX platform before diving in is essential. A video overview of the steps discussed in this section is also available here: Watch video
Summary
dYdX is a cutting-edge decentralized trading exchange that caters to retail and professional traders. The launch of V4, a completely decentralized platform, highlights dYdX's commitment to fostering transparency and empowering community control. As the DeFi landscape evolves, dYdX will play a significant role in the future of decentralized trading and empowering traders, worldwide.