ETH Layer2 inventory series: dYdX, the leading project on the chain derivatives track
dYdX is a decentralized perpetual contract exchange deployed on the ETH mainnet , and a leading project on the chain derivatives track.
In February of this year, dYdX and StarkWare launched a cross-margin perpetual contract platform in the ETH Layer2 blockchain system based on Starkware’s StarkEx scalability engine and dYdX’s Perpetuals smart contract, which significantly increased the scale of non-custodial transactions.
According to data from its official website, dYdX’s average daily trading volume has exceeded US$2 billion for several consecutive days, and the amount of open positions is also close to US$1 billion. Its rapid growth rate is very rare.
There are two reasons for the rapid growth of dYdX trading volume:
First of all, dYdX has been iterated to the V3 version. It is in this version that dYdX’s perpetual contract transactions are deployed on the ETH Layer2 blockchain system (Starkware) to run.
This allows the exchange to provide higher transaction throughput and lower minimum order volume, while also greatly reducing the user’s cost of use.
After the user deposits the funds into Layer 2, there is no longer a need to pay Gas Fee for each transaction.
Secondly, the issuance model of DYDX, the governance Token of the dYdX protocol, is also contributing to the rapid growth of transaction volume.
The release of DYDX adopts a transaction reward model. Users only need to perform contract transactions on dYdX to obtain DYDX token rewards.
The specific model is that starting from September 1, 2021, every 28 days will be a cycle, and 3,835,616 DYDX Tokens will be distributed as rewards to users who have made transactions during the period. The specific formula is shown in the figure:
Users earn points based on the contributed transaction fees and average holdings, and then share 3,835,616 DYDX in each period based on the proportion of points.
The calculation formula of the trade score (traderScore) is actually a Cobb-Douglas production function, in which the weight of the transaction fee is 70%, and the weight of the average open interest is 30%.
For example, if Xiao Ming contributed a transaction fee of $1,000 in a certain period of distribution, and his average position is $100,000, then his trading points are:
If all the transaction points generated in this period are 1,000,000, then the amount Xiao Ming can allocate to DYDX is:
In this allocation model, as long as the market value of DYDX that the user can allocate is higher than the fee spent, he has the motivation to continue to increase his trading points, which in turn promotes the increase in the trading volume and open interest of the dYdX platform .
dYdX hidden risks
Although dYdX does have its innovations, this type of model also hides some risks, which may lead to the emergence of a “death spiral” in severe cases.
In the official introduction document given by dYdX, DYDX Token only has the functions of governance voting and fee discount, and did not state that part of the transaction fee will be used to repurchase DYDX, which shows that DYDX’s value capture ability is not strong.
In the absence of stable cash flow to repurchase DYDX, if the hot money in the secondary market is no longer interested in DYDX, which causes the price of DYDX to fall, then the user’s motivation to “swipe the volume” will also decrease, and currency prices may appear. And the vicious circle of both decline in trading volume.
Moreover, the monthly fixed release of DYDX is also a big selloff.
Compared with speculators who directly purchase DYDX in the secondary market, the cost is much lower than that of users who earn tokens from dYdX by “swiping”.
Therefore, for some speculators in the secondary market, be extra careful, the price fluctuations will be huge and unpredictable.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/eth-layer2-inventory-series-dydx-the-leading-project-on-the-chain-derivatives-track/
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