DyDx is “cool” and Commands Billions, but is it Overvalued?

DyDx is actively demonstrating a future in which Ethereum won’t be under the choke-hold of scaling issues. The resulting unbridling would open unimagined possibilities, accommodating innovations from the hyper-growth within the Ethereum ecosystem.

Trading is gradually being decentralized and migrating to able layer-2 containers for better execution and user experience.

DyDx is a crypto derivatives platform presenting several incentives to participants. On the table, traders can margin trade besides accessing other exciting features as you would expect in any other ambitious DeFi protocol. In DyDx, the setup is as a typical DeFi pool. The main difference is the offloading of execution from the base layer to layer-2. This change results in negligibly low Gas fees and lightning-fast settlement.

This is the kind of speed you would expect in Binance and experience in Arbitrum or Uniswap on Optimism. Settlement is quick—and this is precisely what the trading community wants to “feel.” However, unlike Binance, a trader won’t have to take a selfie as part of the verification. All that’s needed is a MetaMask wallet, and everything is good to go.

Powering DyDx is StarkEx by Starkware using ZK-Rollups—(inaccessible to U.S. users).

ZK-Rollups use rollups—just like Optimism—but is not optimistic, meaning that the protocol wouldn’t rely on or trust validators to “act right” and not include a fake transaction in a block.  In place of trust is zero-knowledge-proof mathematics allowing for automatic transaction validation—an effective, privacy-enhancing data integrity measure.

While a trader could mention BNB or FTT as a reason for sticking with Binance or FTX exchange, the rollout of the DYDX governance token is the game-changer. DyDx Exchange borrowed a leaf from Uniswap—the world's largest DEX. There will be 1 billion DYDX tokens as total supply. Out of which a big chunk will be allocated to the community comprising liquidity providers, active traders, stakers, and other stakeholders—it's DeFi, after all. The fuel depends on community participation.

Five hundred million DYDX tokens will then be distributed to early investors, the foundation, the team, consultants, employees, name them all.

Like Uniswap's UNI, DYDX will strictly be a governance token where token holders would help shape the project's trajectory. Holding DYDX and surpassing the threshold requirements would allow token holders to achieve utility functions. They can set risk parameters for the layer-2 protocol, vote for the inclusion of new token listing, govern underlying contracts, vote on market makers that can be added to the liquidity pool, or define safety staking pool payouts if there are losses.

As they hold DYDX tokens, they will, in turn, receive retroactive mining rewards. However, only active traders qualify, and rewards depend on their activity levels--trading rewards—including trading discounts-- to encourage the use of the trading portal—also depending on trading activity and volumes--and receive liquidity provision rewards.

This program will run for five years, during which participants can supply liquidity—provided they meet the protocol's set requirements. All rewards, it should be mentioned, would be distributed after 28 days. DyDx states that the goal is to build liquidity over the long haul steadily.

DyDx is offering niceties while not disappointing on their product offerings, a reason why participation has been exploding in recent weeks. As of writing on September 29, DyDx has a TVL of $653 million, rising 26 percent week-to-date and only tracking Arbitrum with over $1.3 billion under management. The protocol's TVL has more than 20X from December 2020—thanks to Layer-2 integration and the introduction of the DYDX token. Besides the rapid expansion in TVL, there are over 40k cumulative traders. Most of them entered the system after August—during which over 8.5k joined.

Despite all that DyDx Exchange is offering and demonstrating, DYDX token holders don't receive a share of trading fees—a big concern for one observer. What's more, there is no plan encoded for the DAO to allow fees distribution to token holders; neither is there any other use case nor buy backs of the token. Instead, all fees are distributed between DyDx Foundation and the Exchange.

Adam Cochran @adamscochran

1/22 I love DyDx as a product, it shows the huge value that onchain perps are going to have. But, I think its overvalued compare to the upside potential of others in the space. China's push on CEXs was a huge gift to the space, that while up large, I think is just starting.

Therefore, while he admits the benefits of DyDx—for instance, its ingeniously crafted liquidity programs--and its position as a leader in Layer-2, DYDX—at spot rates—is over-valued. Accordingly, it might just under-perform competitors, for example, the Perpetual Protocol or the Injective Protocol, which he argues have better rewarding schemes.

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