Author: Severin, thanks to @0X_IanWu for providing in-depth guidance and advice on this article
TL;DR
The dYdX token economic model update requires token holders such as teams and early investment institutions to pledge DYDX tokens in order to capture dYdXs fee income. This will increase the pledge rate of DYDX, reduce the amount of DYDX in circulation, avoid large-scale token sales, and improve the value capture capability of DYDX.
dYdXs migration to the application chain avoids profit redistribution with StarkWare. The performance improvement and customizability brought by the application chain can also strengthen the markets future performance expectations for dYdX.
dYdXs new early stage incentive plan, Nobles upcoming native USDC, and the recent significant increase in secondary market liquidity and volatility will all benefit the development of dYdXs fundamentals.
December will usher in a huge amount of tokens being unlocked, but we do not expect this to cause a large amount of token selling. The team and early investment institutions may choose to capture the growth expectations of dYdX in the form of pledged tokens.
introduction
dYdX recently completed the migration from StarkWare to the Cosmos application chain and completed its first transaction on November 13. dYdX has also updated the token economic model of V4, giving DYDX stronger value capture capabilities. We expect that under the dual impact of these two events, dYdXs fundamentals will be greatly improved, and DYDX will also be able to capture greater secondary market gains.
Token economic model update empowers DYDX’s value capture capabilities
1. dYdX income goes to currency pledgers
dYdX founder Antonio announced that dYdX Trading Inc. has officially become a Public Benefit Corporation and will not generate fee income from the operation or trading of dYdX V4. dYdX Chain will distribute all protocol fees, including USDC-denominated transaction fees and DYDX-denominated Gas fees, to validators and pledgers. It is worth noting that the dYdX team also needs to pledge tokens to obtain dYdX fee income, which also prevents teams holding large amounts of tokens from selling and causing damage to the market. dYdX’s current average annual revenue is approximately $105.47 m, and the distribution of protocol revenue among validators and stakers will increase DYDX’s value capture capabilities.
dYdX Daily Fees
2. DYDX token model update
Previously, DYDX tokens were mainly used for protocol governance, fee discounts and exemptions, and pledge capture token inflation incentives. dYdX V4 makes changes to the protocol governance and staking modules, expanding token governance authority and allowing token stakers to capture real returns.
First, DYDX holders are now able to vote and govern key parameters and key functional modules of dYdX, including but not limited to transaction rate parameters, transaction reward mechanisms, third-party price sources, adding/removing existing markets, etc. The expansion of governance rights allows DYDX holders to dynamically adjust transaction parameters and protocol functions according to market demand to adapt to market changes, making governance rights more valuable.
Secondly, DYDX holders who pledge tokens will receive a source of income consisting of transaction fees and gas fees, instead of the previous token inflation incentives, which will increase the real rate of return of the pledgers. DYDX tokens will also be transformed from mining coins into dYdX Chain universal tokens with value capture capabilities, wealth effects and governance rights. The increase in dYdXs trading volume and improvement in fundamentals will increase dYdXs fee income and amplify its appeal to DYDX holders for staking tokens. This process will further reduce the number of DYDX tokens in circulation, amplify the market demand for DYDX tokens, promote the price of tokens, and form a positive upward flywheel.
dYdX Price & Fees
The picture above shows the token price and protocol fee performance of the DYDX token model that has not yet been modified. We expect that the new token model will further strengthen the growth of token prices and protocol fees.
Application chain migration strengthens dYdX’s future performance expectations
1. Pursuing higher performance than CEX
One of the important reasons why dYdX left StarkWare is that StarkWare has been upgraded, and the existing performance and cost overhead are not enough to support dYdXs growth plan to compete with centralized exchanges. The specially designed application chain eliminates the need for dYdX to compete with other protocols. It can exclusively enjoy the performance of the application chain, reduce on-chain transaction costs, and better meet dYdX’s high TPS requirements for order books and matching engines. Before the migration, dYdX could only process about 10 transactions and 1,000 order/cancellation requests per second. After the migration, dYdX was able to process up to 2,000 transactions per second. In addition to performance improvements, dYdX no longer needs to distribute profits with StarkWare after independence, which will significantly increase the stakers expected income from the protocols future income distribution mentioned at the beginning.
2. Customized application chain brings better trading experience
Another major benefit of migrating to the application chain is that dYdX can achieve higher customization of the workflow of the blockchain and verification nodes to meet the needs of decentralized derivatives trading.
In dYdX v4, each validator node will run an in-memory order book that will never reach consensus off-chain. Order placement and cancellation will be propagated through the network, and only transactions that are successfully matched in real-time and confirmed by consensus will be finally submitted to the blockchain to ensure that the order book data stored by each verification node is unified. Based on the above operation logic, the users order placing and order cancellation behaviors are off-chain behaviors, and there is no need to pay gas fees. Only when the order matching transaction is completed on the chain, the user needs to pay the gas fee for order completion.
Additionally, dYdX has partnered with Skip Protocol to develop the MEV dashboard to expose harmful/dishonest nodes. The community will punish such nodes to ensure the fairness of the dYdX trading network. Migrating to the application chain will allow dYdX to further optimize users actual trading experience and increase users willingness to trade on dYdX.
MEV Dashboard on dYdX
Other benefits and future risk warnings
1. Early Incentive Plan
The dYdX community passed the launch incentive proposal for dYdX v4 and will allocate $20 million in DYDX from the dYdX Chain community treasury for a 6-month launch incentive program deployed on v4 to incentivize early adopters. The early incentive plan can strengthen users willingness to cross-chain funds to dYdX Chain and promote the increase of dYdX transaction volume and fee income.
2. Native cross-chain USDC
Circle Cross-Chain Transfer Protocol (CCTP) will be launched on the Cosmos ecological application chain Noble on November 28, allowing users to cross-chain native USDC from Noble to dYdX Chain in a single transaction. The launch of CCTP on Noble makes it easier, safer and more efficient for users to send USDC to dYdX Chain.
3. Unlock the amount of tokens in December
The biggest risk event that dYdX V4 faces in the near future is the unlocking of daily tokens in December. According to TokenUnlocks information, 15% of the total dYdX tokens will be unlocked on December 1st. However, this unlocking may not necessarily result in massive selling pressure. As mentioned above, staking DYDX tokens can obtain a considerable share of handling fees and gas fees. Most of the tokens unlocked this time belong to the team and early investment institutions. Affected by the recent boom in the secondary market and changes to the dYdX token model, the team and institutional investors may also choose to capture the subsequent value growth of dYdX in the form of pledged tokens.
DYDX Token Unlocks
To sum up, we believe that under the influence of the completion of the dYdX application chain migration and the upgrade and update of the token economic model, the fundamentals of **dYdX have a stable and positive growth trend, and the DYDX token can also further capture the value growth of dYdX . **At the same time, since October 25, the overall crypto market has recovered, with volatility and liquidity increasing significantly. The sharp increase in the price of DYDX tokens also reflects the market’s optimistic expectations that the market outlook will continue, the platform’s transaction volume will continue to expand, and it will drive continued growth in fee income.
Reference
https://dydx.exchange/blog/public-benefit-corporation
https://www.dydx.foundation/blog/dydx-token-mechanics
https://dydx.exchange/blog/dydx-chain-official-release
https://dydx.exchange/blog/dydx-chain
https://dydx.exchange/blog/distinguishing-mev-from-expected-noise
MT Capital
MT Capital, headquartered in Silicon Valley, is a crypto-native fund focusing on Web3 and related technologies. We have a global team, and our diverse cultural backgrounds and perspectives allow us to have an in-depth understanding of the global market and to seize investment opportunities in different regions. MT Capitals vision is to become the worlds leading blockchain investment firm, focused on supporting early-stage technology companies that can generate significant value. Since 2016, our investment portfolio covers Infra, L1/L2, DeFi, NFT, GameFi and other fields. We are not just investors, we are the driving force behind the founding team.
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