dYdX has become the new winner of the DeFi wave, this article understands the core competitiveness of dYdX
Decentralized Finance (DeFi) is an ecosystem full of unknown treasures. From lending to yield farming, from high APY staking protocols to margin trading, DeFi is gradually transforming into one of the most ideal and preferred solutions for private investors, institutions, cryptocurrency venture capital firms, and retailers. Since all kinds of new ideas and value propositions burst out in this field every day, DeFi is destined to become a subversive of finance in the 21st century.
Over the past few years, the digital asset space has undergone a period of enormous expansion and built a truly novel, cutting-edge economic framework. In fact, DeFi provides the necessary infrastructure for blockchain projects to fulfill the functions of the traditional financial system while experimenting with various new possibilities in a decentralized environment. This, in turn, has facilitated the development of decentralized financial applications, or dApps, essentially incorporating them into a trustless, disintermediated environment.
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What is dYdX
dYdX is a decentralized margin trading protocol built on the Ethereum blockchain. The protocol allows users to lend, borrow, and invest in the future price of crypto assets through its decentralized exchange (DEX), with the ultimate goal of bringing trading tools that are usually found in traditional markets such as foreign exchange and stocks to the region. In the blockchain ecosystem.
While on the surface it looks like any other Ethereum-based lending protocol, dYdX is actually a trailblazer from the ground up. While decentralized lending protocols have existed on the Ethereum network for quite some time (example: Compound), the Ethereum ecosystem has always been lacking in advanced margin trading tools and protocols, which is what dYdX fills blank fields.
Just like most DeFi financial products, dYdX can be used by anyone at any time, and its users' assets are managed, run and stored entirely by smart contract applications, rather than third-party custody. The dYdX decentralized trading platform is open source, transparent, and free to use, and one of the most exciting features offered by its infrastructure is that it allows users to perform trustless peer-to-peer shorting and options trading on any ERC-20 asset .
To facilitate decentralized perpetual transactions on-chain, dYdX recently launched its second-layer scalability infrastructure. In fact, in order to greatly improve efficiency and expand the transaction scale on its platform, dYdX cooperated with StarkWare, based on StarkWare's StarkEx scalability engine and dYdX's perpetual smart contract, designed its own Layer-2 protocol for cross margin Perpetual trading(Cross Margin: Different products or different product categories in a portfolio investment are related, so the risks can offset each other, and the corresponding total margin can and should be reduced to a certain extent).
Through its in-house second-layer scaling solution, dYdX enables platform users to execute transactions with zero gas costs, lower transaction fees and reduced minimum transaction sizes. This represents a major step forward for DEX perpetual trading and will surely accompany dYdX as the leader in the space."First"A Journey to a Decentralized Exchange Protocol.
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What is margin trading?
To understand the core competitiveness of dYdX, it is necessary to understand what is margin trading. Margin trading is essentially leveraged trading, such as BTC-USD. Cryptocurrency traders place bets on the price of a crypto asset to move in a particular direction, whether up or down, and they can execute trades on the exchange's spot market. And margin trading allows them to magnify their profits when they are right, but similarly magnify their losses if the trade goes against their predictions. Essentially, traders use margin to increase their potential returns and thereby utilize capital more efficiently.
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What is collateral?
Collateral forms the backbone of a decentralized lending protocol. Since identity solutions and reliable credit checks have yet to be incorporated into the blockchain, almost all DeFi protocols require collateral as proof of funds to guarantee users’ solvency.
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What is a Compound Loan?
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What is perpetual contract trading?
Perpetual contracts are derivatives similar to leveraged spot transactions, and are digital currency contract products settled in BTC, USDT and other currencies. Investors can obtain income from rising digital currency prices by buying long, or obtain income from falling digital currency prices by selling short. There is a certain difference between the perpetual contract and the traditional futures: it has no expiration time, so there is no limit on the holding time. In simple terms, it can be understood as an infinite futures contract.
Currently, there are relatively few decentralized protocols on the market that provide derivatives or margin trading. In reality, most margin trading occurs on centralized exchanges, but even these exchanges fail to provide sufficient financial products on decentralized assets.
In fact, for decentralized derivatives and margin trading protocols to work effectively, there needs to be a way to trustlessly swap assets and determine the exchange price for those assets. So far, the Defi ecosystem has proposed several solutions to this problem, including AMMs, on-chain order books, and hybrid off-chain order books.
The dYdX white paper reads, “We chose to build dYdX on the hybrid approach pioneered by 0x because we believe it can create the most efficient marketplace. The blockchain is only used for settlement.”
dYdX primarily chose to implement 0x’s infrastructure to improve its efficiency as a DEX, as well as use off-chain order books with on-chain settlement to improve transaction performance. Previous attempts at decentralized derivatives have proposed the use of oracle-based approaches that feed the exchange rates of asset pairs to smart contracts. However, the oracle-based approach suffers from some significant shortcomings in terms of infrastructure. In fact, due to the frequency, delay and cost of price updates, it is quite difficult to achieve market efficiency comparable to that of centralized exchanges. Additionally, using oracles in any protocol requires some degree of centralization, as some centralized authority has full control over how prices are set.
Since dYdX allows trading decentralized financial products at any price agreed upon by both parties. This basically means that contracts on dYdX do not require price oracles, nor do contracts need to know market prices, as contractual agreements are settled directly between two entities in order to maintain decentralization.
Currently, dYdX lends on Layer-1 of Ethereum and mainly supports three assets, namely, ETH, DAI and USDC. Considering that dYdX is a completely trustless, permissionless decentralized margin trading protocol, rather than a pure lending platform, it is reasonable to have fewer asset types for lending.
dYdX is committed to facilitating the process of leveraged trading of crypto assets in a decentralized environment, reflecting the explosive development of the emerging DeFi field. Through dYdX, users can seamlessly go long and/or short perpetual contracts with up to 25x leverage, and margin trade ETH-USDC and ETH-DAI with up to 5x leverage.
In a sense, dYdX fundamentally changes the way traders engage with DeFi applications and decentralized exchanges (DEXs) in general, as it provides them with the necessary infrastructure to perform transactions that were previously only possible in centralized exchanges. Exchanges (CEX) get features and take advantage of them.
This article is from Bitpush.News, reproduced with authorization.
Image source: Internet
Author: Chen Zou
This article is from Bitpush.News, reproduced with authorization.
