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Brief analysis of dYdX economic mechanism

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DYdX's token incentivizes its ecological growth.

A Brief Introduction to the dYdX Economy

Original author: Blue Fox Notes

Crypto derivatives trading is the next big trend as DeFi evolves. Before blue Fox notes introduced Perpetual protocol "Perpetual Curie", today simply take a look at dYdX token economy mechanism.

DYdX, like Perpetual, is a DeFi derivatives trading platform. Both are among the largest in terms of volume of perpetuity contracts in DeFi. At the time of writing, dYdX had about $623 million in trading volume, more than 130,000 orders and more than $1.90 in open position. Perpetual's transaction volume was approximately $239 million, with approximately 51,000 transactions and a one-day agreement capture fee of $238,000.

(dYdX trading volume in the last 24 hours at the time of writing, from dYdX website)

(Transactions of Perpetual in the past 24 hours at time of writing, from DuneAnalytics)

DYdX's recent rapid rise in trading volume, a large part of the reason is related to its token incentive. Blue Fox Notes started paying attention to dYdX in 2019. It hadn't been using token incentives until now, but with the rapid rise of its competitors, dYdX's adoption of token incentives was inevitable unless it stayed in a corner.

In addition, dYdX currently has both perpetuation contracts and leverage. The perpetuation contracts are built on StarkWare, an L2 solution that is superior to L1 in terms of transaction speed and fees, which is an important foundation for dYdX's rapid growth in transaction volume.

* Main uses of DYDX

DYdX tokens dYdX is primarily a governance token that can be used to make community decisions about its development. At the same time, it can be used as a discount for user transactions on its platform, as shown in the following figure:

(Discount relationship between traders' wallet balance and transaction fees, dYdX website)

There are no capture fees for DYDX tokens, however, and it will be up to the community to determine the direction. By comparison, Perpetual's protocol token, PERP, captures transaction costs, see Perpetual's Curie.

The release of the * DYDX

There are 1 billion DYDX tokens, which will be released over five years, followed by a possible 2 percent annual increase, though the decision will be made by the community after five years. In this five-year release ratio, liquidity offering and pledge together get 10% token reward (2.5% pledge, 7.5% liquidity offering); Community Treasury 5%; Retroactive reward 7.5%; 25% trading bonus. The remaining 50% is divided among investors, teams, etc.

(DYDX token allocation, DYDX website)

Initially, 55,680,000 units are expected to enter circulation, accounting for 5.56% of the total. Most of these will be backdated users (who have used dYdX before and have completed a certain amount of transactions within a specified time frame). According to the data of its control panel, the total number of real circulation is 33,201,266 at the time of writing, accounting for 3.33% of the total number of circulation. With the progress of users' receiving, the circulation will continue to increase, but only for the current situation, the increase is not large.

(Total DYDX circulation at the time of writing, DYDX website)

*DYDX aims to drive its liquidity and trading network

DYDX's contribution to its ecosystem is that it promotes the development of its network through trading rewards and liquidity pledge rewards. This in itself is not new, as many DeFi projects have had similar incentives before. DYDX token rewards will bring more users to trade and more people to provide liquidity. Better liquidity leads to more traders. Some traders are looking for a reward, some for a better trading experience, or both.

The current incentive for dYdX is around 5 million dYdX per month, which is currently worth over $60 million. Of course, there will be some equilibrium. As more traders and liquidity providers enter, the share of divisible rewards decreases and the cost of obtaining rewards increases. As yields reach a certain equilibrium, liquidity miners or traders are likely to move into other platforms, such as Perpetual, eventually forming an equilibrium.

In addition, the behavior of traders or liquidity pledges who are rewarded with tokens will also have a greater impact on the price. Whether these users are selling users, holding users, or trading users (because they attach importance to trading discount holding), the proportion and behavior of different types of users will have a direct impact on their future ecological development.