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dYdX's Alternative Expansion Road

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In addition to operational factors such as trading and mining, what other underlying logics support the price of DYDX?

The development of the trading platform on the chain has always followed two independent main lines, one is to pursue higher transaction efficiency, and the other is to pursue higher efficiency of computing usage.

In traditional centralized trading platforms, the pursuit of computing efficiency is often ignored. Since the marginal cost of each calculation on the centralized platform approaches zero, the focus of its competition is on how to improve transaction efficiency. Eventually, the familiar order book transaction matching mechanism was developed.

When the underlying structure of the trading platform was converted from a centralized server to a platform-based public chain, the transaction efficiency was obviously superior, but the calculation volume was inefficient. The order book mechanism is also showing symptoms of acclimatization. It was not until the emergence of the AMM mechanism that greatly optimized the efficiency of calculation usage that the problem of spot transactions on the chain was basically solved.

dYdX's unique attempt to expand the solution

After solving the problem of on-chain spot transactions, on-chain derivatives transactions have become the next focus of DeFi innovation. Different from spot trading, derivatives platforms have the same high requirements for transaction efficiency. Therefore, it may still be difficult to meet the needs of users only by optimizing the usage efficiency of the amount of computation.

The current derivatives projects can be roughly divided into two categories according to the idea of solving this problem. One is to refer to the successful experience of the spot trading platform and continue to improve the platform’s calculation capacity The efficiency of the use, the representative solution is the vAMM mechanism adopted by Perpetual Protocol, but this solution will still be subject to certain restrictions in terms of transaction efficiency;

The other is to keep the order book mechanism as much as possible, and at the same time reduce the unit cost of computing through capacity expansion. Therefore, almost every derivative project is promoting some form of expansion.

Before the official release of the V2 version of dYdX, the main directions of various projects are application chain expansion, Rollup expansion, and high-performance public chain expansion. However, the platforms that adopted these expansion solutions have not been able to produce phenomenal products until the dYdX V2 version is officially launched.

So, what is the essential difference between dYdX's expansion plan and other plans?

Readers who have experienced the dYdX transaction process must be able to clearly feel that, except for deposits and withdrawals, derivatives transactions on dYdX are almost zero-cost. Users do not need to sign transactions through wallets, nor do they need to pay expensive gas fees. At the same time, the time for transaction confirmation is also greatly shortened.

It can be said that trading derivatives on dYdX is almost the same as trading on a centralized platform. However, other projects that also adopt the Layer 2 expansion solution obviously cannot achieve the transaction efficiency and user experience of dYdX.

So what is the basis for supporting dYdX to achieve a centralized trading platform experience? This is the unique expansion solution StarkEx adopted.

Validium and Rollup

As long as the Layer 2 expansion solution is mentioned, people's first reaction is often Rollup. Indeed, Rollup is the main technical path for Layer 2 expansion, but it is not the only one.

The relative advantage of the Rollup scheme is that transactions on Layer 2 can enjoy mainnet-level security, and at the same time, it can increase transaction costs and TPS by at least one Magnitude. Arbitrum, which has been widely adopted at present, is one of the Rollup expansion solutions.

And dYdX adopts an expansion solution called StarkEx. Although it still belongs to the Layer 2 category in terms of classification, it is another technical path completely different from Rollup. According to Vitalik's proposal, this scheme is currently classified as Validium.

The biggest difference between Validium and Rollup is the storage location of transaction data after expansion. Although Rollup contains more transactions than the main network, all transaction information is stored on the Ethereum main network in the form of Calldata, so the transaction information on Rollup can be verified and restored through Ethereum. However, the Validium mechanism adopted by StarkEx chooses to store these data off-chain.

The off-chain storage and calculation of data gives the Validium mechanism obvious cost and efficiency advantages. Since there is no need for data to be uploaded to the chain, there will naturally be no gas costs, and off-chain computing can utilize the already mature centralized server architecture, which allows Validium to provide upper-level applications with a smooth user experience that is close to that of a centralized trading platform. This is the key reason that makes the dYdX trading experience comparable to centralized platforms.

There is no need to say more about the advantages of using the Validium expansion solution. The only question is whether this decentralized expansion solution will be replaced by the blockchain The risk of centralization that technology has basically solved has been brought back into the system?

Validium's trade-off between performance and security

It should be said that although the Validium solution seems to be centralized, it is still significantly different from a purely centralized platform.

First of all, the Validium solution avoids the risk of custody of assets. Access to the entire asset is still decentralized and permissionless. Compared with centralized trading platforms that may freeze users' funds or even run away at any time, the StarkEx (Validium) solution adopted by dYdX still has obvious advantages in asset security.

On the other hand, the centralized organization responsible for the main data calculation and verification work on the StarkEx platform is a Data Availability Committee (DAC) composed of eight well-known organizations ), each update to the state needs to be signed by all DAC members, and cannot be arbitrarily decided and tampered by a single institution.

Of course, the security of the committee mechanism will be significantly lower than that of most public chains. In theory, individual members of a DAC can still freeze user funds. In addition, it is difficult to guarantee that these well-known organizations responsible for the security of the entire StarkEx system will one day be pressured by regulators to start KYC for users and even assist law enforcement agencies to freeze users' funds.

Although the probability of this happening is not high at present, it is still a potential risk that is difficult to completely eliminate. Perhaps, this is one of the reasons why dYdX blocks US IP addresses.

In addition, the StarkEx scheme based on the Validium mechanism makes dYdX sacrifice the extremely important composability in DeFi. The upgraded dYdX is more like an independent, safer alternative to existing centralized platforms. But it is still difficult to become an integral part of the entire Ethereum DeFi ecosystem. This problem may need to wait for the subsequent upgrade of StarkWare, the development team of StarkEx, to solve it.

Potential opportunities brought by expansion to the Ethereum ecosystem

Understanding the underlying expansion technology is undoubtedly boring, and it seems difficult to help investors obtain economic returns. But here, readers are advised to pay close attention to the progress of the new generation of expansion infrastructure represented by StarkNet and zkSync 2.0.

Why is it necessary to care about these infrastructures that may not issue tokens?

Here are two hot projects this year, Axie and dYdX, as examples. Looking back at their outbreak this year, we can find that these two projects have one thing in common, that is, they both keep the original application architecture almost completely unchanged, and only by adopting a suitable expansion plan, the projects appear. Explosive development.

In the current Ethereum ecosystem, there are still many projects that are excellent in application architecture, but are limited by the performance of the public chain and are difficult to truly display their strengths. For example, various order book-based trading platforms (especially many options trading platforms), as well as active market-making tools and even games based on Uniswap V3.

With various expansion schemes based on zero-knowledge proofs that are more advantageous than Optimistic Rollup (Such as StarkNet and zkSync), these projects, which have been suppressed by high transaction costs for a long time, may usher in their own spring in the new platform.