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DYdX's fightback: From near collapse to $2 billion in trading in a single day

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A significant minority can change the outcome more than the majority.

The History of dYdX (So Far)

Original article by Antonio Juliano

原文编译：Colin Wu Gary Ma，吴说区块链

This paper has obtained & NBSP; Translated into Chinese by Antonio Juliano

This is a brief history of dYdX so far. I think this should be a good background for anyone interested in dYdX. For anyone working in the broader DeFi/ cryptocurrency space, the journey we've taken may also be useful.

2015-2016.

Working in the Coinbase

Before joining Coinbase, I knew nothing about cryptocurrencies. Shortly after starting at Coinbase, I got really excited about the future of cryptocurrencies. When I started at Coinbase, basically the only legitimate cryptocurrency (as we know it) was Bitcoin. We all 100% believe that Bitcoin will be the only interesting thing in cryptocurrencies, because if any other chain does something interesting, Bitcoin will integrate it and use its superior network effects to smash the other chain. Of course, this is ultimately wrong.

When I finally discovered Ethereum, I was extremely excited: I realized that this was a new computing paradigm -- the first time programs could run completely autonomously, determinedly, and without the control of anyone else. I was convinced that something had to be built on top of Ethereum that would eventually become huge.

2017

Weipoint

Before founding dYdX, I had been working full-time on search engines for decentralized applications. I worked on it for four to five months, but no one used it -- I had about 10 users at one point. This idea is too early. There were only a few dozen DApps in the world. What's the point of a search engine if there's no searchable content?

Lesson: This taught me the importance of time in entrepreneurship. Too early or too late is a mistake.

DYdX launched - July 27

After Weipoint, I decided to do something useful to the market. The main way cryptocurrencies were used then (and still are today) was for trading and speculation. Around this time, the first decentralized exchange (0X, Kyber) appeared. I looked at this and thought this is something really useful to build on top of Ethereum.

Given this, I think the next logical thing to build is decentralized margin trading and derivatives. This seemed logical, as margin trading (led by Bitfinex) was taking off in the crypto space. Financial markets evolved over time from cash margin derivatives. Cryptocurrencies, it seems, should be no different.

I came up with the name (my main contribution to dYdX) and started dYdX on my own.

Preliminary progress

I wrote the first version of the dYdX white paper (which is now super outdated) and the first basic version of the Smart contract (which was never launched). The original white paper had deals for margin trading and (fully collateralized) options. I decided to set up margin trading first.

$2 million seed round

DYdX raised a $2 million seed round at a $10 million valuation, led by Andreessen Horowitz and Polychain. We were lucky to bring in 15-20 top angel investors. DYdX is now starting to look like a real company!

2018

In the early

Brendan, Zhuoxun (head of operations, who left to start Magic Eden) and Bryce (senior software Engineer) joined the team! Going from one person to multiple helps us move faster! We started out in a private WeWork office in Soma and moved to our first office near Jackson Square in mid-2018.

$10 million series A financing

We raised A $10 million Series A round at A $40 million valuation. The round was again led by Andreessen Horowitz and Polychain. This gives us 5 times more capital and a longer runway (we still have no revenue).

V1 Margin Agreement

Brendan and I set up the first version of the margin trading agreement. While it was impressive technology at the time (we invented the Lightning loan and dex aggregator), it was too complex and too general. It took nearly a year for dYdX to go live.

Lesson learned: We should build some more specific uses/MVPS and iterate

Expo

dYdX 的第一个产品 Expo 建立在 V1 保证金协议之上。这是一个可以用来购买杠杆 Token 的简单的交易应用程序。杠杆 Token 是 ETH 上空头/多头保证金头寸的 Token 化版本。

The idea is that we will give users an easier way to trade on margin -- just buy tokens and get leverage! We believe this will expand the leveraged trading market and attract users who find exchanges, such as Bitfinex, too complex.

At peak times, Expo Turnover is about $50,000 a day.

The lesson: We were wrong. We found that our users didn't want a simple transaction product, and the abstractions we built to simplify the transaction made it harder for them to do what they wanted to do. Our users are not simple, they are complex. They want a full deal.

2019

Solo

We built and launched the second version of the dYdX Margin trading protocol, codenamed "Solo". This version is more powerful, and it addresses some of the problems of the original protocol.

Learning from Expo, we launched trading products aimed at more mature traders. It went well and almost immediately increased our trading volume to about $1 million a day.

DYdX order book

So far, dYdX has not built its own trading system. Instead, we integrate with third parties DEX, 0X to get buy and sell orders for ETH. Our users experience a number of issues in this regard, including high failure rates (for example, users make trades and then discover that the trades fail) and low liquidity.

So we decided to build our own order book-based trading system. This allowed us to build our own liquidity and resolve some product issues. This worked well and allowed us to quickly become one of the most liquid DEX at the time.

Lesson: Vertically integrating more stacks under our control usually leads to a better product experience

2020

In March, we started to turn a profit for the first time with transaction fees!

Sustainable contract

In April, we launched the BTC Perpetual contract. We quickly launched a sustainable contract for ETH and LINK.

The decision to move into perpetuities was driven by a surge in volumes in perpetuities at the time, driven by Bitmex. Driven by leveraged trading in perpetuity contracts, Bitmex quickly overtook Bitfinex and others in volume. We (correctly) see this as an important emerging trend in crypto trading and believe it is time to move into derivatives trading.

No one had ever set up a perpetual transaction on DEX before us. At the time, it was unclear whether we could successfully build sustainable contracts in a decentralized way. Obviously, in the long run, the bets paid off in a big way.

The introduction of perpetual contracts also enables us to support the trading of cross-chain assets such as BTC. We initially thought trading BTC on DEX would be the killer use case, but it turned out to be wrong and our ETH perpetual contract ended up with more volume.

Initially, volume in our perpetuals was lower than in our margin products. One problem is that the V1 Perps protocol only supports segregated margin (users must deposit collateral separately for each market). That makes it very difficult to build liquidity and launch new markets. For this reason, we only have 3 markets for V1 Perps.

Lesson: Catching up early (not first, but early) and not being afraid to discard/de-prioritize everything we've built before can bring huge benefits

COMP & The rise of Uniswap

Most people don't remember this, but dYdX was the number one DEX by volume in early 2020. Sometimes we approach 50% market share. We were doing about $10 million a day.

Compound's launch of COMP and the subsequent explosion of liquidity mining and DeFi changed all that. The exponential success of COMP and its liquidity mining (resulting in a 100-fold increase in Compound'S TVL almost overnight) quickly spurred a flood of new DeFi tokens.

人们自然想交易这些 Token 。但他们中的许多人只能在 Uniswap 上交易（它可以很容易地极快地添加新 Token）。这几乎在一夜之间再次导致 Uniswap 的交易量和采用率大幅增长了 100 倍。

We were left in the dust and completely missed the trend. We couldn't add any new tokens at all, only 3 compared to Uniswap's hundreds. Our market share went from about 50%. 0.5% fell rapidly.

Lesson: It's important to anticipate, or at least respond quickly to, drastic changes in market conditions

Collapsed under Gas

A major side effect of DeFi's rise has been a 100-1000x increase in ethereum gas costs. At this point, we are subsidizing gas for our customers. Right now, it costs $100 + gas to execute a single transaction, and our transaction fee is not nearly enough.

We started hemorrhaging money at an alarming rate. On our highest trading days, when people trade on exchanges, we're going to lose tens of thousands of dollars, and if we don't act, we're going to run out of money in nine months.

So we did take drastic action. We increased the minimum transaction size to more than $10,000 (the minimum amount you can trade on dYdX) and eventually imposed a flat transaction fee proportional to the cost of gas per transaction (so our users had to pay more than $100 per transaction). This is hurting transaction volumes and adoption rates at a time when the rest of DeFi is exploding.

$10 million series B round

We need to raise more money, or the company looks like going under.

At this point, our long-term plan is never to be fully decentralized, but to always remain a profitable business with a central order book on top of the agreement. I do not believe it is possible to build a fully decentralized product with current technology to support the needs of professional traders, our core users.

This brings us to an existential question: if we never fully decentralised, what is our competitive advantage over Binance and FTX? Can we do it 10 times better than them? To be honest, I didn't have a good answer.

As a result, we were rejected from this round by basically every major crypto investor in Silicon Valley (A16Z, Polychain, Paradigm, etc.). Fortunately, we ended up raising money on good terms from Three Arrows Capital, who turned out to be a great partner and very helpful. We raised $10 million at an $80 million valuation (we intentionally sold a smaller percentage than before because we knew we were in a tough spot and it wasn't an ideal time to raise money).

2021

The new office

After COVID, we moved into a new office in San Francisco in March! We are still there today.

L2 - Starkware

We needed to make major changes to our product because our business was hit by Gas charges and we couldn't keep up with Uniswap, FTX and others from a product standpoint. We decided it was time to move from Ethereum L1 to a more scalable chain.

After considering many different options (Starkware, Solana/Near, building our own Optimistic rollup), we chose Starkware. It gives us higher throughput, lower latency than Ethereum, and is by far the best fit.

We originally planned the Starkware build to take three months, but it ended up taking seven months. Layer 2 products were launched in April 21. Importantly, the increased throughput of Starkware and Ethereum enabled us to switch to cross margin (multiple positions can be collateralized by a margin account). This allows us to build better liquidity and launch more trading pairs. We now have about 30 instead of three. Shortly after we launched L2, our transaction volume soared about fivefold to about $30 million a day.

$65 million series C round

In June 21, we raised a $65 million Series C round at a valuation of $215 million, led by Paradigm. In addition to a great new major investor, we have brought in some quality investors.

The dYdX Foundation publishes dYdX

The dYdX Foundation, an independent Swiss foundation, was founded in the summer of 2011. The Foundation released DYDX, the DYDX Protocol Token, in August 21.

I think it did a good job of setting incentives -- better than any other DeFi agreement to date, I think. After the Token launch, dYdX trading volume soared to over $2 billion/day.

2022

We're in New York. Opened a second headquarters!

Work on the fully decentralized version of dYdX V4 began in earnest. With V4, we have a clear mission and reason why dYdX can achieve its goal of becoming the largest cryptocurrency exchange -- a fully decentralized and open source professional exchange that could be 10 times better than existing financial platforms. We published a blog post detailing our V4 plans. It remains a top priority for the company. V4: https://dydx.exchange/blog/v4-full-decentralization