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MT Capital Insight: Application chain migration and economic model updates drive DYDX flywheel growth

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dYdX recently completed the migration to the Cosmos application chain and updated the V4 token economic model. It is expected that under the dual impact of these two events, dYdX's fundamentals will be greatly improved, and DYDX will be able to capture gr

Source: Severin, MT Capital; Thanks to @0X_IanWu for providing in-depth guidance and suggestions in this article.

TL;DR

(Note: TL;DR stands for "Too Long; Didn't Read" and is often used to summarize a lengthy article or text)

The update of dYdX token economic model requires team, early investors and other token holders to stake DYDX tokens in order to capture dYdX's fee income. This will increase the staking rate of DYDX, reduce the circulating supply of DYDX, avoid large-scale token sales, and improve DYDX's value capture ability.

The migration of dYdX to the application chain avoids profit redistribution with StarkWare. The performance improvement and increased customizability brought by the application chain can also strengthen market expectations for the future performance of dYdX.

dYdX's newly launched early incentive plan, Noble's upcoming native USDC, and the significant increase in secondary market liquidity and volatility in recent times will all benefit the fundamental development of dYdX.

In December, there will be a massive token unlock, but we don't expect it 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 staking tokens.

Introduction:

dYdX recently completed its migration from StarkWare to the Cosmos application chain and completed its first transaction on November 13th. dYdX also updated its token economic model for V4, giving DYDX stronger value capture capabilities. We expect that with the dual impact of these two events, the fundamentals of dYdX will be greatly improved and DYDX will be able to capture larger gains in the secondary market.

Token Economic Model Update Empowers DYDX's Value Capture Capability

1.dYdX revenue goes to holders who stake their tokens

dYdX founder Antonio announced that dYdX Trading Inc. has officially become a Public Benefit Corporation, which will not generate fee revenue from the operation or trading of dYdX V4. All protocol fees, including transaction fees priced in USDC and Gas fees priced in DYDX, will be distributed to validators and stakers through dYdX Chain. **It is worth noting that the dYdX team also needs to stake tokens to receive fee revenue from dYdX, which to some extent avoids teams holding a large number of tokens from selling and dumping the market.** Currently, dYdX's annual revenue is approximately $105.47m, and the distribution of protocol revenue between validators and stakers will increase DYDX's value capture ability.

dYdX Daily Fees，source：<https://tokenterminal.com/terminal/projects/dydx>

2.DYDX Token Model Update

Previously, DYDX tokens were mainly used for protocol governance, fee discounts, and token inflation incentives through staking. With dYdX V4, changes have been made to the protocol governance and staking modules, expanding token governance rights and allowing token stakers to capture real profits.

Firstly, DYDX holders can now vote on key parameters and modules of dYdX, including but not limited to trading fee rates, trading reward mechanisms, third-party price sources, and adding/removing existing markets. The expansion of governance rights enables DYDX holders to dynamically adjust trading parameters and protocol functions according to market demand, making governance more valuable.

Secondly, DYDX token holders who stake their tokens will receive revenue from transaction fees and gas fees, instead of the previous token inflation incentive, which will increase the stakers' real yield. The DYDX token will also transition from a mining token to a dYdX Chain universal token with value capture ability, wealth effect, and governance rights. The increase in dYdX trading volume and improvement in fundamentals will increase dYdX's fee revenue, amplifying the attractiveness of staking DYDX tokens for holders. This process will further reduce the circulating supply of DYDX tokens, increase market demand for DYDX tokens, and promote a price increase, forming a positive upward spiral.

dYdX Price & Fees，source：https://tokenterminal.com/terminal/projects/dydx

(The above figure shows the performance of dYdX token price and protocol fees before the modification of the token model. We expect the new token model to further strengthen the growth of token price 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 upgraded, and the existing performance and cost are not enough to support dYdX's growth plan to compete with centralized exchanges. The custom application chain allows dYdX to enjoy the performance of the application chain without competing with other protocols, reducing on-chain transaction costs, and better meeting dYdX's high TPS requirements for order books and matching engines. Before the migration, dYdX could only process about 10 transactions per second and 1,000 order/cancellation requests per second, while after the migration, dYdX can process up to 2,000 transactions per second. In addition to performance improvements, dYdX no longer needs to share profits with StarkWare after becoming independent, which will significantly increase the expected income distribution for stakers mentioned at the beginning.

2. Customized application chains bring better trading experience

The other major benefit of migrating to the application chain is that dYdX can achieve higher customizability of the blockchain and validation node workflow to meet the needs of decentralized derivative trading.

In dYdX v4, each validation node will run an in-memory order book that will never reach consensus off-chain. Placing and canceling orders will be propagated through the network, and only trades that are successfully matched in real-time and confirmed by consensus will be ultimately submitted to the blockchain to ensure that the order book data stored by each validation node is consistent. Based on the above operating logic, user placing and canceling orders are off-chain behaviors and do not require payment of Gas fees. Only when the order matching transaction is completed on-chain, users will need to pay the Gas fee for the order completion.

In addition, dYdX has also collaborated with Skip Protocol to develop an MEV dashboard to expose harmful/dishonest nodes. By punishing such nodes through the community, the fairness of the dYdX trading network is ensured. Migrating to the application chain can allow dYdX to further optimize users' actual trading experience and increase their willingness to trade on dYdX.

MEV Dashboard on dYdX，source：https://dydx.exchange/blog#

其余利好以及未来风险提示

translates to

Other positives and future risk warnings

1. Early Incentive Plan

The dYdX community has approved the launch incentive proposal for dYdX v4, which will allocate $20 million DYDX from the dYdX Chain community treasury for a 6-month launch incentive program deployed on v4 to incentivize early adopters. The early incentive program can strengthen users' willingness to cross-chain funds to dYdX Chain, promoting the increase of dYdX trading volume and fee revenue.

2. Native Cross-Chain USDC

Circle Cross-Chain Transfer Protocol (CCTP) will go live on the Cosmos ecosystem application chain Noble on November 28th, allowing users to transfer 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.

3.12 Monthly Token Unlock

dYdX V4's biggest risk event recently is undoubtedly the massive token unlock in December. According to TokenUnlocks, 15% of dYdX's total tokens will be unlocked on December 1st. However, this unlock may not necessarily cause a large amount of selling pressure. As mentioned earlier, staking DYDX tokens can earn substantial fees and gas fee splits. And most of the tokens unlocked this time belong to the team and early investment institutions. Influenced by the recent hot secondary market and changes to the dYdX token model, the team and institutional investors may also choose to capture the future value growth of dYdX by staking their tokens.

DYDX Token Unlocks，source：https://token.unlocks.app/dydx

Overall, we believe that with the completion of the dYdX application chain migration and the upgrade of the token economic model, the fundamentals of dYdX have a stable and positive growth trend, and the DYDX token can further capture the value growth of dYdX. At the same time, since October 25th, the overall cryptocurrency market has rebounded, with significant increases in volatility and liquidity. The significant increase in the price of DYDX tokens also reflects the market's optimistic expectations that the future market trend will continue, platform trading volume will continue to expand, and transaction fee income will continue to grow.

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