dYdX - A Potential Blue-chip?
Introducing dYdX
dYdX is a derivatives exchange that offers both margin trading and perpetual futures, all in a decentralised manner on Ethereum.
Given the regulatory pressures and the natural cycle of innovation, the money flow and flood of users will likely head towards a decentralised derivatives exchange – especially if it is competent.
The exchange was launched in mid-2018, a time when only serious builders were in this space because the money was very thin and there were little to no rewards over the short-term. Led by Antonio Juliano, dYdX is the father of DeFi Perpetuals and has been progressing forward since their inception but they never released a token until now.
Exchange Mechanics
In DeFi, there are two ways to go for an exchange in regards to bringing liquidity: orderbooks or liquidity pools.
Orderbooks: Harder to gather high liquidity but can tolerate higher risk because of low slippage execution.
Automated Market Maker (AMM)/Liquidity Pool: Great way to bring liquidity to illiquid pairs but large order execution can result in massive slippage.
dYdX works using orderbooks and that’s why compared to other DeFi perpetual protocols they have the highest leverage offered at 25X. Another very decent DeFi derivatives exchange is Perpetual Protocol but they are limited to 10x leverage because they use pools for liquidity.
dYdX has off-chain orderbooks but keeps all transactions settlements on-chain, this helps increase speed and reduces gas costs. Traders can put an order in the books and if another trader comes to execute a trade against that order then the smart contract simply ensures those funds are still there and then executes the trade.
Right now, dYdX operates on Layer-2 using Starkware’s StarkEx which uses zero-knowledge proofs. This has made the experience very relatable to centralised exchanges which eases the onboarding process.
As of today, the trading volume on the exchange stands at $1.2bn (24 hours volume) - which is very impressive for a relatively new exchange. I can only see this growing as the market matures and more people discover dYdX.
I have personally used the protocol for a few trades and have to say it is a seamless experience. Very easy to use, easy on the eye and most importantly - low fees.
DYDX, The Token
Product first, token second is an aspect I love seeing with DeFi projects because it drastically reduces the possibility of a team doing a scammy money grab – dYdX wouldn’t have built a state of the art exchange that held through the September 7th 2021 crash when Coinbase and Binance couldn’t handle it if they just wanted to run a quick scam.
The purpose of the token is to decentralise the protocol. So far, all decisions have been made by the founding team and that is needed until that protocol is put on the right path and tracks. Once that’s done, decentralisation comes into play and this is when a DAO (decentralised autonomous organisation) needs to be built to govern the platform. They have issued the token by the “dYdX Foundation” and have also made a statement that they will not be pursuing exchange listings which is all part of staying on the good side of the law in my opinion and perhaps a smart move too.
The DYDX token is a governance token by design that also reduces holders’ trading fees on the exchange. There is no revenue sharing – yet. Honestly, when you pass governance to token holders it just becomes a matter of time until they vote revenue sharing into existence.
The Airdrop
The project did an airdrop and it was quite a sizable one! Unfortunately I did not get any part of this aridrop as I hadn’t previously used the exchange, however, the airdrops were distributed with the below metrics:
Trading volumes between $1,000-$10,000 get ~1,150 DYDX tokens
Trading volumes between $10,000-$100,000 get ~4,350 DYDX tokens
Trading volumes between $100,000-$1,000,000 get ~6,400 DYDX tokens
Trading volumes of $1,000,000+ get ~9,000 DYDX tokens
The most basic tiered airdrop is currently worth $11,500.
The Backing
Rarely have I seen a project so heavily backed by some of the Top VC firms in crypto. Notable backers include Naval Ravikant (AngelList), Brian Armstrong (CEO of Coinbase), 3 Arrows Capital and Paradigm.
These are literal powerhouses in the world of Tech/Finance VC’s, and I wouldn’t bet against them.
Valuation: The Maths
Buckle up, here come the numbers.
The total number of tokens is 1,000,000,000 (billion) but the initial circulating supply is meant to be ~80 million out of which 25 million worth of airdropped tokens have been subtracted and sent and into the treasury because their users did not meet trading requirements which now puts the initial circulating supply at just 55 million tokens; or 5.5% of the total supply.
This is both a blessing and a curse.
Blessing: Pumps price
Curse: Pumps price likely too fast which makes it hard to invest in at launch and brings too high of an FDV
What people care about is the Market Cap, the one CoinGecko and CoinMarketCap show on their homepage and that is calculated using the circulating supply. On the other hand, the fully diluted valuation (FDV) which is calculated using the total supply is often disregarded even though it fundamentally shouldn’t – for some reason people only care about it in a bearish market and completely disregard it in a sideways or bullish market.
Assume a sideways/bullish market which is roughly what we have here, how will the market value it. Well, let’s run a relative value analysis:
Perpetual Protocol is its competition and it’s currently valued by the market at $900 million in MCap, but we must also note that dYdX is larger, older and has higher revenues.
Relatively speaking, the market should value DYDX at around $2-3 Billion MCap in the near future (1-2 months), provided we remain in an overall bull market which sets a token price of ~$36-54.
If the market were to rank it higher, given its history, product and investors, these are the different potential prices by MCap rankings:
Top 100: $17.30
Top 75: $32.30
Top 50: $63.60
Top 25: $135.50
Top 10: $510.90
Now obviously these are guideline prices and not a prediction.
My Take
Personally, I am looking to hold dYdX as part of my long-term portfolio as I do believe they have the potential to be a leading DEX, and as the crypto market matures and more volume starts to come in - it is important to be well-positioned into projects that generate profit and onboard ‘the masses’.