Blockchain

dYdX Full Guide: A DeFi Margin DEX

DeFi protocol dYdX might seem like another trading and lending platform based on Ethereum, but that’ only the tip of the iceberg. Probing further, you’ll find out that this protocol is challenging the status quo to take Decentralized Finance to new heights.

Margin trading, derivatives, and options are the relevant tools that power traders use. Unfortunately, in the crypto space, these tools are mostly available only on centralized exchanges like Binance, Huobi, and Kraken.

With dYdX, the entire traditional trading spectacle is now built in a permissionless and decentralized mechanism.

Table of Contents

Background

Antonio Juliano, founder of dYdX

The five-person empire behind dYdX built and developed a margin trading protocol based on Ethereum. This platform provides users the freedom to create their own cryptocurrency-based financial products such as short sells, long positions, and interest-bearing loans. Contrary to traditional finance, dYdX technology is trustless as it does not require a middleman for transactions.

Decentralized lending and borrowing isn’t a novel idea in the crypto arena. It has already existed in DeFi under Compound and MakerDAO. However, dYdX is pivoting towards generating more advanced tools on the blockchain.

This is also free for anyone to use and build asset management systems that run on smart contracts. As of August 2020, there has been an astounding total volume amounting to $1.2 billion on the platform.

dYdX was founded by Antonio Juliano in 2017. He is known to be an authority figure in crypto, as well as being an ex-Uber and Coinbase engineer.

What is dYdX?

dYdX is a trustless and decentralized lending, borrowing, and betting platform that is based on the  Ethereum blockchain. It supports borrowing, lending, and taking on margin positions. Furthermore, it is a dynamic platform that appears to intrigue traders.

The DeFi protocol has limited functionality as a trading platform. However, dYdX is considerably on an advanced level as an open, non-custodial, and trustless protocol. The new version of dYdX has become a business-in-the-box concept for traders who are into borrowing, lending, and margin trading crypto assets.

New Protocol

The new version of the DEX is powered by Solo, which is its new open-source protocol. To date, dYdX has no native token and has successfully passed two security audits.

The new dYdX highlights the following features:

  • Lending and borrowing without imposing lock-up periods or minimums.
  • Trading on custom and non-tokenized margin positions that have up to 4x more leverage than other DEXs.
  • Expert portfolio management of your positions and assets.

It’s an intuitive yet simple platform that offers the following capabilities:

  • Basic trading of ETH, USDC, and DAI
  • Isolated Margin Trading
  • Cross Margin Trading
  • Interest-bearing loan

dYdX users can trade with margin or short any ERC-20 token for hedging or speculation. Additionally, they could buy any token as a form of leverage.

This would require taking out long trades. In this case, a margin trader will have to look for a creditor who will let him borrow the tokens.

The users would normally negotiate in private or outside of the blockchain or thru relayers; then finalize agreement on-chain. Additionally, dYdX is also eyeing options trading. With options, the owner is given the right (not an obligation) to buy an asset at a strike price.

How It Works?

In dYdX, the individual borrower or lending transactions are now replaced with a global on-chain transaction in a “global lending pool”.

Basically, each asset has individual lending pools that are under smart contracts so any digital transactions like borrowing, lending, and withdrawing can happen at any point in time without having to wait in line for matches, approvals, or adequate capital. The interest rates for each loan would be based on the demand and supply behavioral chain between lenders and borrowers, as well as the assets.

The accrued interest would be paid to the lenders, while 5% is dedicated to the dYdX insurance fund. Furthermore, a liquidation would incur a 5% penalty.

Margin trades and loans can remain open for a maximum period of 28 days. After that, they would be charged with a 1% expiration fee. Like other DeFi project, dYdX requires an Ethereum wallet and ETH to pay for gas. 

Since last March 2020, dYdX has zero trading fees for makers and 0.15-0.50% for takers.

Lending

Lending allows users to enjoy passive income from their crypto holdings on dYdX. The funds that are deposited in the platform will continue to accrue interest. Moreover, interest rates are dynamic and automatic.

Users can easily get hold of their funds as the platform supports easy deposits and withdrawals at any given time.

Borrowing

Through dYdX, you can easily borrow funds and send them to your Ethereum wallet with any of the supported assets as long as you are able to maintain an initial or minimum collateral ratio of 1.25x or 1.15x. Moreover, the borrowed funds can be used for anything such as working capital, expansion, trading, or any other personal or business pursuits.

Margin Trading

Margin trading refers to borrowing money in order to make huge trades. It is best suited for traders who want to place bets that their current capital couldn’t normally afford. Many traders also consider it a double-edged sword.

Through leverage, margin trading can increase profit by orders of magnitude if a prediction is right. However, the losses can also be substantial if it goes the wrong way. In essence, the more leverage you take the higher your risks and rewards become.

What are Perpetual Contracts?

Perpetual Contract Markets refers to synthetic trading markets on the Ethereum blockchain that is on a perpetual, transparent, and highly viable environment. The contract’s price is linked to the price of the asset with a dynamic interest rate.

Furthermore, the order-books are off-chain, which allows quick price movements and much better liquidity. An on-chain price book is used for interest payments and liquidation.

The underlying asset on a perpetual contract does not need to exist as a token. The perpetual, profits, and losses are exchanged with ERC-20 token as the collateral assets. This allows crypto users to trade assets that may not even be on the Ethereum blockchain.

Conclusion

dYdX is an open, non-custodial, and trustless platform on Ethereum that is engineered to attract experienced traders.

Future plans of dYdX include further adoption of more advanced trading capabilities or features. Recently, dYdX project has added stop-loss options which help reduce the potential losses of traders.

The dYdX team is also planning to expand to include other tokens apart from their three basic crypto assets that are available on the platform.

No doubt, this was one bold move by dYdX. It has padded the complexity of the protocol and the entire DeFi sphere which speaks volumes of how far this technology has come.

Source: https://www.asiacryptotoday.com/dydx-guide/

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