dYdX, a popular derivatives exchange, will develop and expand a new blockchain on the Cosmos network. The exchange has not yet decided what will happen to the current version on StarkEx.
dYdX V4 will be developed as a standalone blockchain based on Cosmos SDK and Tendermint consensus protocol Proof-of-Stake† We are pleased to announce that dYdX V4 will be developed as a standalone blockchain based on Tendermint consensus and built using Cosmos SDK! dYdX V4 marks the complete decentralization of the dYdX protocol and we are excited about the unique combination of decentralization, extensibility and customization that Cosmos offers.
A desire for decentralization for dYdX
The fundamental problem with any L1 or L2 products that we could develop on is that none of them are capable of managing a flow that comes close to the flow required to complete an order book. and run a trading engine. For reference, the existing dYdX product processes approximately 10 transactions per second and 1,000 order placements/cancellations per second, aiming to move to higher orders of magnitude.
We considered developing another trading model, such as an AMM or RFQ system, but ultimately decided that an order book-based protocol was essential to the trading experience that professional traders and institutions demand. We also weren’t happy with existing off-chain order book systems that don’t include matching (huge problems with walk ahead and transaction collisions) or were based on centralized matching (there can be no central systems in dYdX V4). So we realized that we needed to build a decentralized off-chain network to manage the order book.
This is where Cosmos comes in. One of the great benefits of developing a dedicated blockchain for dYdX V4 is that it offers full customization of how the blockchain itself works, as well as the tasks performed by users.
In dYdX V4, each validator executes an in-memory order book that is never committed in consensus (ie off-chain). Orders placed and cancellations are propagated through the network in the same way as normal blockchain transactions, so that orders placed and cancellations still make their way through the network. The order book that each validator stores is ultimately consistent between them. Orders are matched across the network in real time. The resulting trades are then recorded on-chain at each block.
This allows dYdX V4 to have extremely high order book throughput (which, let’s not forget, requires 100x the trade throughput!) while remaining decentralized.
No trading gas costs
As mentioned, a major advantage of Cosmos is that the chain can be extended to exactly meet the needs of the dYdX network. One application of this is that traders would not pay gas fees to trade, but rather fees based on trades executed, similar to dYdX V3 and centralized exchanges. These fees would accrue to validators and their strikers.
An ideal platform to rely on
dYdX V4 is a fully sovereign blockchain, meaning the chain does not rely on any external blockchain or system. This is a great platform for the dYdX community to build further in a vertically integrated manner, with protocol token holders in full control of the system. Whether building additional functionality such as spot trading, options or multi-collateral, or enhancing the underlying core technology, the dYdX community will now control every aspect of the stack and create the best possible product experience.
A big change for the dYdX token
DYDX, the protocol token of the dYdX protocol, is controlled by its holders. The company has no control over how it is used.
That said, the V4 protocol was designed with the need for a Layer 1 protocol token. This protocol token will be used for validator staking, as well as ongoing management of the chain. The DYDX token, of course, seems suitable for use as a Layer 1 token of the V4 network, but we would like to hear the perspective of the dYdX community.
Think 10 times bigger, dYdX’s vision for 2022
One of dYdX’s core values is thinking ten times bigger. dYdX should focus on what it could achieve, rather than protecting what has been built so far.
Our goal is for dYdX to eventually become one of the largest exchanges in all cryptocurrencies. We realize that this is an extremely difficult and ambitious goal, but we believe that dYdX must make choices to maximize the chances of achieving this goal, rather than settling for a lower definition of success.
We were not happy with the existing approaches to developing a fully decentralized exchange. While we were confident that we could develop a state-of-the-art protocol with any of these tested approaches, we didn’t believe they could support an experiment that would bring us closer to our goal.
The development of a decentralized, off-chain order book and matching engine, and moving Ethereum to a dYdX-specific chain as a major DeFi protocol has not yet been tested, but we believe this gives dYdX the best chance of developing a network that could provide a long-term competitive product experience with centralized exchanges. There are many things to develop and many question marks, but we are excited that dYdX will continue to be a leader in adopting new technologies that offer the opportunity to develop the best possible product experience.
We are excited about the possibility of what can be built and the chance to reach our goal.
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I am convinced that the coming years will be those of cryptocurrency and the metaverse. Passionate about the Tendermint Cosmos ecosystem and NFTs, I will share my knowledge. Co-founder of Stakelab.fr