dYdX founder recounts 5 years of entrepreneurial history: once rejected by all VCs in Silicon Valley and on the brink of collapse, learning lessons from each setback

Author: Antonio Juliano

Translation: Colin Wu Gary Ma

This is a brief history of dYdX to date. I think it should provide a good background for anyone interested in dYdX. For anyone working in the broader DeFi/cryptocurrency space, the journey we have experienced may also be useful.

2015--2016

Working at Coinbase

Before joining Coinbase, I knew nothing about cryptocurrency. Shortly after I started working at Coinbase, I became very excited about the future of cryptocurrency. When I first began at Coinbase, the only legitimate cryptocurrency (as we know it) was Bitcoin.

We all believed 100% that Bitcoin would be the only interesting thing in cryptocurrency, because if any other chain did something interesting, Bitcoin would integrate it and leverage its superior network effects to crush another chain. Of course, this turned out to be wrong.

When I eventually discovered Ethereum, I was particularly excited: I realized that this was a new computing paradigm—programs could run completely autonomously and deterministically for the first time, without being controlled by anyone else. I was convinced that something huge had to be built on top of Ethereum.

2017

Weipoint

Before creating dYdX, I was working full-time on a search engine for decentralized applications. I worked on it for about 4 to 5 months, but no one used it—I had about 10 users at one point. The idea was too early. At that time, there were only a few dozen dApps in the world. What’s the point of a search engine without anything to search for?

Lesson: This taught me the importance of timing in entrepreneurship. Being too early or too late is both wrong.

dYdX Founded—July 27

After Weipoint, I was determined to build something useful for the market. At that time (and still today), the primary use of cryptocurrency was for trading and speculation. Around this time, the first decentralized exchanges (0x, Kyber) emerged. I looked at this and thought it was something truly useful being built on Ethereum.

Given this, I thought the logical next thing to build was decentralized margin trading and derivatives. This seemed logical because margin trading (led by Bitfinex) was starting to rise in the crypto space. Financial markets evolve over time from spot → margin → derivatives. It seemed that cryptocurrency should be no different.

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

Initial Progress

I wrote the first version of the dYdX whitepaper (now super outdated) and the first basic version of the smart contracts (which was never deployed). The initial whitepaper included protocols for margin trading and (fully collateralized) options. I decided to build margin trading first.

$2 Million Seed Round

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

2018

Early Days

Brendan, Zhuoxun (the operations lead, who has since left to found Magic Eden), and Bryce (senior software engineer) joined the team! Going from one person to several helped us move faster! We initially worked out of a private WeWork office in Soma and moved to our first office near Jackson Square in mid-2018.

$10 Million Series A

We raised $10 million in Series A funding at a $40 million valuation. This round was again led by Andreessen Horowitz and Polychain. This gave us 5 times the capital and a longer runway (we still had no revenue).

V1 Margin Protocol

Brendan and I built the first version of the margin trading protocol. While it was impressive technology at the time (we invented flash loans and a DEX aggregator), it was overly complex and too generic. It took nearly a year from the founding of dYdX to launch.

Lesson: We should have built something more specialized/MVP and iterated.

Expo

dYdX's first product, Expo, was built on top of the V1 margin protocol. It was a simple trading application that could be used to purchase leveraged tokens. Leveraged tokens were tokenized versions of short/long margin positions on ETH.

Our idea was to provide users with a simpler way to trade on margin—just buy a token and get leverage! We thought this would expand the leveraged trading market and attract users who found exchanges like Bitfinex too complex.

At its peak, Expo had a daily trading volume of about $50.

Lesson: We were wrong. We found that our users did not want a simple trading product, and the abstractions we built to simplify trading made it harder for them to do what they wanted. Our users were not simple; they were complex. They wanted a complete trading experience.

2019

Solo

We built and launched the second version of the dYdX margin trading protocol, codenamed "Solo." This version was more robust and addressed some of the issues of the original protocol.

Drawing from our experience with Expo, we launched a trading product aimed at more sophisticated traders. Progress was smooth, and we almost immediately increased our trading volume to about $1 million per day.

dYdX Order Book

Up until this point, dYdX had not built its own trading system. Instead, we integrated with third-party DEXs, like 0x, to get buy and sell orders for ETH. Our users encountered many issues in this regard, including high failure rates (e.g., users would attempt to trade and then find that the trade failed) and low liquidity.

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

Lesson: Vertically integrating more of the stack under our control can often lead to a better product experience.

2020

In March, we started charging trading fees and began making a profit for the first time!

Perpetual Contracts

In April, we launched BTC perpetual contracts. We soon followed with perpetual contracts for ETH and LINK.

The decision to enter perpetual contracts was driven by the surge in perpetual contract trading volume led by Bitmex at the time. With the push of perpetual contract leverage trading, Bitmex's volume quickly surpassed that of Bitfinex and others. We (correctly) saw this as an important emerging trend in crypto trading and thought it was time to pivot to derivatives trading.

Before us, no one had built perpetual trading on a DEX. At that time, it was unclear whether we could successfully build perpetual contracts in a decentralized manner. Clearly, the gamble paid off for us in the long run.

Launching perpetual contracts also allowed us to support trading of cross-chain assets (like BTC). Initially, we thought trading BTC on a DEX would be a killer use case, but it turned out to be wrong, and our ETH perpetual contracts ultimately had more trading volume.

At first, our perpetual contracts had lower trading volume than our margin trading product. One issue was that the V1 perps protocol only supported isolated margin (users had to deposit collateral separately for each market). This made it difficult for us to build liquidity and launch new markets. For this reason, our v1 perps only had 3 markets.

Lesson: Catching trends early (not first, but early) and not being afraid to deprioritize or scrap everything we built before can yield huge benefits.

The Rise of COMP & Uniswap

Most people don’t remember this, but dYdX was the number one ranked DEX by trading volume in early 2020. At times we approached 50% market share. Our daily trading volume was about $10 million.

The launch of COMP by Compound, along with the subsequent explosion of liquidity mining and DeFi, changed everything. The exponential success of COMP and its liquidity mining (which led to Compound's TVL increasing nearly 100 times overnight) quickly stimulated a large number of new DeFi tokens.

People naturally wanted to trade these tokens. But many of them could only trade on Uniswap (which could easily and quickly add new tokens). This led to a massive increase in Uniswap's trading volume and adoption almost overnight, growing by 100 times.

We were left in the dust, completely missing this trend. We were unable to add new tokens at all, having only 3, while Uniswap had hundreds. Our market share quickly dropped from about 50% to < 0.5%.

Lesson: It’s important to predict or at least be able to quickly respond to drastic changes in market conditions.

Overwhelmed by Gas

A major side effect of the rise of DeFi was that Ethereum's gas costs increased by 100-1000 times. At this point, we were subsidizing (paying) gas fees for our users. Now, executing a single transaction cost over $100 in gas fees, while our trading fees were still far from sufficient.

We began to lose funds at an alarming rate. On our highest volume days, we would lose tens of thousands of dollars when people traded on the exchange, and if we didn’t take action, we would run out of money in 9 months.

So we did take drastic action. We raised the minimum trade size to over $10,000 (the minimum amount you could trade on dYdX) and eventually imposed a fixed trading fee proportional to the gas fee for each trade (thus our users had to pay over $100 for a single trade). Just as the rest of DeFi was exploding, this severely hurt our trading volume and adoption.

$10 Million Series B

We needed to raise more funds, or the company looked like it would go under.

At this point, our long-term plan was to never fully decentralize but to always maintain a profitable business on top of a centralized order book. I did not believe it was possible to build a fully decentralized product that could meet the needs of professional traders (our core users) with the current technology.

This posed an existential question for us: If we never fully decentralized, what was our competitive advantage relative to Binance and FTX? Could we do better than them by 10 times? Honestly, I didn’t have a good answer at the time.

As a result, we were essentially rejected by all the major crypto investors in Silicon Valley (a16z, Polychain, Paradigm, etc.) for this round of funding. Fortunately, we eventually raised funds from Three Arrows Capital (who turned out to be a great partner and very helpful) under decent terms. 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 funds).

2021

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 significant changes to our product as our business was hit hard by gas fees, and from a product perspective, we couldn’t keep up with Uniswap, FTX, and others. We determined 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 offered us better throughput and lower latency than Ethereum and was the best fit so far.

We initially planned for Starkware to take 3 months to build, but it ultimately took 7 months. The Layer 2 product launched in April 2021. Importantly, the throughput increase with Starkware and Ethereum allowed us to switch to cross-margining (multiple positions could be collateralized by one margin account). This enabled us to build better liquidity and launch more trading pairs. We now have about 30 instead of 3. Shortly after launching L2, our trading volume skyrocketed about 5 times to around $30 million per day.

$65 Million Series C

In June 2021, we raised $65 million in Series C funding at a $215 million valuation, led by Paradigm. In addition to a great new lead investor, we also brought in some high-quality investors.

dYdX Foundation Issues $DYDX

In the summer of 2021, the independent Swiss foundation dYdX Foundation was established. The foundation released DYDX, the dYdX protocol token, in August 2021.

I think the incentives were set up well—I believe better than any other DeFi protocol to date. After the token launch, dYdX's trading volume surged to over $2 billion per day.

2022

We opened our second headquarters in New York!

V4

Work on the fully decentralized version of dYdX, V4, began in earnest. With V4, we have a clear mission and reason for dYdX to 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. This remains the company's top priority project…