Dialogue with dYdX Foundation CEO: dYdX Chain abandons off-chain order book, aiming to become public infrastructure

Author: Daria Krasnova, BeinCrypto; Vishal Chawla, The Block

Compiled by: Felix, PANews

The dYdX Chain launched on the mainnet on October 27, with the genesis block created at 1 AM. Charles d'Haussy, CEO of the dYdX Foundation, stated, "This marks a significant leap for the dYdX ecosystem and represents a new chapter of complete decentralization." Recently, in a media interview, Charles provided insights into the design of the dYdX Chain, the future development of dYdX, and the current state of cryptocurrency, revealing that dYdX has achieved a trading volume of $1 trillion since its inception. This accounts for about 1% of the global derivatives trading volume, but he expects dYdX's market share to eventually rise to 7%.

dYdX Chain

dYdX's main developer, dYdX Trading, announced on October 24 that it would open-source the v4 code, marking the launch of the dYdX v4 upgrade. v4 will be an independent L1 blockchain based on the Cosmos SDK (dYdX Chain), with everything from the order book to the matching engine becoming part of a decentralized, community-governed project on an independent blockchain, secured by audited smart contracts. The dYdX Chain testnet was first launched in March this year and has since undergone multiple upgrades. The dYdX Chain aims to provide transparent and secure derivatives trading, managed solely by its user community through code operations. The post-genesis phase of the dYdX Chain includes Alpha and Beta stages.

The Alpha phase focuses on bridging, staking, and security, ensuring that the dYdX Chain is stable and reliable, prioritizing economic balance, meaning the value of staked DYDX tokens exceeds the value of liquidity on the network, along with other effective security measures. The main goal of the mainnet during the Alpha phase is to stress-test the network. Over 60 validators are being recruited to ensure network security.

The Beta phase will support trading but without rewards. This phase will incorporate traders, LPs, and other critical system components. All activities on the dYdX Chain (if deployed on the mainnet) will gradually increase, providing a comprehensive trading experience for all users of the dYdX Chain open-source software.

In addition to the blockchain transition, dYdX Trading also plans to relinquish control over various components of the protocol and stop charging trading fees. Governance and decision-making responsibilities will be fully transferred to the dYdX stakeholders and the community of ecosystem participants.

Charles mentioned in the conversation that dYdX previously used an off-chain order book hosted on AWS, which was open to the public. However, the dYdX Chain adopts a new architecture that abandons the off-chain order book. The order book will reside in the memory of validators, eliminating the need to wait for block confirmations.

Charles stated, "I think it's important in our industry to choose who you are and what you do. dYdX chooses DeFi. Not half DeFi or half CeFi. You want to be clear about your identity and strive for it. So stay tuned, we will see dYdX become a public good, a public infrastructure."

"dYdX's market share is expected to eventually rise to 7%"

Charles believes that dYdX will soon become an important resource for the crypto community, especially in the perpetual contract space:

"When analyzing the market prospects for perpetual contracts, a clear development trajectory can be seen from a historical perspective. In the spot market, Uniswap currently accounts for 5% to 7% of global trading volume, reflecting the growth and importance of decentralized infrastructure. dYdX, holding a 1% share of the crypto derivatives market, is also preparing to follow a similar path. While the timing is uncertain, the historical trend is undeniable. It is expected that dYdX's market share will eventually rise to 7%. With our continuous progress, the future is indeed promising."

Charles envisions dYdX becoming a significant player in the DeFi space, providing users with multiple avenues for participation. In the current version, the diversity of access points to dYdX is already evident, with users accessing its services in various ways. Some users opt for convenient mobile applications, while others prefer desktop interfaces. A significant portion of trading volume also comes from institutional participants utilizing API integrations.

The flexibility of accessing dYdX is continuously strengthening, representing a shift from single interaction to multi-touch engagement. Just as some users interact with Compound without realizing it, dYdX is similar. Users can access dYdX through official portals, centralized exchanges, insurance products, or various other channels. The overall narrative is that applications transition to protocols, ultimately evolving into a public good for derivatives contracts.

Additionally, Charles proposed the secret to DeFi's success. He believes that true success lies in creating exclusive markets. These markets must offer something unique that gives DeFi a competitive edge and provides clear value propositions for its users.

CeFi Regulation Accelerates DeFi's Rise

As the conversation progressed, a deeper exploration of crypto regulation took place. Charles predicts that centralized exchanges will soon be forced to obtain licenses, primarily applicable to spot trading.

"I am not against regulation. I think regulation is important, but teams should consider specific circumstances and think carefully." "dYdX is very cautious, and we typically work with many legal advisors and lawyers. For projects looking to join the dYdX ecosystem, dYdX will analyze and decide based on the project's business. If a project offers services or software, the project team will also be very cautious."

Ironically, this shift may accelerate the rise of DeFi, with centralized exchanges becoming bridges to the decentralized financial world. The birth of the term "DeFi mullet" signifies the combination of traditional finance (front-end) and DeFi (back-end), which could reshape the financial landscape in the coming years.

Nevertheless, Charles pointed out that this is a rather lengthy process, requiring at least 5 to 10 years. He believes that painful events like the collapse of FTX have made people more aware of the vulnerabilities of CeFi infrastructure.

"People realize that they cannot trade forever on CeFi, so they need to explore different areas. They start learning about Curve, understanding how DeFi derivatives work, and begin using different protocols. Their first stop is always dYdX. Currently, we account for about 1% of global derivatives trading volume, and dYdX has achieved a trading volume of $1 trillion since its inception. I believe the dYdX testnet also reflects how many people are interested in DeFi and know that a solid infrastructure is being built."

Charles also noted that the current situation is very similar to the early days of the internet. Initially, there was a lot of concern about it, mentioning issues like drugs, weapons, and terrorism. There were calls for regulation, but these efforts did not yield significant results. Over time, it became clear that internet operators could set guidelines, rules, and implementation plans, but the technology itself remained unregulated.

Charles believes that this conclusion will apply to blockchain technology. Blockchain technology cannot be directly regulated, but the focus of regulation should be on the behavior of operators within the ecosystem.

Evolution of the Bear Market

Charles recalled the earlier days of the crypto industry when the bear market was both long and destructive, dragging everyone or every project down with the market slump.

"The early bear market was a problem because the industry was small, and everyone was going downhill. Today, the crypto industry has expanded significantly. Although the current bear market is still painful for everyone, many are continuing to build because there is enough funding. When a bull market occurs, some projects will not get overly excited; they manage a treasury that allows the project to survive and have the financial strength to continue building for years. This was not possible in previous bear markets."

Today, the market environment is completely different. While bear markets may still bring shocks, their duration has noticeably shortened. The crypto ecosystem is broader and more resilient. The industry has learned to adapt and grow, showcasing a maturity that was once unimaginable.

As Charles emphasized, what stands out in today's crypto environment is the connection between the crypto market and the broader macroeconomic backdrop. The crypto market is no longer an isolated industry but a category of financial assets that harmoniously develops with the global economy. This shift in perception and the recognition of cryptocurrencies as legitimate financial asset classes have attracted participation from a wider array of traders. Therefore, macroeconomic factors play a significant role today.