MT Capital Insight: Application chain migration and economic model updates drive DYDX flywheel growth

Author: Severin, thanks to @0X_IanWu for the in-depth guidance provided in this article

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TL;DR

• The update to the dYdX tokenomics model requires token holders such as the team and early investors to stake DYDX tokens in order to capture dYdX's fee revenue. This will increase the staking rate of DYDX, reduce the circulating supply of DYDX, prevent large token sell-offs, and enhance the value capture capability of DYDX.

• The migration of dYdX to an application chain avoids profit redistribution with StarkWare, and the performance improvements and increased customizability brought by the application chain will strengthen market expectations for dYdX's future performance.

• The newly launched early incentive program, the upcoming native USDC on Noble, and the recent significant increase in secondary market liquidity and volatility will all benefit the fundamental development of dYdX.

• A massive token unlock is expected in December, but we anticipate that this will not lead to a large sell-off, as the team and early investors may choose to capture dYdX's growth expectations by staking their tokens.

Introduction:

dYdX recently completed its migration from StarkWare to the Cosmos application chain, with the first transaction completed on November 13. dYdX has also updated the V4 tokenomics model, granting DYDX a stronger value capture capability. We expect that the dual impact of these two events will significantly improve dYdX's fundamentals, allowing DYDX to capture greater gains in the secondary market.
1.

### Tokenomics Update Empowers DYDX's Value Capture Capability

2. dYdX Revenue Goes to Stakers
3. 4. dYdX founder Antonio announced that dYdX Trading Inc. has officially become a Public Benefit Corporation and will not generate fee revenue from the operation or trading of dYdX V4. dYdX Chain will allocate all protocol fees, including USDC-denominated trading fees and DYDX-denominated gas fees, to validators and stakers. Notably, the dYdX team also needs to stake tokens to earn dYdX's fee revenue, which to some extent prevents the team from dumping large amounts of tokens. dYdX's current annual revenue is approximately $105.47 million, and the distribution of protocol revenue among validators and stakers will enhance DYDX's value capture capability.

DYDX Token Model Update

Previously, DYDX tokens were primarily used for protocol governance, fee discounts, and staking to capture token inflation incentives. dYdX V4 has modified the governance and staking modules, expanding the governance rights of the tokens and allowing stakers to capture real revenue.

First, DYDX holders can now vote on key parameters and critical functional modules of dYdX, including but not limited to trading fee parameters, trading reward mechanisms, third-party price sources, and adding/removing existing markets. The expansion of governance rights allows DYDX holders to dynamically adjust trading parameters and protocol functions based on market demand, making governance rights more valuable.

Second, DYDX holders who stake their tokens will receive revenue from trading fees and gas fees, rather than the previous token inflation incentives, which will increase the real yield for stakers. The DYDX token will transition from being a mining token to a general-purpose token on the dYdX Chain with value capture capability, wealth effects, and governance rights. The increase in dYdX trading volume and the improvement in fundamentals will enhance dYdX's fee revenue, amplifying the appeal of staking DYDX tokens. This process will further reduce the circulating supply of DYDX tokens, amplify market demand for DYDX tokens, promote price increases, and create a positive feedback loop.

The above image shows the unchanged token price and protocol fee performance of the DYDX token model. We expect the new token model to further strengthen the growth of token prices and protocol fees.

Application Chain Migration Strengthens Future Performance Expectations for dYdX

1. Pursuing Higher Performance Comparable to CEX

One of the key reasons for dYdX's departure from StarkWare is that StarkWare's upgrades and current performance and cost expenditures are insufficient to support dYdX's growth plans to rival centralized exchanges. The custom application chain allows dYdX to operate without competing with other protocols, enjoying the performance of the application chain, reducing on-chain transaction costs, and better meeting dYdX's high TPS requirements for order books and matching engines. Before the migration, dYdX could only handle about 10 transactions per second and 1000 order/cancel requests, while after the migration, dYdX can handle up to 2000 transactions per second. In addition to performance improvements, dYdX's independence also eliminates the need for profit sharing with StarkWare, significantly enhancing the expectations of stakers regarding future revenue distribution from the protocol.

2. Customized Application Chain Provides a Better Trading Experience

Another major benefit of migrating to an application chain is that dYdX can achieve higher customizability in the workflows of the blockchain and validation nodes to meet the needs of decentralized derivatives trading.

In dYdX v4, each validation node will run an in-memory order book that will never reach consensus off-chain. Orders and cancellations will be propagated through the network, and only transactions that are successfully matched in real-time and confirmed by consensus will be submitted to the blockchain, ensuring that the order book data stored by each validation node is consistent. Based on this operational logic, user order and cancellation actions are off-chain and do not require gas fees. Users only need to pay gas fees when the order matching transaction is completed on-chain.

Additionally, dYdX has collaborated with Skip Protocol to develop an MEV dashboard to expose harmful/untrustworthy nodes. By penalizing such nodes through community actions, the fairness of the dYdX trading network is ensured. Migrating to an application chain allows dYdX to optimize the actual trading experience for users more deeply, increasing their willingness to trade on dYdX.

MEV Dashboard on dYdX

Other Benefits and Future Risk Warnings

1. Early Incentive Program

The dYdX community has approved the launch incentive proposal for dYdX v4, allocating $20 million DYDX from the dYdX Chain community treasury for a 6-month launch incentive program to encourage early adopters. The early incentive program will strengthen users' willingness to move funds across chains to dYdX Chain, promoting increases in dYdX trading volume and fee revenue.

2. Native Cross-Chain USDC

The Circle Cross-Chain Transfer Protocol (CCTP) will launch on November 28 on the Cosmos ecosystem application chain Noble, allowing users to transfer native USDC from Noble to dYdX Chain in a single transaction. The launch of CCTP on Noble will make it simpler, safer, and more efficient for users to send USDC to dYdX Chain.

3. Massive Token Unlock in December

The biggest risk event facing dYdX V4 recently is the massive token unlock in December. According to TokenUnlocks information, 15% of the total dYdX supply will be unlocked on December 1. However, this unlock may not lead to significant selling pressure. As mentioned earlier, staking DYDX tokens can yield substantial shares of trading fees and gas fees. Moreover, most of the tokens being unlocked belong to the team and early investors. Due to the recent bullish secondary market conditions and the changes in the dYdX token model, the team and institutional investors may also choose to capture dYdX's future value growth by staking their tokens. DYDX Token Unlocks

In summary, we believe that with the completion of dYdX's migration to the application chain and the upgrade of the tokenomics model, the fundamentals of dYdX show a stable upward growth trend, and the DYDX token can further capture dYdX's value growth. At the same time, since October 25, the overall crypto market has warmed up, with significant increases in volatility and liquidity. The substantial rise in DYDX token prices also reflects market optimism that the future market conditions will continue to improve, platform trading volumes will continue to expand, and fee revenues will continue to grow.

Reference

1. https://dydx.exchange/blog/public-benefit-corporation
2. https://www.dydx.foundation/blog/dydx-token-mechanics
3. https://dydx.exchange/blog/dydx-chain-official-release
4. https://dydx.exchange/blog/dydx-chain
5. https://dydx.exchange/blog/distinguishing-mev-from-expected-noise
6. https://token.unlocks.app/dydx

MT Capital

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