MT Capital Insight Application chain migration and economic model updates drive DYDX price wheel growth.

MT Capital Insight Chain Migration and Economic Model Updates Spur Significant Growth in DYDX Price Wheel

TL;DR

• The dYdX tokenomics update requires team members, early investors, and other token holders to stake DYDX tokens to capture dYdX’s fee income. This will increase the staking rate of DYDX, reduce circulating DYDX supply, prevent token dumping, and enhance DYDX’s value-capturing ability.

• The migration of dYdX to the Cosmos application chain avoids profit redistribution with StarkWare. The performance improvement and increased customizability brought by the application chain can strengthen market expectations for dYdX’s future performance.

• The newly launched early incentive program by dYdX, the upcoming native USDC from Noble, and the significant increase in secondary market liquidity and volatility all bode well for the fundamental development of dYdX.

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• December will bring about a large number of token unlocks, but we expect this will not result in a significant token sell-off. The team and early investors may choose to capture dYdX’s growth expectations by staking tokens.

Introduction

dYdX recently completed its migration from StarkWare to the Cosmos application chain and completed the first transaction on November 13th. dYdX also updated its tokenomics model for V4, giving DYDX stronger value-capturing capabilities. We expect that under the dual impact of these two events, dYdX’s fundamentals will be greatly improved, and DYDX will be able to capture larger gains in the secondary market.

Tokenomics Update Empowers DYDX’s Value-Capturing Ability

1. dYdX Revenue Goes to Stakers

dYdX founder Antonio announced that dYdX Trading Inc. has officially become a Public Benefit Corporation and will not generate any fee income from the operation or trade of dYdX V4. dYdX Chain will distribute all protocol fees, including USDC-denominated trading fees and DYDX-denominated gas fees, to validators and stakers. It is worth noting that the dYdX team also needs to stake tokens to receive fee income from dYdX, which to some extent prevents teams with a large number of tokens from dumping them on the market. dYdX currently has an average annual revenue of $105.47 million, and the distribution of protocol revenue between validators and stakers will enhance DYDX’s value-capturing ability.

dYdX Daily Fees

2. DYDX Token Model Update

Previously, DYDX tokens were mainly used for protocol governance, fee discounting, and staking incentives for token inflation. dYdX V4 made changes to the protocol governance and staking modules, broadening token governance authority and allowing token stakers to capture real earnings.

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

Secondly, DYDX holders staking tokens will receive income from transaction fees and gas fees, instead of the previous token inflation incentives, which will increase the real yield for stakers. DYDX tokens will also transition from being just mining tokens to becoming universal tokens for dYdX Chain with value capturing ability, wealth effect, and governance rights. The increase in dYdX trading volume and the improvement of fundamentals will enhance dYdX’s fee income and amplify the attractiveness of staked tokens for DYDX holders. This process will further reduce the circulating supply of DYDX tokens, increase the market demand for DYDX tokens, promote token price growth, and create a positive upward spiral.

The above chart shows the performance of DYDX token price and protocol fees before the token model was modified. We expect the new token model to further strengthen the growth of token price and protocol fees.

Application Chain Migration Enhancing Future Performance Expectations for dYdX

1. Pursuing Higher Performance Comparable to CEX

One of the important reasons for dYdX’s departure from StarkWare is that StarkWare’s upgrade, existing performance, and cost expenditures are insufficient to support dYdX’s growth plan to match centralized exchanges. The custom-made application chain allows dYdX to not compete with other protocols and enjoy the performance of the application chain, reducing on-chain transaction costs and better meeting dYdX’s high TPS demands for order books and matching engines. Before the migration, dYdX could only process about 10 transactions per second and 1,000 order/cancellation requests per second, after the migration, dYdX can process up to 2,000 transactions per second. In addition to performance improvements, dYdX no longer needs to share profits with StarkWare after the migration, which will significantly increase the expected income distribution for stakers mentioned earlier.

2. Customized Application Chain for Better Trading Experience

Another major benefit of migrating to an application chain is that dYdX can achieve higher customization of the blockchain and validation node workflow to meet the needs of decentralized derivative trading.

In dYdX v4, each validation node will run an in-memory order book, which will never reach consensus off-chain. Placing and canceling orders will be propagated over the network, and only trades that are successfully matched in real-time and receive consensus confirmation will be ultimately submitted to the blockchain to ensure that the order book data stored by each validation node is consistent. Based on this operating logic, placing and canceling orders are considered off-chain actions and do not require Gas fees. Only when the order matching trade is completed and goes on-chain, users will need to pay the Gas fees for order settlement.

Additionally, dYdX has also partnered with Skip Protocol to develop a MEV dashboard to expose harmful/dishonest nodes. By penalizing such nodes within the community, the fairness of the dYdX trading network is ensured. Migrating to an application chain allows dYdX to further optimize the actual trading experience for users and improve their willingness to trade on dYdX.

MEV Dashboard on dYdX

Other benefits and future risk warning

1. Early Incentive Program

The dYdX community has passed the launch incentive proposal for dYdX v4, which will allocate $20 million worth of DYDX from the dYdX Chain Community Treasury for a 6-month launch incentive program on v4 to incentivize early adopters. The early incentive program can strengthen users’ willingness to cross-chain their funds to dYdX Chain, promoting an increase in dYdX trading volume and fee revenue.

2. Native Cross-Chain USDC

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

3. Massive Token Unlock in December

The biggest risk event currently faced by dYdX V4 is the massive token unlock in December. According to TokenUnlocks information, December 1st will see the unlocking of 15% of the total dYdX tokens. However, this unlock may not necessarily cause a large amount of selling pressure. As mentioned earlier, staking DYDX tokens can earn considerable fee and Gas revenue sharing. Furthermore, a large portion of the unlocked tokens belongs to the team and early-stage investment institutions. Given the recent hot secondary market trend and the impact of dYdX token model changes, the team and institutional investors may also choose to capture the future value growth of dYdX by staking tokens.

DYDX Token Unlocks

In summary, we believe that with the completion of the dYdX application chain migration and the upgrade of the token’s economic model, **dYdX’s fundamentals show a stable and positive growth trend, and the DYDX token can further capture the value growth of dYdX.** Additionally, since October 25th, the overall cryptocurrency market has been warming up, with significantly increased volatility and liquidity. The sharp increase in the price of DYDX token also reflects the market’s optimistic expectations of continued market conditions, sustained expansion of platform trading volume, and continued growth in fee income.

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

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