MT Capital Insight Application Chain Migration and Economic Model Update Drive DYDX Flywheel Growth

Revitalizing DYDX Flywheel Growth with MT Capital Insight Application Chain Migration and Economic Model Enhancements

TL;DR

• dYdX tokenomics update requires token holders such as the team and early investors to stake DYDX tokens to capture dYdX fee revenue. This will increase DYDX staking rate, reduce circulating DYDX, prevent massive token dumping, and enhance DYDX’s value capture capability.

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

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

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• December will see a large number of token unlocks, but we expect this will not lead to a large amount of token dumping. The team and early investors may choose to capture dYdX’s growth expectations by staking tokens.

Introduction

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

Tokenomics update empowers DYDX’s value capture capability

1. dYdX income goes to token stakers

dYdX founder Antonio announced that dYdX Trading Inc. has officially become a Public Benefit Corporation and will not generate fee income from the operation or trading of dYdX V4. dYdX Chain will distribute all protocol fees, including transaction fees denominated in USDC and gas fees denominated in DYDX, to validators and token stakers. It is worth noting that the dYdX team also needs to stake tokens to receive dYdX fee income, which to some extent avoids token-rich teams from selling off and causing a market crash. dYdX’s current annual revenue is about $105.47m, and the distribution of protocol income between validators and token stakers will enhance DYDX’s value capture capability.

dYdX Daily Fees

2. DYDX token model update

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

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

Secondly, DYDX holders pledging tokens will receive revenue from transaction fees and gas fees, instead of the previous token inflation incentives, which will increase the real rate of return for pledgers. The DYDX token will also transition from being just a mining coin to a dYdX Chain utility token with value capture capabilities, wealth effects, and governance rights. Increased dYdX trading volume and improved fundamentals will increase dYdX’s fee income, amplifying the attractiveness of pledging tokens for DYDX holders. This process will further reduce circulating DYDX tokens, increase market demand for DYDX tokens, promote token price appreciation, and create a positive upward cycle.

The above figure shows the token price and protocol fee performance of the DYDX token model before modification. We expect the new token model to further strengthen the growth of token price and protocol fees.

Application chain migration strengthens the future performance expectations of dYdX

1. Pursuit of higher performance comparable to CEX

One of the important reasons why dYdX is leaving StarkWare is that StarkWare’s upgrade, existing performance, and cost are insufficient to support dYdX’s growth plans to be on par with centralized exchanges. The dedicated 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 requirements for order books and matching engines. Prior to migration, dYdX could only process about 10 transactions per second and 1000 order/withdrawal requests per second, but after migration, dYdX can process up to 2000 transactions per second. In addition to performance improvements, dYdX no longer needs to share profits with StarkWare after independence, which will greatly increase the expected income distribution for pledgers mentioned earlier.

2. Custom application chain for a better trading experience

One of the major benefits of migrating to the application chain is that dYdX can achieve higher customization of the blockchain and validation node workflows to meet the needs of decentralized derivative trading.

In dYdX v4, each validation node will run an in-memory order book that never reaches consensus off-chain. Placing and canceling orders will be propagated through the network, and only trades that are successfully matched in real-time and have consensus confirmation will be committed to the blockchain, ensuring that the order book data stored by each validation node is consistent. Based on the aforementioned operation logic, user actions of placing and canceling orders are considered off-chain actions and do not require payment of gas fees. Only when the order matching transaction is completed on-chain, users will need to pay the gas fees for the order completion.

In addition, dYdX has also collaborated with Skip Protocol to develop an MEV dashboard, which exposes malicious/dishonest nodes. By punishing such nodes through the community, the fairness of the dYdX trading network is safeguarded. Migrating to the application chain allows dYdX to optimize the actual trading experience of users at a deeper level and improve their willingness to trade on dYdX.

MEV Dashboard on dYdX

Other advantages and future risk warnings

1. Early incentive plan

The dYdX community has passed a launch incentive proposal for dYdX v4, allocating 20 million US dollars’ worth of DYDX from the dYdX Chain community treasury for a 6-month launch incentive plan on v4 to incentivize early adopters. The early incentive plan strengthens users’ willingness to cross-chain their funds to dYdX Chain and promotes the increase in dYdX trading volume and fee revenue.

2. Native cross-chain USDC

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

3. Token unlocking in December

The biggest risk event for dYdX V4 in the near future is the unlocking of a large number of tokens in December. According to TokenUnlocks, December 1 will see the unlocking of 15% of the total dYdX tokens. However, this unlocking may not necessarily cause a significant selling pressure. As mentioned earlier, staking DYDX tokens can earn substantial fee and gas fee dividends. Most of the tokens unlocked this time belong to the team and early-stage investment institutions. Due to the recent bullish secondary market and changes in the dYdX token model, the team and institutional investors may choose to capture the future value growth of dYdX in the form of staked tokens.

DYDX Token Unlocks

In summary, we believe that under the influence of the dYdX application chain migration completion and the upgrade and update of the token economic model, dYdX’s fundamentals have a stable and positive growth trend, and the DYDX token can further capture the value growth of dYdX. At the same time, since October 25th, the overall cryptocurrency market has warmed up, and volatility and liquidity have significantly increased. The sharp rise in the price of DYDX tokens also reflects the market’s optimistic expectations for the continued extension of the market outlook, the continuous expansion of platform trading volume, and the continuous growth of 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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