Why did dYdX choose to launch its own chain?

What led dYdX to decide on launching its own chain?

Author: @FourPillarsFP

Translation: Plain Speaking Blockchain

dYdX plans to launch its V4 version on its application-specific blockchain based on Cosmos. The chain is scheduled to launch in the second quarter of 2023, making the trading platform more decentralized as it will no longer have a centralized matching engine. So why is dYdX launching its own chain? This article will analyze the following points:

• What’s interesting about dYdX? The history and story
• Migrating to StarkWare
• Transitioning to V4, the reason for launching its own chain
• The potential impact of dYdX’s changes
• What’s next for dYdX?

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1. What’s interesting about dYdX?

From a researcher’s perspective, what makes dYdX interesting is:

1) Its existence itself is a counterexample to Rollup extremism.

2) It proves that in the battle between infrastructure and applications, infrastructure remains crucial.

The challenges and repeated attempts of dYdX

Until early 2020, dYdX was the highest-volume application in the Ethereum Layer 1 DEX, right from the start, it was a very successful product. Ironically, the difficulties started during the “DeFi summer” when DeFi began to flourish. With the emergence of Uniswap and the creation of various DeFi governance tokens actively traded on Uniswap, all of dYdX’s trading volume shifted to Uniswap.

Additionally, the DeFi summer led to a surge in on-chain transactions, resulting in a significant increase in Ethereum transaction costs. For dYdX, this change had a fatal impact on product operations as they needed to bear the transaction costs for user convenience.

If they continued subsidizing transaction costs, bankruptcy was inevitable. At that time, dYdX only had a few months of survival space left.

2. Migrating to StarkWare

Subsequently, dYdX had to leave Ethereum. If they didn’t leave, they would go bankrupt. At that time, the best choice for dYdX was StarkWare Ltd.

StarkWare is one of the Ethereum-based ZK Rollup solutions. What sets StarkWare apart from other ZK Rollup solutions that could only handle simple transactions at the time is its ability to handle a greater variety of transactions.

Of course, StarkWare Ltd is not compatible with the Ethereum Virtual Machine (EVM) and uses a separate programming language, but at that time, it allowed dYdX to leverage the Ethereum ecosystem while ensuring scalability and minimizing costs.

Subsequently, dYdX became a well-known leading DEX in the blockchain industry.

Although dYdX has achieved great success, its founder Antonio (@AntonioMJuliano) still has a major concern.

This concern involves the “vagueness” of the product. How can something that is done so well be “vague”?

But in reality, there is indeed vagueness. dYdX is nominally a “decentralized” trading platform, but its order book and matching engine operate in a centralized manner.

Indeed, some people call dYdX not a decentralized trading platform, but a “hybrid trading platform.” “dYdX needs a change, a change that can distinguish it from traditional centralized trading platforms.

3. Transition to V4

This is why they chose to “launch their own chain”. The purpose of the @dYdX chain is to achieve “full decentralization”. The previously mentioned order book and matching engine are also intended to operate in a decentralized manner in @dYdX V4.

Governance Transition

In order to achieve “full decentralization”:

1) The foundation and company will not be involved in the governance of @dYdX

2) Transaction fees will be redesigned and allocated to $DYDX token holders

This is also a declarative statement that the foundation and company will no longer intervene in the direction of the product.

4. Potential Impact of dYdX’s Changes

dYdX quickly and flexibly adjusts its product and infrastructure based on the constantly changing technological and market environment. In the end, they know how to make the right decisions when necessary.

Impact of dYdX’s changes 2: Rollups are not a panacea

Some people say that dYdX became “centralized” after leaving the Ethereum ecosystem, but from a product perspective, it only achieved “true decentralization” after establishing its own chain.

These changes support the view that “Rollups are not a universal solution”. For dYdX, Rollup is not the answer, but a “temporary measure”. This also prompts us to reconsider whether utilizing Ethereum’s security is the only way to achieve “decentralization”.

5. What is the future of dYdX?

It is still too early to judge the success of V4, as it was only launched a month ago. However, the author believes that an “independent Layer 1 is absolutely necessary” and hopes that dYdX’s recent moves will be successful.

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