Michaël van de Poppe - 28 June 2022
dYdX moves into the Cosmos
dYdX, the perpetual trading platform, is developing their own standalone blockchain based on Cosmos. At the moment dYdX is running on Starknet, which is a layer 2 solution for Ethereum. Their goal is to become one of the largest decentralized exchanges in all of crypto, and creating their own blockchain might just bring them one step closer to their goal.
Why did they choose Cosmos and what does it mean for the protocol? Let’s have a look, but first let’s go over what dYdX is.
dYdX is a perpetual trading platform that allows on-chain leverage trading. You could compare it to an exchange like Binance, but completely on-chain, meaning all transactions are finalized and recorded on the blockchain. The platform is currently running on Starknet, which actually bottlenecks the protocol because of Starknet’s limited throughput and capabilities. dYdX wants to shift to a fully decentralized system which is not possible by staying on Starknet.
Enter dYdX V4
The V4 upgrade will feature a fully decentralized off-chain order book and matching engine which will enable the protocol to scale its throughput with orders of magnitude, all while maintaining a high level of decentralization. The Cosmos SDK is essential to the realization of the V4 upgrade.
For a detailed description of each component that dYdX V4 will consist of please refer to this blog post by the dYdX team.
Cosmos is a framework for developers to create a standalone blockchain with cross-chain capabilities. Blockchains that run on the Cosmos SDK are based on the Tendermint proof-of-stake consensus algorithm, which is a certain type of consensus algorithm. Even though the Ethereum blockchain is more decentralized, Cosmos offers higher throughput and more flexibility in terms of customization.
The Cosmos SDK allows developers to fully customize how the blockchain works as well as what functionalities its validators have to perform. This is the exact reason the dYdX team chose to build on top of it.
At the moment dYdX V3 is not truly decentralized because some components are run on centralized systems. The aim of V4 is to fully decentralize all of its components, which is possible through the Cosmos SDK.
An example of the decentralized composition is the off-chain order book. Currently, dYdX V3’s order book is run on centralized systems. In dYdX V4 each validator will run an in-memory order book that is never committed on-chain. This allows decentralization of the order book while preventing issues that come with on-chain order books such as frontrunning and trade collisions.
The Cosmos ecosystem
The Cosmos ecosystem consists of strong fundamental projects such as Thorchain (decentralized liquidity) and Osmosis (decentralized exchange), but still has some way to go before becoming an all encompassing ecosystem.
The collapse of Luna has had a negative impact on the Cosmos ecosystem since Luna had the highest TVL and volume of all Cosmos chains, combined with the role that UST was expected to play within the Cosmos ecosystem. Regardless of Luna’s collapse, the Cosmos ecosystem is still expanding and its developers are working hard to add important functionalities such as cross-chain communication, liquid staking and interchain security.
dYdX choosing the Cosmos SDK infers that there is demand for application specific blockchains (the introduction of Avalanche’s Subnets strengthens this thesis). Since Cosmos does not have a native perpetual swap platform, the addition of dYdX to their ecosystem will make the ecosystem more whole. Creating their own appchain allows dYdX to build in a vertically integrated manner with the DYDX token fully controlling its system.
DYDX will be the native token of choice for the new L1. The token will be used for gas fees, staking to validators as well as on-chain governance. Once the appchain goes live it would increase the token’s utility, which in turn would result in an increase of its value, especially once more functionalities are added such as spot trading, options trading and multi-collateral. Please note that the dYdX team is open for discussion regarding the token of choice.
The dYdX team is planning to release the V4 upgrade by the end of 2022. We look forward to its release and what it could bring to Cosmos as well as dYdX. Since dYdX is the first project ever to realize a DEX specific blockchain, its success is not guaranteed. If the dYdX team is able to pull this off it would be an impressive improvement to the platform, and we would expect similar projects to follow suit. An open source DEX running on permissionless networks has been the dream for many crypto enthusiasts.
If successfully implemented, dYdX V4 could result in a great addition to Cosmos and increase adoption of the ecosystem.