dYdX Analysis: How to Make a More Attractive Investment Opportunity

The lifeblood of encrypted transactions can be referred to as perpetual contracts. Perps accounted to two-thirds, while spot transactions only accounted for one-third. dYdX is the most used decentralized exchange (DEX), for trading perps. With the release dYdX version 4, they will soon be moving over to the Cosmos chain. dYdX uses a central order book model instead of the popular one. The Automated Market Maker model (AMM), makes it easy to use for even experienced traders who have never traded cryptocurrency. The dYdX protocol combines the security and transparency that a DEX with speed and usability that a CEX. It was launched in 2017 and quickly gained popularity with its rich liquidity, large trading pairs, and user-friendly interface (UX). Today, dYdX is still the leader in terms of daily user count and trading volume. The trading volume of the dYdX account for more than 70% daily perpetual trading volume. This transaction volume is converted to revenue via a maker-taker model. The maker-taker fee model allows you to distinguish between order fees that add liquidity (or regular orders) or remove liquidity (or orders that execute immediately). The taker fees are between. Taker fees range from 0.2% to 0.5%, while maker fees range between. 0%-0.02%. Fees range from 0% to 0.02%. GMX uses liquidity pools to trade with traders, rather than dYdX’s order book model. This model has the advantage that it allows for lower slippage, but also results in lower liquidity. GMX’s currency pairs are limited and there are limits on the liquidity of certain currency pairs. GMX also has a flat fee structure in which traders pay 0.1% to initiate trades and 0.1% to close trades. A small hourly borrowing fee is also charged due to the structure and terms of the swap contract. Despite trading volumes that are much lower than dYdX, GMX can often make higher daily revenues due to higher fees. GMX and dYdX together generate 70% of all DEX revenues. Spot trading gives GMX an additional source. The fees range from 0.2% to more than 0.5% and help the protocol increase its profits by hundreds of thousands of dollars every day. GMX replaces Curve, but only allows for trades for a few assets. The fees help the protocol add hundreds of thousands of dollars in profits every day. This issue has been brought back to the forefront by the upcoming token unlocks scheduled for February 2. Originally, dYdX was to unlock most of the tokens for early investors on February 2. Investors, contributors, and advisors will have access to vested tokens. Unlocked tokens could have caused some selling pressure in the near-term as many people would have enjoyed huge gains of at least 2x. This distribution is especially noteworthy, as only 23% of token supply is currently in circulation. The token supply nearly doubled overnight after the February unlock. However, dYdX announced recently that they will delay unlocking until December 2023. This move gave the team time to consider further distribution options that would not result in a flood of new tokens flooding the market.Concerns about DYDX go beyond the vesting schedule, including that the income currently earned will go to the private entity dYdX Trading Inc., rather than the agreement or token holders, and the relatively small demand for tokens that will be in circulation.Potential solutionThe adjusted vesting schedule merely postpones the inevitable and does not address the broader underlying problems facing the agreement. As token supply is still limited, it is important to increase the appeal of tokens for investors. Why should the protocol care so much about token value? The token value will become an integral part of network security as dYdX moves to its own Cosmos chains. DYDX market cap becomes part of the cost of attacking the network.dYdX has taken the first and most meaningful step towards improving token economics, announcing that it will redirect accrued revenue to validators and stakers instead of dYdX Trading Inc. It’s a fantastic first step, but it could be moved forward with some potential solutions that should further increase its appeal to potential token holders and proponents of decentralization.Adjust the fee structureTrading on dYdX is already about 5 times cheaper than trading on GMX and about 4 times cheaper than Gains Network and MUX. Even doubling the fees would leave a large gap in revenue. It is easy to adjust fees between existing tiers using the existing maker-taker fee structure. To encourage deep liquidity, taker fees could be increased. dYdX offers a greater number of trading pairs than competitors and already has a group large market makers on its platform. dYdX’s increased liquidity will continue to attract institutional-level traders rather than retail investors. CEXs like Binance are the largest competitors. dYdX has essentially the same fees today as Binance. It would be less competitive than Binance if it had additional fees, but there are good reasons to allow some decentralization premium. GMX is a good example of this. Even though the fee is a lot higher, users still use it. Users are unlikely to move towards CEX if there is a slight increase in fees. Increase transparency The dYdX team needs to improve communication about protocol development and how funds are allocated. It is unclear what dYdX Trading Inc. has done with the almost $400 million it has amassed over its history. Token holders will benefit if they have a clear understanding of how the capital is allocated to grow the company. Transparency in the allocation of funds will improve investor sentiment. Spot trading with GMX is not the most cost-effective, but it is very easy to use. GMX makes an average of $200,000 per day from spot trading. Metamask is another example of this use case. It makes millions of dollars every day from token conversions, even though it is more expensive than other options. This can be done by outsourcing it to an aggregator, which will also charge volume fees. Users concerned about slippage should consider changing the token unlock schedule. Teams can adjust to unlock tokens gradually on a monthly, or even daily basis. This eliminates the need to have many upcoming unlocks. There is no reason for liquidity to flood the market in one day. Investors can access their funds in 180 days or 365 days. The problem will be one of coordination – it is necessary to change off-chain legal agreements. It is possible to create a new demand pool. New demand pools for DYDX are needed to mitigate this. While stakes will be the most important, there are other options. There is still room for DYDX holders to receive higher discounts due to the higher fees. This is the most direct path to continue incentivizing liquidity while reducing DYDX token velocity.ConclusiondYdX is a top-notch platform, but a series of issues with the associated tokens have made investor addition slower than it should have been. DYDX will be a more attractive investment if the proposed solution is adopted. This will increase the security of new networks and make it even more attractive. The good news is that dYdX has become the most popular DEX. This is your chance to unlock the value the underlying protocols have to offer token holders. 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