• The updated dYdX tokenomics model necessitates that teams, early investors, and other token holders stake DYDX tokens to capture dYdX transaction fee income. This approach will increase the staking rate of DYDX, reduce its circulating supply, prevent large-scale token selling, and enhance DYDX’s value-capturing capability.
• Migrating dYdX to an AppChain avoids profit redistribution with StarkWare. The performance improvement and increased customization offered by the AppChain also strengthen market expectations for the future performance of dYdX.
• The recently launched early incentive program by dYdX, the upcoming release of native USDC on Noble, and the significant increase in secondary market liquidity and volatility all bode well for the fundamental development of dYdX.
• December will see a substantial token unlocking, but we anticipate this won’t result in a significant token sell-off. Teams and early investors might opt to capture dYdX’s growth potential by staking tokens.

Introduction

dYdX recently completed its migration from StarkWare to the Cosmos application chain, finalizing its first transaction on November 13. Alongside this move, dYdX updated its V4 tokenomics model, enhancing DYDX’s value-capturing capabilities. With the combined impact of these two events, we anticipate significant improvements in dYdX’s fundamentals, enabling DYDX to capture greater gains in the secondary market.

The updated tokenomics model empowers DYDX with enhanced value-capturing capabilities

1. dYdX income belongs to token stakers

dYdX founder Antonio announced that dYdX Trading Inc. has officially become a Public Benefit Corporation, and will not generate revenue from the operation or transactions of dYdX V4. All protocol fees, including transaction fees priced in USDC and Gas fees priced in DYDX, on the dYdX Chain will be allocated to validators and stakers. It’s noteworthy that the dYdX team also needs to stake tokens to receive fee rewards, which will mitigate the risk of significant token sell-offs by the team. With dYdX’s current annual revenue at approximately $105.47 million, the distribution of protocol income among validators and stakers will enhance the value-capturing capability of DYDX.

dYdX Daily Fees

2. DYDX Tokenomics Model Update

Previously, DYDX tokens were primarily used for protocol governance, fee discounts, and capturing token inflation incentives through staking. With the changes in the dYdX V4 protocol governance and staking modules, token holders now have expanded governance rights and stakers can capture real yield.

Firstly, DYDX holders can now vote on key parameters and critical functional modules of dYdX, including but not limited to transaction fee rate parameters, trading reward mechanisms, third-party price oracles, and the addition/removal of existing markets. The expanded governance authority empowers DYDX holders to dynamically adjust transaction parameters and protocol functionalities based on market demand, making governance rights more valuable.

Secondly, DYDX token holders staking tokens will receive income derived from both transaction fees and gas fees, replacing the previous token inflation incentives. This change aims to enhance the real yield for stakers. DYDX tokens are transitioning from being just mining rewards to becoming universal tokens on the dYdX Chain, with value-capturing capabilities, wealth effects, and governance rights. As dYdX trading volume increases and fundamentals improve, the rise in fee income for dYdX will amplify the appeal for DYDX holders staking tokens. This process will further reduce circulating DYDX tokens, increase market demand for DYDX tokens, drive token price appreciation, and create a positive growth flywheel.

dYdX Price & Fees

The chart above depicts the performance of DYDX token prices and protocol fees under the yet-to-be modified token model. We anticipate that the new token model will further strengthen the growth of token prices and protocol fees.

The AppChain migration strengthens expectations for dYdX’s future performance

1. Pursuing performance surpassing that of centralized exchanges

One of the significant reasons for dYdX’s departure from StarkWare is that StarkWare’s upgrades, with the existing performance and cost structure, are insufficient to support dYdX’s ambitious growth plans aiming to compete with centralized exchanges (CEX). The bespoke application chain allows dYdX to operate without direct competition from other protocols, enabling exclusive access to the application chain’s performance. This, in turn, reduces on-chain transaction costs and better accommodates dYdX’s high TPS demands for order book 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 handle up to 2,000 transactions per second. Apart from performance improvements, the independence from StarkWare eliminates the need for profit-sharing, significantly raising stakers’ expectations for future income distribution from the protocol.

Source: https://dydx.exchange/blog#

2. Customized AppChain delivers a superior trading experience

Another significant advantage of migrating to the application chain is that dYdX can achieve higher customizability in the workflows of the blockchain and validating nodes to meet the demands of decentralized derivative trading.

In dYdX V4, each validating node runs an in-memory order book that never reaches consensus off-chain. Order placement and cancellation are propagated through the network, with only trades that match in real-time and receive consensus confirmation being ultimately submitted to the blockchain. This ensures uniformity in the order book data stored by each validating node. Following this operational logic, user actions for placing and canceling orders are considered to be off-chain activities, eliminating the need to pay gas fees. Users only incur gas fees when the matched transactions are successfully completed and submitted to the blockchain.

Additionally, dYdX has collaborated with Skip Protocol to develop an MEV dashboard, to expose harmful/dishonest nodes. By penalizing such nodes through community consensus, dYdX safeguards the fairness of its trading network. Migrating to the application chain allows dYdX to optimize users’ actual trading experience at a deeper level, which will increase user willingness to transact on the dYdX platform.

MEV Dashboard on dYdX

The remaining positives and future risk considerations

1. Early Incentive Program

The dYdX community has approved the launch incentive proposal for dYdX V4, allocating $20 million worth of DYDX from the dYdX Chain community treasury for a 6-month launch incentive program to encourage early adopters. The early incentive program aims to strengthen users’ willingness to cross-chain their funds to the dYdX Chain, fostering an increase in dYdX trading volume and fee income.

2. Native Cross-Chain USDC

The Circle Cross-Chain Transfer Protocol (CCTP) is set to launch on the Cosmos ecosystem application chain Noble on November 28th. This will enable users to seamlessly transfer native USDC from Noble to the dYdX Chain in a single transaction. The introduction of CCTP on Noble simplifies, secures, and streamlines the process of sending USDC to the dYdX Chain, offering users a more straightforward and efficient experience.

3. The substantial token unlocking in December

One of the significant risk events recently faced by dYdX V4 is the substantial token unlocking in December. According to TokenUnlocks data, December 1st will witness the unlocking of 15% of dYdX’s total supply. However, this unlocking event may not necessarily result in a significant sell-off. As mentioned earlier, staking DYDX tokens provides substantial fee and gas fee dividends. In this unlocking, the majority of tokens belong to the team and early investment institutions. Given the recent bullish trend in the secondary market and the impact of changes in the dYdX token model, teams and institutional investors might opt to stake tokens to capture the potential future value growth of dYdX.

DYDX Token Unlocks

In summary, we believe that with the completion of dYdX’s application chain migration and the impact of its upgraded tokenomics model, dYdX’s fundamentals show a steady and improving growth trend, and the DYDX token will also further capture dYdX’s value growth. At the same time, since October 25, the overall crypto market sentiment has warmed up, with significantly increased volatility and liquidity. The significant increase in the DYDX token price also reflects the market’s optimistic expectations that the bullish market sentiment can continue, platform trading volume will keep expanding, and fee income will sustain growth.

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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