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dYdX is a decentralized exchange that provides more sophisticated trading features like options and derivatives.
At first glance, dYdX appears to be another lending protocol on Ethereum. But upon closer inspection, it is a protocol that is trying to elevate Decentralized Finance (DeFi) to new heights. In the following paragraphs, we will explore the origins of dYdX, how it works, and what sets it apart from other protocols.
There are already several decentralized platforms for borrowing and lending in the DeFi space, such as MakerDAO and Compound. dYdX is focused on providing more advanced trading tools built on the Ethereum blockchain. As with other DeFi products, the dYdX protocol is available for anyone to use and build upon. Users' assets are managed by smart contracts instead of people. dYdX is currently the most popular decentralized margin trading platform. In October 2021, it reached a peak of over $1.12Billion locked up in its smart contracts. As of November 2022, more than $400 million are locked on the platform.
Major lending protocols - medium.com/dydxderivatives
Margin trading is a way of borrowing money to make bigger bets. Crypto traders use margin trading to bet on whether the price of a crypto asset will go up or down. If they're right, they can make more money, but if they're wrong, they could lose everything they've invested. Margin trading allows traders to use leverage, which means that their potential gains or losses are increased. For example, using 2x leverage would essentially double a trader's potential gain or loss.
As blockchain technology is still in its infancy, there are not many identity solutions or reliable credit checks available. This means that most borrowing done through decentralized means requires the use of collateral. Collateral is the minimum amount needed to take out and repay a loan. The more you can put down as collateral, the more you can borrow.
If the value of the trader’s collateral falls below a certain level, it will be sold in order to repay the loan - this is known as liquidation. Loans are at high risk of liquidation when there is too much borrowed compared to the value of the collateral. This risk increases significantly in markets which are more volatile like cryptocurrency.
Who is the Team Behind dYdX?
Founded in 2017, dYdX was created by Antonio Juliano, an ex-Coinbase and Uber engineer. To increase liquidity on the platform and encourage adoption of Coinbase's stablecoin, USDC, the Coinbase investment fund for DeFi products, "USDC Bootstrap Fund," invested $1 million USDC into dYdX.
Antonio Juliano - mpost.io
dYdX may not have many features as a trading platform, but it is much more advanced than other platforms because it is open, trustless, and non-custodial. The three assets that can be traded on the platform (ETH, DAI, and USDC) are simple compared to what veteran traders are used to, but they are a big improvement for the DeFi ecosystem.
Unlike margin trading, lending on dYdX is seen as low risk and passive. With dYdX, lenders make interest each time a new block is mined. Any funds put into the system will make interest constantly at every block and can be taken out whenever with no minimum requirements. Since all loans are backed by collateral and could be liquidated, the lender will always get their money back.
Different people interact in one big "lending pool" instead of individuals making and taking loan offers. There is a lending pool for each type of asset, which is managed by computer code (smart contracts). This makes it possible to borrow and lend money without having to wait for someone else to agree. The rates for each asset are based on how many people want to borrow it compared to how many people are willing to lend it.
The vision for dYdX has always been to provide more sophisticated trading features like options and derivatives, in addition to their core margin trading capabilities. Recently, they added "stop-loss" options to help traders manage risk. And looking ahead, the team plans to expand beyond the three cryptos that are currently available on the platform. By adding more complexity to their offering, dYdX is contributing to the overall growth and maturity of the DeFi ecosystem.
DYDX offers users the ability to participate in community governance. Stakers and holders of DYDX tokens can submit proposals on how to change key aspects of the network, which are then put to a vote by the community. Approved proposals are implemented. Investing in DYDX tokens is a chance to invest in one of the best decentralized exchanges.
Important dYdX (DYDX) links: