dYdX - An exchange for the next generation

dYdX is building a powerful and professional cryptocurrency exchange for trading perpetuals. While trading on dYdX platform, traders enjoy decentralized security and privacy benefits from Starkware zero-knowledge proofs. dYdX operates in a decentralized way. Investors and former employees or consultants of the dYdX Foundation can use DYDX tokens to propose, delegate, or vote on proposals relating to operations of the Protocol. All the important decisions are done in an open way via the voting process.

About dYdX

dYdX is a decentralized exchange powered by Starkware’s (a blockchain company that builds STARK based solutions for the Blockchain industry) layer 2 Ethereum based zero knowledge (ZK) proofs. It is positioned for everyone to gain access to professional and advanced traded crypto financial products such as Pepertuals and NFTs.

With such advanced features, it is also one of the simplest platforms to use when trading leveraged cryptocurrencies via perpetual contracts.

How dYdX started

The advent of dYdX was the introduction of Solo protocol for trades on the Ethereum network (Layer 1). The instruments were spot and margin trades. As time went on, more products like perpetual contracts were introduced and traders could now open leveraged positions thereby giving them an opportunity to take on bigger risks for bigger rewards. The attraction towards the perpetual contracts made about 99% of the trades happen on that platform.

Now, even though most trades were no longer done on the solo protocol, dYdX had to maintain bandwidth for the solo protocol to give an overall quality experience across all platforms. Hence, the solo protocol was Decommissioned on November 1, 2021.

Perpetuals

According to Coinmarketcap, perpetual contracts are crypto instruments that allow traders to speculate the price of a cryptocurrency by taking up a leveraged position. By leveraged position, we mean that traders can put a down payment for a large amount of assets such that when the price of the cryptocurrency goes in line with the trader’s speculation, more tokens or coins are earned, if not, tokens or coins are lost.

For dYdX, about 28 contracts are live and can be traded across mobile and web based devices. Some of the contracts available are Ethereum, Bitcoin, Cardano, Yearn, Compound, Polkadot, Chainlink among others.Also, due to the fact that dYdX is built on a Layer 2 Ethereum network, the gas fees are really low, speed for depositing and withdrawing are ultra fast.

Also, leverage available on dYdX range from 2x to 10x of the value of assets put down to be traded with. For example, if a trader uses $1000 to trade on a 5x perpetual contract, He or She will be able to trade with $5000. If the trade goes as planned, the reward is also 5x the original amount and if it goes in the opposite direction, the loss can be up to all the amount placed in the trade. This point where all the amount placed in the trade is lost is known as liquidation.

Testnet

Testnet is a combination of two words, ‘test’ and ‘net’ which basically means test network. Cointelegraph explains that it can be for networks that have not been released or for operational networks. Generally, when traders want to practice trades, they do it via a demo account which does not contain any real asset. On the blockchain, that testing platform is called Testnet. Apart from trades, developers who build blockchain products usually experiment and test their products on Testnet networks and there are various ways to experiment on Testnet.

dYdX has built a testnet platform to help traders build better decision making and speculating skills by trading with assets that do not have any real value.

Hedgies

Hedgies are a collection of 4200 NFTs developed by dYdX to foster community relations and brand awareness. The goal of these NFTs is to reward community members such as voters and traders for actively participating in the growth of dYdX. There are two phases of distribution of Hedgies to the community.

Firstly, the initial distribution which is a distribution of 2443 NFTs to addresses who had voted on-chain and those who traded during Epoch 5 (Between December 1st, 2021 and January 18th, 2022). The next set of 1757mNFTs are to be distributed via the ongoing distribution to top traders in terms of PNL (Profit and Loss) every week over the two (2) years.

dYdX does not earn royalties on the NFTs, however, gas fees are paid when NFTs are minted on Hedges. Also, a 2.5% royalty is paid to the artists who created the NFTs when secondary sales are made on each. To learn more about Hedgies, check here.

Governance at dYdX

dYdX is governed by the dYdX Foundation which operates as a DAO. The governance token for the DAO is $DYDX which gives holders the opportunity to propose, vote and earn rewards by staking their tokens. This means that only holders of the $DYDX token are members of the DAO. As an organization transitioning from a centralized structure to a decentralized one, most processes are still formative and the operation of the DAO is constantly evolving.

$DYDX holders have control over the following

Allocation of the community treasury
New token listings on the Protocol
Risk parameters for the Protocol
Capital allocations to market makers in the liquidity staking pool
Addition of new market makers to the liquidity staking pool
Determining safety staking pool payouts in the event of a loss
Changing any of the rewards and pools existing at launch
The governance contracts themselves

dYdX Improvement Proposals (DIP)

dYdX Improvement Proposals (DIP) are proposals written in the dYdX community when a change is needed around the operation of the DAO. It usually contains an argument FOR or AGAINST a decision to be made.

Generally, for changes to be made, the following process is followed:

A discussion is raised on the Forum
A request for comments (DRC) post is also made to get community engagement and buy in.
A snapshot proposal is written for signaling activities and voting is done off-chain
A dYdX Improvement proposal (DIP) is written when changes are to be made to the smart contract and voting is done on-chain
If the proposal passes, then it is executed; else, it is not.

More details on the process for executing DIPs can be found here.

Governance Voting Strategy

A discussion was raised in the community Forum (read details here) concerning the need to standardize the process of voting stating the inefficiencies around the initial process of voting. Some of the challenges faced were:

No minimum quorum or minimum vote differential to know if a snapshot proposal was binding or not.
The absence of a formal voting delay period to help the community prepare to vote or delegate votes.
Investors who custody their $DYDX are not able to participate in voting.

For these reasons and reasons that may occur in the future, there had to be a documented process from writing proposals to voting on or off chain.

The following requirements were setup to help manage the process end to end:

Binary voting for all proposals so that members can either vote FOR or AGAINST proposals.
A minimum voting delay of one (1) day and maximum delay of seven (7) days to be given from when the snapshot poll was created to when voting begins. This delay gives opportunity for members to acquire tokens, move tokens from wallets or delegate votes.
A voting period of four (4) days for all members to execute their votes.
A minimum quorum of 0.1% (1,000,000 tokens) of total supply needs to vote for that proposal to be valid.
A minimum vote differential of 67% needs to vote FOR the proposal for it to be executed.
A 7 day execution grace period is given for the proposal to be executed if successful.

Governance Parameters

Every holder of $DYDX is bound by virtue of holding to participate in Governance activities. These activities have set parameters upon which they are run seamlessly. The Governance has right over the following parameters for all contracts:

Timelock
Priority Timelock
Governor
DYDX Token
Treasury
Merkle Distributor
Liquidity Staking
Safety Module
Stark Proxy
Stark Perpetual

Full details on the parameters are stated here.

Endorsed Delegates

Voting on proposals sometimes requires members to know pretty much about what is being proposed, have the time to vote and also have the gas fees needed to vote. So, many members may have lost opportunities to vote directly or indirectly due to the absence of the above mentioned conditions, hence the need for delegation of votes.

However, how does a member know the right person to delegate the vote to if need be? This is the reason dYdX developed the Endorsed Delegates route to aid more proper delegation of votes. To be an endorsed delegate, certain conditions have to be met.

Complete the endorsed delegate onboarding material
Fill in profile and pitch
Submit on the Endorsed Delegates thread on the Forum and Discord

Also, to be able to delegate votes, members would need to become endorsed delegators by going via a similar process like the one above. More on the whole process can be found here.

Voting for All Critical Decisions

Treasury Decisions

One of the major treasury Decisions made in this DAO is the approval of the dYdX Grants Program (DGP). In this program, members do not need to go through the full voting process to carry out a specific function for the DAO. In fact, members will be encouraged to do more work to grow the community knowing that.

The dYdX Grants Program has a budget of $6.25 Million to run for two (2) quarters. $6 Million is for the Grants Program while $250,000 is for operations of the committee managing the program. It would be run by one full-time program lead and eight part-time reviewers (committee members) who also serve as the multi-sig.

How it works is that members can apply for grants between $5,000 to $500,000 to bring ideas in marketing, development, product, growth, education and others to life. After applying, the committee will consider the viability of the idea and the value to the community before allocating funds to that idea. Details of the DIP can be found here and snapshot here.

Also, another key decision was reimbursing early Safety Module stakers their full amount with an additional 10% as compensation after their tokens got stuck due to an error in the deployment of the upgraded smart contract (read more on the outage here.) This decision was made so as not to cause panic within members of the community and a renewed trust in the community. To learn about the proposal, kindly read the DRC engagement here, the snapshot poll here or the on-chain DIP here.‍

Process Decisions

A key process decision was the restoration of the safety module after an error occurred in the deployment of the upgraded smart contract. After tokens were mistakenly locked from the owners, there was a pause on the use of the safety module to stake $DYDX for $stDYDX (see the discussion here). There was a DRC on the idea of restoring the safety module which then led to the development of a proposal. The following process was implemented:

A DRC was written to highlight the problems and proposed solution of restoring the Safety Module with details here.
A snapshot poll was created to vote off-chain. Details are stated here.
An on-chain DIP was created to vote FOR or AGAINST the restoration. Details of the voting process are seen here.

Product Decisions

A key product decision is the Upgrade of StarkProxy smart contracts to support deposit cancellation and recovery. The reason behind this decision is the fact that when people deposit USDC to the Layer 2 exchange they are held in a Bridge contract waiting to be processed by the L2 sequencer and prover. Within this time, users should be able to cancel their deposit. However, this was not possible in the scope of the contract, hence the need for an upgrade. Check out the DRC thread here, the snapshot here and the on-chain DIP here.

Community Treasury

The community treasury is the place from which funds are managed and distributed within the DAO. A 5% of the initial token supply (50,000,000 DYDX) was allocated to the treasury to fund initiatives, grants, liquidity mining and other programs on an ongoing basis. The governance token $DYDX will vest to the community treasury over five (5) years and if after that period, the governance chooses to enact perpetual inflation at a 2% per annum inflation rate, the newly minted $DYDX goes to the treasury. To learn more about the community treasury, check here.

Conclusion

dYdX being an exchange for leveraged crypto products is transitioning from a centralized form of governance to a decentralized structure. dYdX sets and example for other protocols and projects about how important decisions can be taken openly and in a transparent way using voting process.