What is dYdX? A Beginner’s Guide to Trading on a Decentralized Exchange

dYdX is a decentralized exchange (DEX) platform that offers advanced trading options such as perpetual contracts, which allow users to hold positions indefinitely without an expiration date. Founded by Antonio Juliano in 2017, dYdX has grown to become one of the largest decentralized exchanges in terms of trading volume and market share.

Built on Ethereum smart contracts and StarkWare’s zero-knowledge rollups, dYdX aims to provide a fully decentralized trading experience. The platform initially offered margin trading, lending, and borrowing services but has since evolved to include perpetual trading and other advanced financial instruments.

Perpetual Trading on dYdX

Perpetual trading is the flagship product of dYdX, allowing users to trade contracts without expiration. This feature enables investors to hold buy or sell positions indefinitely until the predetermined conditions are met. For instance, an order to sell 1 Bitcoin at $100,000 will remain active until Bitcoin reaches that price.

The dYdX perpetuals are non-custodial, meaning traders retain control of their funds at all times. These contracts are built on Ethereum-based ERC-20 tokens, allowing for the creation of new asset classes that derive value from underlying blockchain assets.

Governance and Staking

In 2021, dYdX introduced its governance token, DYDX, to empower users in the decision-making process of the platform. The governance mechanism operates through the dYdX DAO (Decentralized Autonomous Organization), where token holders can vote on proposals related to platform development and operations.

Staking on dYdX is facilitated through two main pools: the liquidity pool and the safety pool. Users can stake USD Coin (USDC) in these pools to earn rewards and contribute to the platform’s liquidity. Staking DYDX tokens also allows users to participate in governance and earn a share of the trading fees generated on the platform.

Non-Fungible Tokens (NFTs)

dYdX has also ventured into the NFT space with its collection named Hedgies, which features animated hedgehogs designed by independent artists. Launched in February 2022, the Hedgies collection includes 4,200 NFTs minted on the Ethereum blockchain. These NFTs are distributed based on users’ trading activity and community interactions.

Owners of Hedgies NFTs enjoy certain perks while trading on dYdX. The NFTs were created to reward users for their achievements and contributions to the platform.

Legacy Spot and Margin Trading

Initially, dYdX offered spot and margin trading on the Ethereum layer-1 blockchain. However, in November 2021, the platform discontinued its layer-1 services to focus on layer-2 perpetual trading. This shift aligns with dYdX’s goal of becoming a fully decentralized exchange.

The Future of dYdX

The roadmap for dYdX includes achieving full decentralization by eliminating centralized components such as the order book and matching engine. With the release of dYdX v4, the platform aims to operate as an open-source, community-controlled trading environment.

dYdX v4 will reintroduce features such as spot and margin trading, along with additional synthetic products. The platform’s transition to full decentralization will transfer control from dYdX Trading Inc. to the community, enhancing transparency and decentralization.

How to Start Trading on dYdX

Setting Up

• Install a Wallet: Begin by installing a compatible Ethereum wallet such as MetaMask.
• Fund Your Wallet: Transfer USDC or other supported cryptocurrencies into your wallet.

Connecting to dYdX

• Visit the dYdX Website: Navigate to the dYdX trading platform and connect your wallet.
• Authorize Transactions: Approve the connection and authorize transactions through your wallet.

Exploring the Platform

• Dashboard: View your account balances, open positions, and trade history.
• Markets: Browse available trading pairs and recent market activities.
• Order Book: Analyze active buy and sell orders to inform your trading strategy.

Placing Trades

• Select a Market: Choose your preferred trading pair.
• Order Type: Decide between market orders (immediate execution) and limit orders (specified price).
• Enter Trade Details: Specify the amount and price for your trade.
• Leverage: Set your leverage, keeping in mind the associated risks.

Risk Management

• Start Small: Begin with smaller trade sizes to understand the platform.
• Use Stop-Loss Orders: Protect your investments by setting stop-loss orders.
• Continuous Learning: Educate yourself about the cryptocurrencies you trade and advanced trading concepts.

Comparing dYdX and Uniswap

dYdX focuses on derivatives and perpetual contracts, making it suitable for experienced traders seeking advanced trading options. In contrast, Uniswap is known for its simplicity and automated market maker (AMM) model, catering primarily to beginners in decentralized finance (DeFi).

Conclusion

dYdX stands out as a leading decentralized exchange offering a wide range of advanced trading options. Its commitment to decentralization, combined with features like perpetual trading, governance, staking, and NFTs, makes it a compelling choice for crypto traders. As the platform continues to evolve, it promises to offer a fully decentralized and community-driven trading experience, aligning with the core principles of blockchain technology.