dYdX Enters a New Era on the Cosmos AppChain: Analysis of Trading Migration Incentives and Market Performance

On November 13, dYdX v4, built on the Cosmos SDK and Tendermint, officially entered the Beta phase, opening up trading functionality. This new version is referred to as dYdX Chain, which currently runs in parallel with the dYdX v3 version on StarkEx. v3 still carries the majority of the trading volume, and this dual-track parallel operation preserves the functions and user base of v3 while providing space for innovation and development of v4 on the new platform.

In the current environment of significant market volatility, on-chain perpetual contract platforms have seen considerable trading volume, and the platform tokens have performed impressively. As of November 16, the price of the DYDX token reached $4.02, with a staggering increase of 54.45% in just seven days. Data shows that the recent average daily trading volume of dYdX is approximately $1.7 billion, surpassing the peak daily trading volumes of the first two months in the past three months. As the largest project by market capitalization in this field, dYdX's market performance reflects strong interest and positive reactions from investors.

DYDX Profitability Assessment

The latest update from dYdX has attracted significant attention from investors, especially the decision to distribute all transaction fees in the form of USDC to DYDX token stakers and validators. This change marks a significant shift from the previous model where the company collected fees to now allowing token holders to share in the platform's profits.

Compared to other perpetual contract solutions and decentralized exchanges for spot trading, dYdX adopts an order book trading model, eliminating the need for passive liquidity providers. Active market makers can earn rewards through undistributed DYDX tokens. This allows all trading fees to be allocated to stakers, significantly enhancing profitability.

According to current data, the circulating market value of DYDX is $720 million. Based on the $86.7 million in fees over the past 30 days, the annualized fees are expected to be $105 million. The price-to-fee ratio (P/F) is 6.6, and the estimated staking yield reaches 14.6%.

However, this estimation method has limitations, assuming that the trading volume remains unchanged and is entirely transferred to v4, all DYDX tokens are used for staking, while ignoring the fact that the currently circulating DYDX is less than 20% of the total supply.

Multiple Approaches to Facilitate the Migration of Transactions from v3 to v4

dYdX v4 operates as an independent dYdX Chain, with DYDX serving as the transaction fee. Stakers not only receive rewards and governance rights but also bear the responsibility of securing the network. Currently, only the transaction fees generated on v4 will be distributed to its stakers. Given that the current daily trading volume of v4 is a mere $80,000 compared to $1.7 billion for v3, dYdX has implemented a series of measures to incentivize the migration of trading from v3 to v4:

1. Allocate 20 million USD in DYDX tokens to promote the launch of v4, led by Chaos Labs, focusing on research into reward distribution and preventing wash trading.

2. Launch a new trading reward module, allocating rewards based on the transaction fees generated from each block, and controlling the reward scale through a governance mechanism.

3. Gradually eliminate the trading fee discounts, trading rewards, and LP rewards for v3, with the expectation to completely stop the related rewards on v3 by January 16, 2024.

4. Activate the v4 staking feature, allowing the migration of DYDX from Ethereum to the dYdX Chain and staking through the Keplr wallet.

Extensive Support for Cosmos Ecosystem Projects

The fully diluted market capitalization of DYDX currently reaches 4 billion USD, surpassing ATOM, which has garnered comprehensive support from projects within the ecosystem since the launch of dYdX on Cosmos:

• Circle has launched native USDC on Noble and will support the Cross-Chain Transfer Protocol (CCTP).

• Stride has decided to develop a liquidity staking token stDYDX for dYdX, automatically using USDC rewards to purchase DYDX and reinvest.

• DYDX can be used in DeFi applications on Cosmos such as Levana and Shade Protocol for providing liquidity or participating in perpetual contract trading.

Conclusion

dYdX is launched in the Cosmos ecosystem in the form of an AppChain, where validators and stakers of the DYDX token will receive all transaction fees in the form of USDC, while also enjoying governance rights and the responsibility of maintaining network security. Although the trading volume for v4 is currently low, dYdX has taken multiple measures to facilitate the migration of trading from v3 to v4. As the trading and LP reward program for v3 will stop at the beginning of next year, it is expected that most of the trading volume will shift to the v4 platform.