On June 22, dYdX announced a new plan on its roadmap – V4: dYdX Chain. The dYdX team will work on building a new standalone blockchain based on Cosmos Network and Tendermint (an open-source software to launch blockchains on Cosmos). It will have a fully decentralized off-chain order book and matching engine to increase the order throughput. Token DYDX is most likely to become the native token of dYdX chain. This new version is estimated to launch in Q4 2022.
V4 would mean that dYdX is leaving its native blockchain Ethereum. What are its reasons?
While decentralized exchanges (DEX) are popular in the spot market (e.g. Uniswap), DEX is still not the main choice for derivatives traders. These traders often conduct high frequency trading and the current on-chain infrastructure of DEX cannot meet their demands for deep liquidity and fast processing.
In August 2020, dYdX V3 (its current version) tried to solve these obstacles by integrating with StarkWare, a ZK-rollup L2 scaling solution on Ethereum. dYdX announced that the integration would help to meet high-frequency trading demand and offer lower fees. However, V3 still has many problems. For one, StarkWare is not decentralized enough.
The number of sequencers (node validators which store and execute user transactions) is few and they are all centralized (deployed by the StarkWare team). Malicious attempts to exploit dYdX would cause it to suffer from a single point of failure because of its reliance on StarkWare’s sequencers.
Another problem is that the development of dYdX V3 is highly dependent on StarkWare. Currently, dYdX’s core offering of perpetual contracts are powered by StarkWare. If dYdX wants to make some improvements, they would need to check whether StarkWare has the capability to do so. In this case, StarkWare may unintentionally restrict dYdX’s growth.
Cosmos SDK and Tendermint Protocol’s proof-of-stake (PoS) consensus mechanism would ideally help dYdX to improve its trading performance and allow dYdX to build its own chain to further expand its ecosystem.
Token use case
Another key consideration is that V4 could provide value to the dYdX token (DYDX). Currently, DYDX token does not have many use cases. As the standalone dYdX chain would be based on PoS consensus, DYDX tokens could naturally be staked by validators to manage the chain. If V4 happens, DYDX token could become a layer 1 token which would open up new opportunities.
Is dYdX compromising security?
Some claim that dYdX’s decision would compromise security. dYdX’s current blockchain Ethereum uses a competitive computational method where thousands of computers add blocks to the chain and validate transactions. This has helped Ethereum garner widespread acknowledgement of its truly decentralized security model, which is extended to all DApps building on it. It is even a selling point.
Blockchains in Cosmos Network depend on validator nodes to execute transactions and keep the blockchain secure. At times, even with a vibrant governance community and sound governance model, validators still make errors which may affect chain security. To build a standalone blockchain on Cosmos Network, dYdX would have to design its own decentralized validator sets. This introduces several concerns of security.
A new Layer 1 chain with its own validator set also means users have to use cross-chain bridges to onboard the dYdX Chain. We already know that bridges are vulnerable to malicious exploits. This gives another channel for hackers to target dYdX. Aside from security, the process would undoubtedly generate massive costs for dYdX and necessitate the redesign of DYDX tokenomics.
dYdX may be one of the first to move away from its native blockchain to its own chain, but it sure has plenty of challenges ahead.
Software development kit (SDK): A collection of software development tools in one installable package.
Order throughput: A measure of how many actions are completed within a given time frame. Order throughput refers to a rate of how fast a blockchain processes transactions.
ZK-rollup: A Layer 2 scaling solution. Helps blockchains validate transactions faster while reducing gas fees. Similar to Optimistic rollups, but they differ in their processes for verification.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
ApolloX is the leading decentralized solution shaping Web3 trading for retail and institutional traders. Its product suite consists of the biggest decentralized crypto derivatives exchange on BNB Chain, ApolloX DEX, and bespoke derivatives trading solution ApolloX DEX Engine. In 2022, ApolloX shifted to DAO governance.
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