dYdX Enters a New Era of Cosmos AppChain: An Analysis of Trading Migration Incentives and Market Trends

On November 13, dYdX v4, built on Cosmos SDK and Tendermint, officially entered the Beta phase and opened trading functionalities. This new version, referred to as dYdX Chain, runs in parallel with the dYdX v3 version on StarkEx, with most trading volume still concentrated on v3. This dual-track parallel strategy retains the existing functionalities and user base of v3 while paving the way for innovative development of v4 on the new platform.

In the current market environment with significant volatility, on-chain perpetual contract platforms have seen considerable trading volume, and the performance of platform tokens has also been impressive. As of November 16, the price of the DYDX token reached $4.02, with a seven-day increase of 54.45%. According to data platforms, the recent daily trading volume of dYdX is approximately $1.7 billion, far exceeding the daily trading volume peak in the first two months of the past three months. As the largest market capitalization project in this field, dYdX's market performance reflects strong interest and positive response from investors.

DYDX Profitability Analysis

In the latest update from dYdX, the most notable change for investors is the allocation of all trading fees in the form of USDC to DYDX token stakers and validators. This change marks a shift in the revenue distribution model from being collected by the company to being shared among token holders.

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

According to current data analysis, the circulating market value of DYDX is approximately $720 million. Based on the past 30 days' fees of $86.7 million, the annualized fees are expected to reach $105 million. The price-to-fee ratio (P/F) is 6.6, and the estimated staking yield is 14.6%. However, this estimation method has certain limitations, as it assumes that the trading volume remains constant and is fully transferred to v4, while also assuming that all DYDX tokens are used for staking, ignoring the fact that the currently circulating DYDX is less than 20% of the total supply.

Taking multiple approaches to promote the migration of trading volume from v3 to v4

dYdX v4 will operate as an independent chain, with the DYDX token serving as the transaction gas fee. Stakers enjoy governance rights while receiving rewards, and they also bear the responsibility of protecting network security. Currently, only the transaction fees generated on v4 will be allocated to the stakers of this version. Given that the current daily transaction volume of v4 is only $80,000, far below the $1.7 billion of v3, dYdX has implemented a series of measures to incentivize trading to migrate to v4:

1. Allocate 20 million USD for DYDX incentives to launch v4: Determine the allocation through voting, aimed at promoting the launch of v4. The focus will be on the reward distribution method and preventing wash trading.

2. Launch trading rewards and fee discounts: The new rewards module allocates rewards based on the transaction fees generated by each block, aimed at encouraging users to trade.

3. Reduce various rewards on v3: Gradually cancel the trading fee discounts, trading rewards, and LP rewards on v3, with complete cancellation expected by January 16, 2024.

4. Open the v4 staking module: DYDX can now be migrated from Ethereum to the dYdX Chain and staked using wallets from the Cosmos ecosystem.

Support for Multiple Projects within the Cosmos Ecosystem

The fully diluted market cap of DYDX is about $4 billion, surpassing ATOM, which has garnered widespread support from projects within the ecosystem as dYdX launched on Cosmos.

• Circle has launched native USDC on Noble and plans to support the cross-chain transfer protocol (CCTP).
• Stride has decided to develop the 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.

Summary

dYdX has been 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 USDC, along with governance rights and the responsibility to maintain network security. Although the Beta phase of v4 has just started and the trading volume is still small, dYdX has taken various measures to encourage the trading volume to shift from v3 to v4. As the trading and LP reward program for v3 is set to stop early next year, it is expected that most of the trading volume will be concentrated on the v4 platform by then.