dYdX - Decentralized Platform for Advanced Financial Products

Nick Sawinyh on 22 Apr 2020

In our interview Antonio shared dYdX backstory and told us why BTC Perpetual fits really well in DeFi space.

Hello! What’s your background, and what are you working on?

Hi! I’m Antonio Juliano, the founder of dYdX. dYdX is the leading decentralized platform for advanced financial products, including margin trading and derivatives.

I initially got into crypto in 2015 by joining Coinbase as a software engineer as my first job after finishing my CS major at Princeton. At Coinbase, I got to work side-by-side with many of the most forward thinkers in the industry, and have a front-row seat to the most exciting new developments in the space. Working with leaders like Olaf Carlson-Wee, Fred Ehrsam, and Brian Armstrong combined with the opportunity to meet amazing guests like Vitalik, Joey Krug, and Ben Horowitz was hugely influential on me, and solidified my belief in the future of crypto as well as my desire to found a company.

What’s dYdX’s backstory?

After Coinbase, I was convinced that there would be interesting, world-changing products to build on top of Ethereum. To me, Ethereum represented an entirely new paradigm of computing, where for the first time, programs could be verifiably executed deterministically. It seemed inevitable that there would be important products built on this new computing platform.

I started working by myself in early 2017. The first thing I built was not dYdX. It was a search engine for decentralized apps. This was exactly the wrong thing to build. After working on it full-time for four months, a total of 10 people had used the product. The problem was that it was just way too early for a search engine as there were barely any decentralized apps to search for in the first place. This taught me that I needed to build something actually useful right now, not something theoretically useful in the future.

The main way people use crypto is for trading and speculation. At that time, the first decentralized exchanges such as 0x and Kyber were just starting to come out. I believe decentralized finance is a stack: first come decentralized assets, then decentralized buy/sell exchanges, then margin trading, then derivatives. So it seemed the logical next thing to build was margin trading & derivatives.

In the centralized crypto markets, exchanges that offered margin trading had come to dominate those without. In the traditional markets, derivatives usually trade at 10x the volume of the spot markets. The opportunity seemed massive, and the timing looked right.

So I started working on dYdX. After coding some early versions of the protocol and releasing the original whitepaper, dYdX raised a $2M seed round led by Andreessen Horowitz & Polychain Capital. Soon after, I was joined by Brendan Chou, Zhuoxun Yin, and a number of other amazing early dYdX employees. Since then, we’ve raised an additional $10M and now have a team of 8, including seven engineers, with experience from Google, Bloomberg, Bain, Coinbase, Uber, and other top companies & universities.

What went into building dYdX?

dYdX has launched three major products so far: short & leveraged tokens, a margin trading exchange, and now the perpetual.

Our first product, expo, was a brokerage for short & leveraged tokens. Expo was designed to be a simple experience for accessing leveraged crypto products, and to be accessible to relatively unsophisticated investors. We learned this was the wrong thing to build. The types of users that started using expo were not unsophisticated investors, but instead were knowledgeable traders that wanted a professional trading experience.

This led us to building the current dYdX margin trading product. dYdX is built for sophisticated traders who want access to advanced features like leverage, and demand comprehensive data on their trading. dYdX offers direct access to the orderbook through market, limit, and stop orders. dYdX also provides simple to use direct borrowing and lending of crypto assets for less sophisticated users.

A huge amount of engineering effort has gone into building the technology behind dYdX. The dYdX smart contracts represent novel ways to margin trade and trade derivatives on Ethereum. We’ve taken a fullstack approach to building products, building everything from the smart contracts, to frontend application in-house.

We take security very seriously at dYdX. Our team has extensive experience building secure systems - including building & managing the Coinbase hot wallet, which has securely managed many millions of dollars of cryptocurrency. Our smart contracts all have 100% branching test coverage, and have been audited by OpenZeppelin - the top smart contract auditors. No significant security issues have ever been found by auditors in our margin trading or perpetual contracts. dYdX is one of the few major defi protocols to have never had a security vulnerability.

Can you tell us some more about the dYdX BTC Perpetual?

Just announced earlier this week, we’ve launched the first ever product for decentralized perpetual markets. The first perpetual market we’re launching is BTC-USDC. We’re excited about this launch for a few reasons:

  • Perpetual markets are by far the most popular way to trade crypto, and we think are a natural fit for trading on DeFi
  • Users will be able to trade BTC on dYdX for the first time! BTC is obviously the most widely traded asset in crypto, but still has not been able to be traded liquidly in DeFi up until now
  • Perpetual markets allow us to offer higher leverage, better liquidation ratios, and more liquid trading

We’ve built an entirely new protocol to power our perpetual markets. The price of each perpetual is tethered to the price of the underlying asset by a funding rate that is paid between longs and shorts. The dYdX perpetual protocol is now open source, and has been audited by OpenZeppelin.

We’ve built perpetual trading into the current dYdX product. Users can trade on the BTC-USDC perpetual market with up to 10x leverage. Perpetual market trading on dYdX is only available to non-US users.

What’s your business model?

As of one month ago, dYdX charges trading fees. This is a tried and tested business model for exchanges, and ensures our incentives are aligned with those of our customers as more trading volume means more revenue for us. In the first month, dYdX has collected around $150k in fees.

Despite launching in the midst of the 2017 ICO hype, dYdX intentionally does not have a native token. This has allowed us to iterate on the product much more quickly, without having to worry about distributing a token or managing a network of token holders. While we are interested in how a token could someday be used for governance, collateral of last resort, and/or growth initiatives, our current focus is on building the best product.

What’s your position on the regulatory landscape today?

The regulatory landscape for cryptocurrency companies is still quite complicated to understand. Fortunately, a number of US regulators, including FinCEN and the CFTC, have recently put out guidance clarifying aspects of regulation as it specifically relates to decentralized exchanges, which is a good step in the right direction.

dYdX serves customers all over the world, and aims to both comply with current regulations as well as champion how decentralization can help serve the objectives of regulators as well as users. Regulators care deeply about market fairness, stability, and transparency, all things that DeFi natively helps to achieve.

What are your goals for the future?

By the end of 2020, our goal for dYdX is to average over $10M a day in trading volume. In the next few years, we want to build dYdX into a leading exchange not just in DeFi, but for the entire cryptocurrency market.

In order to achieve our long term goals, dYdX will need to build a product that surpasses the UX of centralized exchanges. We’ve already made great progress here since our initial launch, but still much more to do. We’ll also have to directly tackle scalability issues - expect more from us on this in the future.

Where can we go to learn more?

About the author
Nick Sawinyh
Nick Sawinyh is an LA-based crypto entrepreneur. After having spent over four years in the blockchain industry, Nick founded DeFiprime in 2019, with the idea to provide information about emerging DeFi ecosystem. He owns modest amounts of various cryptocurrencies.

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