dYdX is a decentralized borrowing and lending platform based on Ethereum. It offers loan, loan and betting tools for crypto users.
On the surface, dYdX looks like another lending protocol on Ethereum, but dig a little deeper and you’ll see it’s one that is trying to take the Decentralized Finance (DeFi) industry to the next level. Here are details about who invented it, how it works and what makes it so special.
There are still problems
Margin trading, options and derivatives are popular tools for traditional traders and investors, but in cryptocurrencies, these features are limited to centralized exchanges. like Kraken, Huobi and Binance. For the first time, these standard transaction features are built on trust and decentralization.
What is DYdX?
Decentralized borrowing and lending already exists in DeFi through popular platforms like MakerDAO and Compound, but dYdX focuses on building more advanced trading tools on the ETH blockchain. Like other DeFi products, the dYdX protocol is available for anyone to use and build on the basis of user property, managed by smart contracts instead of humans.
It is the most popular decentralized margin trading platform with the highest transaction level of over 150,000 ETH (worth more than $ 30 million at the time) locked in smart contracts in November. 2019. As of April 2020, more than $ 500 million have been traded on the platform.
The basics of margin trading
Before diving deeper into the margin trading protocol, let’s review some margin trading basics.
What is margin trading?
Margin trading is really about borrowing money to make bigger bets. Crypto traders bet that the price of a crypto asset will move in an up or down direction. Margin trading allows traders to increase profits if they are right, but also with the potential to lose money if they are wrong.
Margin trading creates leverage, the more leverage it uses, the more risk (or reward) of profit or loss. For example, using double leverage will essentially double a trader’s potential profit or loss.
What is collateral?
Because trustworthy identity checks and credit checks are not widely available on the blockchain, virtually all decentralized loans use collateral. Collateral is the minimum deposit required to be made and to repay a debt. The more collateral you put in, the more you can borrow.
What is liquidation?
When the value of your collateral falls below a certain level, it is automatically sold to pay you back, a process called liquidation. Loans are at high risk of liquidation when the loan is too much while the collateral is too low in value. Liquidation risks increase sharply in larger volatile markets such as cryptocurrencies.
Who invented dYdX?
The dYdX protocol was founded in 2017 by Antonio Juliano, a former engineer at Coinbase and Uber.
What makes it special?
As a pure trading platform, dYdX has limitations, but as a completely open, unstable and non-binding financial protocol, it is one of the most advanced. The platform’s features are currently limited to basic transactions between three basic asset types (ETH, DAI and USDC), asset lending for interest, and two types of margin trading: margin trading. isolated and cross margin trading. While these are simple tools for veteran traders, they represent a huge step forward for the fledgling DeFi ecosystem.
Is there anything different?
Contrary to the nature of margin trading, lending on dYdX is considered low-risk and passive. With dYdX, the lender automatically makes a profit each time a new block is mined. Any funds deposited on the platform will consistently earn interest on every block and can be withdrawn at any time without minimum requirements. As all loans are mortgaged and face the threat of liquidation, the lender will always be paid back.
How does DYdX work?
Instead of one-to-one borrowers, lenders making and accepting loan offers, everyone must interact in a “local loan group”. Each asset has its own loan group that is managed by smart contracts so withdrawals, borrowing and lending can happen at any time without having to wait for pairing or sufficient capital. Borrowers and lenders interact with each other, based on supply and demand to determine the interest rate for each asset.
How can I use dYdX?
Like most other DeFi products, dYdX only requires an Ethereum wallet like MetaMask with an amount of ETH to get started. There are currently no transaction fees and no special tokens required to use dYdX.
Toward the future
DYdX’s plan is to always offer increasingly advanced trading features, like derivatives and options, along with their leading margin trading features. Recently, the project added “zero loss” options to allow traders to limit their potential losses. The executive team is also planning to expand, not just stop at the three basic types of crypto assets currently available on the platform. By adding complexity to its platform, dYdX is also adding complexity to the DeFi ecosystem as a whole, a hallmark of a mature market.