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Key Metrics that Describe dYdX’s Current Protocol Position
A derivative is a contract between parties, whose value is based on an agreed-upon underlying financial asset. This extensive and essential part of all financial markets is divided into different groups of investing instruments. In crypto we have seen the rise of different derivatives products, between them: options markets, perpetual swaps and future contracts.
Perpetual swap contracts (perps) are the most traded instrument in the crypto derivatives market. This type of derivative experienced fast adoption after its release by BitMex, ultimately being adopted by most centralized exchanges and passing spot trading in volume traded shortly after.
More recently, dYdX, a pioneer in the DeFi space, launched perpetuals trading in its platform. Later on the protocol deployed on a layer 2 chain powered by StarkWare; this enabled users to trade with low fees, deep liquidity and up to 20x more buying power. This led the protocol to achieve market product fit and position itself among the top crypto perpetuals trading platforms.
This article deep dives into key metrics that describe dYdX’s current protocol position, total value locked (TVL) and volume. Furthermore, illustrating the meaning and significance of these metrics in relation with the protocol.
Currently the perpetuals market contains more liquidity than the spot market, hence more volume is traded. Most of this activity currently happens on centralized exchanges (CEXes) with the exception of dYdX. This one managed to penetrate and have competitive numbers in a market dominated by CEXes.
Source: IntoTheBlock’s Derivatives Indicators
The indicator above depicts the perpetual volume traded of ETH on crypto markets. Binance stands as the top exchange by perpetual trading volume across most crypto assets. In this case it has managed to sustain a 40% of trading activity of ETH perpetuals. The latter is followed by FTX which manages to sustain levels of around 8% of the market activity on ETH perpetuals. The surprising aspect about the indicator is that dYdX has managed to sustain trading levels adding up to around 3% of the total market activity. This stands out since 52 out of the 54 top crypto perpetual exchanges are centralized and off-chain.
DeFi is one of the fastest-growing sectors of crypto, it has grown exponentially throughout the past two years in comparison to the growth of crypto in general. This growth has benefited dYdX, it has enabled DeFi users to have a secure on-chain protocol and be able to trade perpetuals. DeFi’s growth is expected to continue, being this the case, dYdX is currently the top derivatives DEX which positions itself to absorb the future growth. This will enable dYdX to propel the platform into new highs.
The base metric to gauge the adoption of a protocol on-chain is its total value locked (TVL). TVL can be measured differently between DeFi’s protocols; in the case of dYdX, it stands for the value of traders’ collateral and the liquidity provided to the USDC and $DYDX token pools.
Source: IntoTheBlock & DeFi Llama
dYdX TVL currently stands near $1 billion, having launched in 2018 the protocol underwent through quick adoption by the market. Users are required to deposit a collateral before trading is permitted. This allows traders to get additional leverage and maximize their profits or potentially lose their collateral due to liquidations.
On September 8, 2021 dYdX launched its governance token $DYDX. The protocol intends to be decentralized and governed by the token holders in an early future. In the process of achieving decentralization the protocol is offering incentives, in the form of $DYDX, to users trading on its platform. The start of the incentives program unleashed tremendous growth in trading volume, hence in the TVL of the protocol as well.
In the case of DEXes, usage is best measured by the value of the transactions processed by the protocol. In addition, the revenue that the protocol is generating can be derived from the volume being processed. dYdX charges a small fee, depending on the amount of tokens that the user holds, for every transaction processed. These fees charged to users become the revenue that the protocol is generating.
Source: IntoTheBlock’s Derivatives Indicators
The metric above shows the monthly volume and revenue that dYdX is generating. Propelled by their incentive program, the protocol managed to reach highs in October 2021 of $105 billion processed in transactions and $79 million in monthly revenue. This placed the protocol among the top ranked by revenue on the DeFi space.
In the path to achieve full decentralization the protocol launched the “dYdX Foundation” which sets the stage for current and future token holders to have full autonomy of the sustained protocol direction. Furthermore, with current revenue and estimates of the trajectory of the protocol, the dYdX foundation will potentially be one of the major powerhouses in the near future of DeFi.
In conclusion, derivatives have been one of the major forces that drive the whole financial industry forward. The financial derivatives market is estimated to be among the biggest in the world, leaving great potential for the growth of crypto derivatives and the protocol. As the market keeps developing new companies will launch and grow in the space, creating a competitive environment and pushing companies to keep improving their product.
Deep Dive into dYdX’s Perpetuals Trading Evolution was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
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