According to Antonio Julio, founder of dYdX, here’s a statistic that gets overlooked: derivatives currently make up about 75% of all trading volume in the crypto market.Thank you for reading this post, don't forget to subscribe!
Deriving value from an underlying asset – rather than spot trading the asset – allows for a wider variety of financial mechanisms such as leveraged trading and futures. This also tends to create a lot of technical demand on platforms that wish to provide service at higher volumes and speeds as customers demand.
But high volume and high speed are two desirable characteristics that rarely overlap in the same Venn diagram of blockchain technology.
On the Lightspeed Podcast (Spotify/Apple), Julio explains how perpetual contract marketplace dYdX is trying to meet performance demands by building its own custom blockchain based on Cosmos SDK technology. “It’s tailored for derivatives trading, tailored for what we’re doing, and we’re very excited about it,” he says.
Julio noted that the change to Cosmos is set to take place this month, at which time the platform will be “fully decentralized.”
“At the moment, dYdX is hybrid-decentralized,” he says. “It is completely non-custodial. What happens on-chain is completely transparent. But the main thing that is not decentralized right now is the order book and matching engine.”
Julio says that most decentralized exchanges, such as Uniswap and Curve, have automated market makers, or AMMs. He adds, AMMs are much easier to operate than order books, which require “much higher performance in terms of transactions per second, lower gas fees and so on.”
Read more: Back in Time: How LVR is an ‘unfair game’ for DeFi liquidity providers
The reason order books demand such high volume and speed is that there can be thousands of programmatically placed orders every second, whether they are filled or not. “No blockchain can support this,” Julio stressed. “Starkware and all the rest [layer-2s] Can’t come close to the amount of performance required for that.”
“Potentially this will change in the long term,” Julio says, “and we’re still excited to see that happen, hopefully, but that’s not the case right now.”
Decentralization of order book
DYdX aims to solve the speed bottleneck by allowing offers to buy and sell off-chain. Julio says, “Or at least through the StarkWare rollup that we are using, all settlements where the trade is completed happen on-chain.”
Julio adds, “The main thing we are decentralizing is the order book and matching engine.” “And it’s actually quite a difficult problem because these systems require really high throughput.”
“We looked around and asked ourselves, OK, which blockchain could support on the order of over a thousand transactions per second, ideally with little or no gas fees.”
“The answer we came back with was none of those things.”
Julio says the result was to create a “decentralized, but off-chain order book and matching system.” Taking the concept of the Ethereum mempool, where transactions wait to be mined, Julio says, “What if we didn’t have to keep the entire order book on-chain?”
“Validators can keep the entire state of the order book in their respective memories,” he says, “thus furthering decentralization.” “But you don’t have to add anything to the consensus state of the chain until the trade actually happens.”
This is a unique property of the system, says Julio. “Only one percent of orders placed on any order book-based exchange are filled,” so the system requires “100x scalability for placing and canceling orders.” He says that a small percentage of trades that actually occur are settled on-chain.
“It made this Cosmos series that we’re building a really natural fit,” he says, “just because if you own the whole stack you can do really custom things.”
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