Podcast Summary
Dydx's Move from Ethereum Layer 2 to Cosmos App Chain: App-Specific Chains vs. Layer 2 Solutions: Dydx's shift from Ethereum layer 2 to Cosmos App Chain highlights the ongoing debate between app-specific chains and layer 2 solutions in the blockchain industry. While the decision could mark a trend or be a sign of impatience, users ultimately benefit from the progress towards decentralized finance platforms offering stability and transparency.
The blockchain industry is experiencing a significant shift as decentralized applications (dApps) and projects explore the potential of app-specific chains, like Cosmos, over Ethereum layer 2 solutions. This trend was highlighted by Dydx's recent move from Ethereum layer 2 to the Cosmos App Chain. The debate surrounding this decision raises questions about the future of the app chain versus layer 2 ecosystems and which one will ultimately prevail. Dydx's move could mark the beginning of a trend, or it could be a sign of impatience with layer 2 development. Regardless, the decision has resulted in a tug of war between the two communities, with Dydx being the focal point. While this competition unfolds, it's essential to remember that the users ultimately benefit from this progress. In the meantime, decentralized finance (DeFi) platforms like Notional offer stability and transparency, allowing users to earn yield on their idle capital without relying on centralized exchanges.
Exploring Innovative Ethereum Projects: Rocket Pool, Aave, Arbitrum, and dYdX: Rocket Pool is a decentralized staking provider with high APY and extra token rewards, Aave is a decentralized liquidity protocol with powerful features, Arbitrum is a layer 2 scaling solution for faster, cheaper, and more secure transactions, and dYdX is moving towards its own app chain on Cosmos for a better user experience.
Both Rocket Pool and Aave are innovative projects in the Ethereum ecosystem that offer unique benefits to users. Rocket Pool is a decentralized staking provider that allows anyone to easily join their network of validating nodes, increasing APY and earning extra tokens. With over 1000 independent validators, it's a great option for those bullish on Ethereum staking. Aave, on the other hand, is a decentralized liquidity protocol with powerful features like isolation mode, efficiency mode, and portals, enabling users to get the most out of DeFi and access their AAVE positions across multiple networks. Additionally, Arbitrum, an Ethereum layer 2 scaling solution, offers faster, cheaper, and more secure transactions, making it an attractive choice for both developers and users. Lastly, dYdX, a leading decentralized exchange, is moving towards its own app chain on the Cosmos ecosystem to build the best possible product for its users. Overall, these projects demonstrate the continued innovation and growth in the Ethereum and DeFi space. To learn more and get started, visit rocketpool.net, aave.com, arbitrum.io, and governance.ave.com.
DYdX chooses Cosmos over Ethereum for building the best DeFi product: DYdX is taking a risky but exciting approach by building its DeFi protocol on Cosmos, focusing on UX, features, decentralization, and security. This move could provide valuable insights for the broader DeFi ecosystem.
DYdX is making a deliberate choice to build its DeFi protocol on the Cosmos App chain, rather than Ethereum or other existing technologies. The reason for this decision is to focus on building the best possible product, with a strong emphasis on UX, features, decentralization, and security. This move is considered risky, as it's uncertain if dYdX can indeed build the best product on Cosmos. However, the team is excited about the opportunity to push the boundaries of what's possible with technology and continue to innovate in the rapidly improving blockchain space. Additionally, dYdX has a history of being an early adopter of new technologies, and this move aligns with their commitment to staying at the forefront of the industry. Ultimately, the data and insights gained from this transition will provide valuable lessons for the broader DeFi ecosystem, as we all strive to optimize these four key parameters in building the best possible decentralized financial products.
DYdX's v4: Improving UX and Decentralization: DYdX is developing v4 to enhance user experience while ensuring full decentralization through Cosmos network, focusing on perpetuals trading and handling high scalability requirements.
The team behind dYdX is working on version 4 (v4) of their decentralized finance (DeFi) platform, which aims to provide a user experience (UX) and features on par with the current centralized exchange, while also making the entire system fully decentralized. This means addressing the lack of decentralization in the current system, particularly in the sequencer layer, which could potentially lead to censorship. The team plans to achieve this through the Cosmos network. The UX and features are expected to remain similar to v3, but with slightly higher latency due to the decentralized nature of the system. The focus will remain on perpetuals, with potential expansion to other types of trading over time. The scalability requirements for dYdX are different from most other decentralized apps, currently handling around 1,000 order places and cancellations per second on their centralized matching engine, compared to 10 trades per second on the blockchain. The team considered pivoting to other trading models, but decided to continue supporting the order book trading experience due to their success in attracting institutional traders.
DYdX Building New Network dYdX v4 for High Trading Volumes: DYdX is building a new network, dYdX v4, on Cosmos to handle high trading volumes with minimal fees, using an off-chain approach where validators store their own order book version, enabling greater scalability and decentralization.
DYdX, a popular decentralized finance (DeFi) platform, is building a new network called dYdX v4 to handle high trading volumes while maintaining minimal fees. This network will operate off-chain and won't require consensus, allowing validators to store their own version of the order book. This approach enables much higher scalability, as the fundamental bottleneck in all blockchains is reaching consensus. After considering various options, dYdX decided to build their network on Cosmos because it offers the highest level of decentralization for their system. The dYdX exchange currently operates as a centralized sequencer, but with a Cosmos app chain, the dYdX token becomes a validating token, enabling a more permissionless level of block production. An intriguing aspect of this new design is that each validator will host their own order book, which functions like a mempool. This off-chain solution allows dYdX to maintain an approachable product for institutions while handling the high trading volumes they require.
Decentralizing dYdX block production for better trading experience: DYdX aims to achieve non-custodial trading, no censorship resistance, and high quality access by decentralizing block production through a decentralized order book, prioritizing innovation and delivering the best product now.
While decentralizing the block production of the dYdX exchange through a decentralized order book adds scalability and decentralization, it's important to consider what benefits this actually brings to the table. Decentralization should be a means to an end, and in the case of dYdX's transition from a centralized sequencer to a decentralized block production, the goal is achieving non-custodial trading, no censorship resistance, and high quality access. The plan is for most roll-ups to move towards a more decentralized sequencer, but dYdX believes they can build a similarly decentralized system with their own base-level validators on the dYdX chain. They prioritize delivering the best possible product now rather than waiting for future technological advancements, and they're not afraid to move on to new technologies as needed. The decision to decentralize the block production was a risky one from a technological perspective, but dYdX values innovation and is confident they can build a highly decentralized and censorship-resistant system.
Building one of the biggest exchanges in crypto: DYdX team aims to build a massive exchange, measuring success through constant improvement and competition, but faces significant risks in creating a decentralized off-chain order book network from scratch with an aggressive one-year timeline.
The team at dYdX is focused on thinking and building 10x bigger, aiming to build one of the biggest exchanges in crypto. They measure their success not by protecting what they have, but by constantly striving for improvement and competition with industry leaders. However, this ambitious goal comes with significant risks. The most pressing one is the immense complexity of building their own decentralized off-chain order book network from scratch, which includes developing a base level blockchain, creating an Oracle network, integrating with other chains, and building user interfaces and mobile apps. The aggressive timeline of one year to complete this project, which is much shorter than the typical 2-5 years for similar projects, adds to the challenge. Despite these risks, the team is confident in their abilities and willing to take the leap, believing it gives them the best chance to build an exceptional product.
Transitioning to dYdX App Chain: Risks and Complexities: DYdX is transitioning to its own decentralized finance chain, called dYdX App Chain, but the process involves risks such as uncertainty of technology development, need for decentralized collateral, potential resistance to adoption, and rebuilding wallet infrastructure. Goal is to build seamless product experience with best UI integration.
The transition of dYdX from Ethereum to its own decentralized finance (DeFi) chain, called dYdX App Chain, involves significant risks and complexities. The main risks include the uncertainty of the technology's development, the need for a decentralized collateral option, and the potential resistance from users to adopt a new chain. Additionally, the wallet infrastructure needs to be rebuilt, but users will still be able to use MetaMask and other wallets. The goal is to build a seamless product experience with the best possible bridging UI integrated into the product. Regarding the decentralization of the order book, dYdX is aiming for a diverse and independent set of validators and stakers, but the exact number has not been specified yet. Another risk is the potential importance of ecosystems and communities built around existing blockchains, which could make it difficult for a new chain to gain traction. Overall, the transition to a decentralized app chain for dYdX is a significant undertaking, but the team is committed to building the best possible product experience.
Distribution of token holders and their intentions matter for decentralization and security: In Tendermint consensus, the honesty of two-thirds of validators is assumed, allowing the network to continue functioning even with a third of dishonest validators. The community's ability to fork the chain adds an extra layer of security.
While the number of validators in a blockchain network is important for security, it's not the only factor that determines decentralization and security. The distribution of the token holders and their intentions play a crucial role. For instance, in Tendermint consensus, at least two-thirds of validators are assumed to be honest. Even if a third of validators are dishonest, they cannot halt the chain or double spend. In the worst-case scenario where two-thirds of validators are dishonest, they could potentially steal funds, but the community can fork the chain to create a new version where the attack never occurred. This sovereignty and ability to fork is a powerful feature of layer 1 blockchains that cannot be found in smart contract systems. However, it's essential to note that there are trade-offs when it comes to security, and each approach has its advantages and disadvantages.
Decentralization of dYdX chain offers security and trading freedom: DYdX chain's decentralization allows for community control and potential inflation, raising questions about token value and fee distribution.
The decentralization of the dYdX chain, while not as extensive as some other chains, offers robust security and trading freedom for users. The community will determine the staking token, likely dYdX, adding complexity with potential inflation and monetary policy questions. Unanswered questions include the number of tokens to stake, fee distribution, and the impact on the fundamental value of the token. Similar to other chains, there is debate over the long-term value of the token and the potential for inflation. The dYdX team plans to advise the community and adopt best practices from other chains to address these questions. Additionally, the potential for high latency in a decentralized network with a high-performance exchange could lead to front-running opportunities and the need to contend with Miner Extractable Value (MEV).
Addressing Latency and MEV in DYDX's DeFi Platform: DYDX aims to optimize transactions and make MEV attacks more transparent to improve its DeFi platform's performance, acknowledging that full solutions are not yet available in the space.
While DYDX is working on reducing latency and addressing the issue of Maximal Extractable Value (MEV) in its decentralized finance (DeFi) platform, it recognizes that nobody in the DeFi space has fully solved these problems yet. The team is focusing on making sure DYDX's latency and MEV issues are not worse than those of other leading DeFi projects. They plan to optimize transactions by knowing the leader schedule in advance, allowing for transactions to be sent directly to the next validator, reducing latency. Regarding MEV, DYDX believes that the incentives for validators are different on their chain compared to general-purpose chains. Validators on DYDX are more intertwined with the network's success or failure, making it less advantageous for them to degrade the network. The team also plans to make MEV attacks more transparent, allowing users to identify potentially problematic validators and potentially take action against them. While these solutions don't completely eliminate latency and MEV issues, they do provide more tools for addressing them.
Addressing MEV challenges in Ethereum ecosystem: Ethereum ecosystem leads in addressing MEV issues with initiatives like Flashbots, Proposer Builder separation, and layer 2 solutions. DYdX faces challenges as a standalone entity but benefits from collaborating with the community.
While a standalone blockchain focusing on one specific function can potentially simplify the MEV (Minimum Excellent Value) problem through community consensus, the Ethereum ecosystem is currently leading the charge in addressing this complex issue with initiatives like Flashbots, Proposer Builder separation, and strategies developed by layer 2 solutions like Arbitrum and Optimism. DYdX, as a separate entity, faces the challenge of having to develop all solutions in-house, but it's essential to be transparent about the trade-offs being made, such as sacrificing composability for scalability and decentralization. Successful tech companies have gone through similar evolutions, becoming more vertically integrated over time to better control their user experience. Although it's a harder path for DYdX, it's crucial to consider the benefits of building on the foundation of existing solutions and collaborating with the Ethereum community to tackle the unsolved MEV problems.
Decentralizing Block Production in dydx Chain Migration: Decentralizing block production in dydx migration provides better legal protections, aligns with DeFi goals, and offers benefits like non-custodial features, better access, and composability.
The decentralization of block production in the dydx chain migration is seen as both a technological and legal improvement. The current setup of dydx has a centralized bottleneck in the form of block production, which can limit decentralization. Decentralizing this process can provide better legal protections and align with the goal of building fully decentralized products in DeFi. Decentralization offers benefits such as non-custodial features, better access, and composability. While the importance of decentralization is still being proven on a global scale, the dydx team sees it as an essential component of building the best possible decentralized financial products. The team's decision to migrate to the dydx chain was driven by the desire to build a fully decentralized system and take advantage of the benefits it offers.
Expanding Ethereum Layer 2 Ecosystem: Cross vs Lido: Cross offers the fastest, cheapest, and most secure bridge between networks, while Lido focuses on decentralized staking. dYdX's decision to abandon Ethereum for a centralized app chain raises concerns, but different forms of decentralization have their trade-offs. Understanding these choices and personal values is key.
The Ethereum layer 2 ecosystem is expanding rapidly, and the need for fast, efficient, and secure bridges between different networks is essential for seamless asset transfer. Cross, a cross-chain bridge, stands out as the fastest, cheapest, and most secure option due to its optimistic oracle and instant asset availability. Lido, on the other hand, focuses on decentralized staking, enabling users to stake their assets and receive liquid staking tokens, allowing them to use their assets for collateral in DeFi without giving them up. However, the discussion around dYdX's decision to abandon Ethereum and create its app chain raises concerns about centralization. Critics argue that giving a set of validators the power to control the order book and roll back transactions could lead to a centralized system reminiscent of traditional financial institutions. While immutability is a crucial aspect of decentralization, there are other forms of decentralization worth considering, and the trade-offs between them must be weighed carefully. Antonio, from dYdX, acknowledges the valid points made and agrees that there are different forms of decentralization, each with its trade-offs. Ultimately, the choice depends on individual priorities, and both immutable and non-immutable systems have their merits. The key is to understand these trade-offs and make informed decisions based on personal values and goals.
DeFi vs Traditional Companies: Different Governance Structures: DeFi platforms offer a more efficient and community-driven governance model through code-enforced social contracts, contrasting with traditional companies where shareholders have limited control over decisions. Understanding the level of immutability in DeFi platforms is crucial, with trade-offs between less credit risk and less sovereignty for upgrades.
While both decentralized finance (DeFi) platforms and traditional public companies have their unique governance structures, DeFi platforms offer a more efficient and community-driven model through code-enforced social contracts. This contrasts with public companies, where shareholders have limited control over company decisions. The discussion also highlighted the importance of understanding the level of immutability in various DeFi platforms and the trade-offs that come with it. For instance, fully immutable platforms offer less credit risk but less sovereignty for upgrades, while others allow token holders to control the network. Ultimately, the future of DeFi governance remains an open question, with the potential for token holders to gain even more control over the platform. However, it's important to recognize that there are differences between DeFi platforms and traditional companies, with DeFi platforms offering a more decentralized and community-driven approach.
Seamless onboarding crucial for traders on DeFi platforms like DYdX: DYdX recognizes the importance of bringing funds onto their platform for traders, planning to use native deployments and bridges to facilitate the transfer.
DYdX, a decentralized finance (DeFi) platform, recognizes the importance of seamless onboarding for users, particularly in relation to getting funds onto their system. This is crucial for traders, who are likely to have their funds on centralized exchanges like Binance and FTX. While they are working on native deployments of stablecoins like USDC on their chain, they also plan to use bridges to facilitate the transfer of funds. However, there is a risk of losing the crypto-native aspect of their platform as more assets become wrapped and dependent on external bridges or custodians. The team is optimistic about the future and is in active conversations with bridge providers like Nomad and Axelar. Despite this, there is a sense of loss for some users who valued the decentralized and crypto-native aspect of the original dYdX platform.
DYdX pivots towards centralized features while staying decentralized: DYdX is prioritizing scalability and improving product offerings within the current decentralized framework, while exploring multi-collateralized trading using stablecoins as a future feature.
DYdX is shifting its focus towards offering more centralized features to cater to the current market demand, while maintaining a commitment to decentralization. This is seen in the popularity of platforms like Binance and FTX, which offer multi-collateralized trading using stablecoins. The market has spoken, and users want to trade synthetic assets using stablecoin collateral. However, dYdX aims to build the best possible product both in the short term and long term, with multi-collateralization being a future feature. The current focus is on solving scalability issues and improving product offerings within the current decentralized framework. The ultimate goal is to become one of the biggest exchanges in crypto, but it may take several years to achieve this. The conversation also touched upon the importance of bridges for interoperability between different blockchains, and the need to ensure security and user experience as these technologies develop.
DYdX team's focus on releasing version 4 by year-end: The dYdX team, with around 40 members, is working to open-source version 4 of their platform by the end of the year, a significant undertaking with an aggressive timeline.
The dYdX core team, which consists of around 40 people with approximately half being engineers, is heavily focused on developing and open-sourcing version 4 of their platform by the end of the year. This is a significant undertaking with an aggressive timeline, but the team is optimistic about executing on it. For those interested in staying updated on dYdX's progress, they can visit dYdX.exchange for links to social media channels and follow Antonio on Twitter for updates. Antonio expressed appreciation for the opportunity to share their work on Bankless, acknowledging the podcast's reputation for providing a fair and challenging interview.
