dYdX Into the Cosmos

dYdX is a decentralized exchange for trading perpetual futures, currently deployed as smart contracts hosted on its own Ethereum layer-2 rollup through StarkEx. dYdX is the most popular L2 decentralized application (dApp) and has facilitated daily trading volumes as high as $30 billion. Those unfamiliar with dYdX should read our asset profile.

On June 22, dYdX announced dYdX chain, an application-specific standalone blockchain built with the Cosmos SDK and Tendermint Proof-of-Stake, expected to launch by the end of 2022.  

Application-Specific Blockchains

On Ethereum, dApps are smart contracts hosted on the Ethereum blockchain. Cosmos developers customize independent application-specific chains that optimize for flexibility and efficiency, without having to compete for block space. Blockchains built with the Cosmos SDK can communicate with each other using the Inter-Blockchain Communication Protocol (IBC) and generally have their own validator sets and native staking tokens. Bridging between IBC chains is low risk and low cost.

Why does dYdX need its own chain?

dYdX founder Antonio Juliano has repeatedly stressed dYdX’s fundamental objective to build the best product possible. In his eyes, this is achieved by optimizing for UX, features, security and decentralization. A product is only as decentralized as its least decentralized components.

Today, the order book for dYdX is hosted on AWS and traditional centralized servers, while successful orders are executed trustlessly on chain. Funds are always custodied by the user and the platform is sufficiently decentralized in regards to security, however, exchange functionality is vulnerable to censorship. Additionally, Starkware has a centralized sequencer (a single user who can publish transactions to chain), adding another layer of centralized permissions. A move to its own chain will improve dYdX’s decentralization, trustlessness and censorship resistance.