Ethereum Based Leverage Trading Protocol dYdX Surpasses Daily Volume of Coinbase and Uniswap

By: Trevor Judice

What happened: Daily trading volume surged to nearly $10 billion on dYdX, a decentralized perpetual exchange, following China’s recent reiteration of their stance on banning cryptocurrency.

Price Action: The price of dYdX’s governance token reflected the rise in exchange use, rising nearly 100% in the past week to highs which briefly touched $27. With a circulating supply of roughly 56 million tokens, this puts the market capitalization of the protocol at $1.5 billion. 

Uniswap, the most well known decentralized exchange, which is currently valued at $16 billion, has been consistently doing less volume than dYdX in recent weeks. While dYdX allows leverage trading which inflates volume, the exchanges ‘flippining’ of Uniswap’s volume is indicative of further growth in the derivative decentralized exchange sector.

This uptick in volume came after major centralized exchanges such as Huboi and Binance began preventing mobile numbers from mainland China from registering for new accounts.

What is dYdX? 

dYdX is a non-custodial decentralized exchange that allows users to leverage trade via Ethereum smart contracts. This gives traders the ability to trade on margin while also benefiting from the security provided by Ethereum. dYdX also partnered with StarkWare to build a layer 2 protocol for the exchange. This allows traders to deposit funds and trade instantly without paying gas fees for every transaction. 

What is Ethereum Layer 2 and Why is it Important for DeFi? 

The margin trading and layer 2 scalability provided by the exchange portrays the current arms race of development within decentralized finance applications. While major decentralized exchanges such as Uniswap have begun developing layer 2 protocols, many protocols are still in the testing stage and not fully operational yet. 

For dYdX, being the first perpetual DEX protocol to implement a layer 2 solution has certainly paid off. 24 hour trading volume on the exchange has skyrocketed in recent weeks, hitting highs of $9 billion on the 28th of September. 

While dYdX is the largest decentralized perpetuals trading protocol, there are many other projects looking to achieve similar trading features. Perpetuals Protocol provides layer 2 perpetuals trading on Ethereum as well as a billion dollar insurance fund used to pay lenders in the event of unexpected losses. Similarly, GMX is a decentralized spot and perpetual exchange built on Arbitrum, a layer 2 development protocol. 

The rise in use and development of layer 2 trading platforms is representative of a consumer driven shift from centralized to decentralized exchanges. Previously, decentralized exchanges were restricted to using automated market makers such as liquidity pools rather than a traditional order book to determine the price of an asset. Reasons for this restriction include the expensive fees required to update an order book, far too slow transaction speeds for high frequency trading and poor liquidity due to sparse usage. 

Using layer 2s, decentralized exchanges can waive gas fees and provide instantaneous transactions. This allows exchanges to utilize order books as a market maker, which is preferred by many traders. As a result, many traders are switching to these platforms to prevent the risk of centralized exchanges acting maliciously.

Check Out Our Favorite Layer 2 Solution Investments: Polygon and Loopring.