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dYdX v4 - Full Decentralization



  • 🚢 The top priority is to open source the next version of the protocol, v4, by end-of-year 2022

  • ✅ dYdX v4 will be fully decentralized, with no central components

  • ❎ No central party (including dYdX Trading Inc.) will have the ability to receive trading fees on dYdX v4

  • 🪦 The current dYdX perpetuals protocol will eventually be deprecated after the migration to dYdX v4 is complete

dYdX’s mission is to build the world’s leading crypto trading platform.

In 2021, dYdX grew to become the largest decentralized exchange by trading volume, and began challenging major centralized exchanges for market share.

Decentralization is core to dYdX’s mission. We believe decentralization will drive radical improvements in transparency, safety, fairness, and equality of opportunity.

To further this mission, we are developing the next version of the protocol, v4. dYdX v4 will be open source, fully decentralized and entirely controlled by the community. dYdX’s top priority is to release dYdX v4 by the end of 2022.

dYdX Today

Today, dYdX functions as a hybrid decentralized exchange. This means that most components of dYdX are decentralized, but some components are run on servers operated by dYdX Trading Inc. and other partners.

The core exchange protocol is built on Ethereum smart contracts and STARK (zero knowledge) rollups powered by Starkware. This structure ensures full transparency and self custody of all funds and positions on dYdX. Additionally, all of dYdX governance and staking are built on smart contracts. dYdX contracts are all open source and audited by third parties, and do not have central admin capabilities.

The main components of dYdX that run centrally are the orderbook and matching engine. dYdX’s orderbook trading model has allowed dYdX to grow into the most liquid exchange in all of crypto. Running a central matching engine has allowed dYdX to scale to tens of millions of orders placed per day with sub-second latency, and has enabled dYdX to grow to well over a billion dollars a day in trading volume.

dYdX v4

With v4, dYdX will become fully decentralized. There will no longer be central points of control or failure of the protocol; all aspects of the protocol that can be controlled could be fully controlled by the community.

The primary aspect of fully decentralizing dYdX is decentralizing the orderbook and matching engine. The main challenges are:

Throughput: dYdX’s off-chain system today processes ~500 orders per second. This is a factor of ~100x higher than the number of trades per second. Ideally, v4 would allow for even higher order capacity.

Finality: Part of the offchain matching engine’s job is to sequence trades and give traders immediate finality on the outcome of their trades.

Fairness: Operators of the network and frontrunners should not be able to extract value from legitimate trading activity.

In addition to full decentralization, we are exploring adding to the v4 protocol:

  • Other trading products, such as spot, margin, and additional synthetic products

  • Improved margining and collateral options

  • Improvements to market structure and trading

  • Seamless addition of new trading markets

dYdX has been working on the architecture in partnership with Paradigm and other leading industry experts. We are excited to bring our history of engineering excellence in the DeFi space to tackle these new challenges.

Why Decentralization?

Our goal is to build the world’s leading crypto trading platform.

We believe DeFi represents a fundamental improvement over centralized financial platforms, and that, long term, the bulk of crypto trading will occur on DeFi.

DeFi offers a massive improvement in transparency. For the first time, the financial system itself is no longer a black box to users. With DeFi, users can trust code instead of corporations. dYdX v4 will be entirely open source and audited by industry experts.

DeFi enables true control of financial platforms by their participants. This dramatically increases fairness, community alignment, and equality of opportunity. The dYdX Foundation’s launch of dYdX governance has started dYdX down this path. Already we have seen significant activity from the dYdX community to drive meaningful change to the protocol. With dYdX v4, dYdX will be entirely community controlled and the future of dYdX will be in the community’s hands.

dYdX Trading Inc.

To date, dYdX Trading Inc. has served three main functions:

  • Develop software related to the dYdX protocol

  • Operate the offchain orderbook and matching engine

  • Promote growth of the dYdX protocol

In exchange for operating the offchain components of the protocol, dYdX Trading Inc. collects revenue through trading fees. As we work towards decentralization, we will use our capital to build out a strong brand, product and community.

Beginning with dYdX v4, dYdX Trading Inc. will not operate any part of the v4 protocol. As a result, it will no longer receive revenue based on trading fees from the v4 protocol. The same is true for all other centralized parties, unless the community decides otherwise.

The Next Year

dYdX v4 will be built and released by the end of 2022. dYdX v4 represents a large and critical improvement to the dYdX protocol, so will require months of heads down building. We are excited to release more information about dYdX v4 over the next year.

In the meantime:

If you’re excited about helping us build the future of DeFi with dYdX v4, check out our open roles!

About dYdX

dYdX is the developer of a leading decentralized exchange on a mission to build open, secure, and powerful financial products. dYdX runs on audited smart contracts on Ethereum, which eliminates the need to trust a central exchange while trading. We combine the security and transparency of a decentralized exchange, with the speed and usability of a centralized exchange.

Terms and Conditions: This post is subject to the dYdX Terms of Use. The dYdX interface and products are not available to persons or entities who reside in, are located in, are incorporated in, or have registered offices in the United States or Canada ("Blocked Persons"), or other Restricted Persons (as defined in the dYdX Terms of Use).  dYdX products and services are not intended for, and should not be used by, Blocked Persons or Restricted Persons. Terms of Use specific to v4 software can be found here.