Author|   Antonio Juliano

translate   |   Colin Wu Gary Ma

This article has been translated into Chinese with permission from Antonio Juliano

This is a brief history of dYdX so far. I think this should be a good background for anyone interested in dYdX. The journey we’ve been on may also be useful for anyone working in the broader DeFi/crypto space.

2015–2016

Working at Coinbase

Before I joined Coinbase, I knew nothing about cryptocurrencies. Soon after I started working at Coinbase, I became very excited about the future of cryptocurrencies. When I first started working at Coinbase, basically the only legitimate cryptocurrency (that we knew about) was Bitcoin. We were all 100% convinced that Bitcoin would be the only interesting thing in cryptocurrencies because if any other chain did something interesting, Bitcoin would integrate it and use its superior network effects to crush the other chain. Of course, this was ultimately wrong.

When I finally discovered Ethereum, I was extremely excited: I realized that this was a new paradigm for computing — for the first time, programs could run completely autonomously, deterministically, and without control from anyone else. I was convinced that something had to be built on top of Ethereum that would eventually become huge.

2017

Weipoint

Before starting dYdX, I had been working full-time on a search engine for decentralized applications. I worked on it for 4–5 months, but no one was using it — I had about 10 users at one point. The idea was too early. There were only a few dozen dApps in the world at the time. What was the point of a search engine if there was no content to search for?

Lesson: This taught me the importance of timing in entrepreneurship. Too early or too late is always a mistake.

dYdX Launches — July 27

After Weipoint, I was determined to build something useful for the market. The main way cryptocurrencies were used at the time (and to this day) was for trading and speculation. Around this time, the first decentralized exchanges (0x, Kyber) appeared. I looked at this and thought it was something really useful to build on top of Ethereum.

Given this, I thought the next logical thing to build was decentralized margin trading and derivatives. This seemed logical since margin trading (led by Bitfinex) was starting to take off in the crypto space at the time. Financial markets evolved over time from spot → margin → derivatives. It seemed like crypto should be no different.

I came up with the name (my main contribution to dYdX) and founded dYdX on my own.

Initial progress

I wrote the first version of the dYdX whitepaper (which is now super outdated) and the first basic version of the smart contracts (which never saw the light of day). The original whitepaper had a protocol for margin trading and (fully collateralized) options. I decided to build margin trading first.

$2 million seed round

dYdX raises $2M seed round at $10M valuation led by Andreessen Horowitz and Polychain. We were lucky enough to also bring on 15-20 top angel investors. dYdX is starting to look like a real company now!

2018

Early

Brendan, Zhuoxun (Operations Lead, now left to start Magic Eden), and Bryce (Senior Software Engineer) joined the team! Going from one person to multiple people helped us move faster! We initially worked out of a private WeWork office at Soma, and moved to our first office near Jackson Square in mid-2018.

$10 million Series A funding

We raised a $10M Series A at a $40M valuation. The round was again led by Andreessen Horowitz and Polychain. This gave us 5x the capital and a longer runway (we still had no revenue).

V1 Margin Agreement

Brendan and I built the first version of the margin trading protocol. While it was impressive technology at the time (we invented flash loans and dex aggregators), it was overly complex and too general. It took nearly a year from the founding of dYdX to its launch.

Lesson: We should build something more specific/MVP and iterate

Expo

dYdX’s first product, Expo, is built on top of the V1 Margin Protocol. It is a simple trading application that can be used to buy leveraged tokens. Leveraged tokens are tokenized versions of short/long margin positions on ETH.

The idea is that we will provide users with an easier way to trade on margin - just buy tokens and get leverage! We think this will expand the margin trading market and attract users who find exchanges (like Bitfinex) too complicated.

At its peak, Expo's daily transaction volume was approximately $50.

Lesson: We were wrong. We found that our users didn’t want a simple transaction product, and the abstractions we built to simplify transactions made it harder for them to do what they wanted. Our users weren’t simple, they were complex. They wanted a complete transaction.

2019

Solo

We built and launched the second version of the dYdX margin trading protocol, codenamed “Solo.” This version is more powerful and addresses some issues with the original protocol.

Taking our learnings from Expo, we launched a trading product targeted at more sophisticated traders. This went very well, almost immediately increasing our trading volume to around $1 million per day.

dYdX Order Book

To date, dYdX has not built its own trading system. Instead, we integrate with a third-party DEX, 0x, to get buy and sell orders for ETH. Our users have encountered many issues in this regard, including high failure rates (for example, users make a trade and then find that the trade fails) and low liquidity.

So we decided to build our own order book based trading system. This allowed us to build our own liquidity and iron out some product issues. This worked well and allowed us to quickly become one of the most liquid DEXs at the time.

Lesson: Vertically integrating more of the stack under our control often leads to a better product experience

2020

In March, we enabled transaction fees and started to make a profit for the first time!

Perpetual Contract

In April, we launched BTC perpetual contracts. We soon launched ETH and LINK perpetual contracts.

The decision to enter perpetual contracts was driven by the surge in perpetual contract volume driven by Bitmex at the time. Bitmex's volume quickly surpassed Bitfinex and others, driven by leveraged perpetual contract trading. We (correctly) viewed this as an important emerging trend in crypto trading and thought it was time to move into derivatives trading.

No one had built perpetual swaps on a DEX before us. At the time, it was unclear whether we could successfully build perpetual contracts in a decentralized way. Obviously, staking paid off big for us in the long run.

Launching perpetual contracts also allows us to support trading of cross-chain assets such as BTC. We initially thought that trading BTC on DEX would be the killer use case, but this turned out to be wrong, and our ETH perpetual contract ended up having more trading volume.

Initially, our perpetual swaps had lower volumes than our margin trading products. One issue was that the V1 perps protocol only supported segregated margin (users had to deposit collateral separately for each market). This made it difficult for us to build liquidity and launch new markets. For this reason, our v1 perps only had 3 markets.

Lesson: Getting on the trend early (not first, but early) and not being afraid to discard/de-prioritize everything we built before can bring huge benefits

The rise of COMP & Uniswap

Most people don't remember this, but dYdX was the #1 DEX by volume in early 2020. At times we were close to 50% market share. At the time we were doing about $10 million in volume per day.

The launch of COMP by Compound and the subsequent explosion of liquidity mining and DeFi changed all that. The exponential success of COMP and its liquidity mining (which caused Compound’s TVL to increase 100x almost overnight) quickly stimulated a large number of new DeFi tokens.

People naturally wanted to trade these tokens. But many of them could only be traded on Uniswap (which makes it easy to add new tokens extremely quickly). This again led to a massive 100x increase in Uniswap’s volume and adoption almost overnight.

We were left in the dust and completely missed this trend. We were completely unable to add new tokens, only 3 compared to hundreds on Uniswap. Our market share dropped rapidly from ~50% → < 0.5%.

Lesson: It is important to anticipate, or at least be able to respond quickly to, drastic changes in market conditions

Overwhelmed by Gas

A major side effect of the rise of DeFi is that Ethereum’s gas costs have increased 100-1000x. At this point, we are subsidizing (paying for) gas fees for our users. It now costs over $100 in gas fees to execute a single transaction, and our transaction fees are nowhere near enough.

We started to lose money at an alarming rate. On the highest volume days, when people were trading on the exchanges, we would lose tens of thousands of dollars, and if we didn’t take action, we would be out of money in 9 months.

So we did take drastic action. We increased the minimum trade size to over $10,000 (the lowest amount you could trade on dYdX) and eventually imposed a flat trading fee proportional to the gas cost of each trade (so our users had to pay over $100 in fees for a single trade). This massively hurt trading volume and adoption just as the rest of DeFi was exploding.

$10 million in Series B funding

We needed to raise more money or the company looked like it would fail.

At this point, our long-term plan is to never fully decentralize, but to always remain a profitable business with a central order book on top of the protocol. I do not believe it is possible to build a fully decentralized product that supports the needs of professional traders (our core users) with current technology.

This brings us to an existential question: if we never fully decentralized, what was our competitive advantage over Binance and FTX? Could we have done 10x better than them? To be honest, I didn’t have a good answer at the time.

As a result, we were rejected from this round by basically all the major crypto investors in Silicon Valley (a16z, Polychain, Paradigm, etc.). Fortunately, we did eventually raise money from Three Arrows (who turned out to be a great partner and very helpful) on good terms. We raised $10M at an $80M valuation (we intentionally sold a smaller percentage than before because we knew we were in a tough spot and it wasn’t an ideal time to raise money).

2021

New Office

We moved into our new office in San Francisco in March, post-COVID! We’re still there today.

L2 - Starkware

We needed to make significant changes to our product because our business was being hammered by gas fees and we couldn’t keep up with Uniswap, FTX, and others from a product perspective. We determined it was time to move off Ethereum L1 to a more scalable chain.

After considering many different options (Starkware, Solana/Near, building our own optimistic rollup), we chose Starkware. It gives us high throughput, low latency, better than Ethereum, and is by far the best fit.

We initially planned for Starkware to take 3 months to build, but it ended up taking 7. The Layer 2 product launched in April 21. Importantly, Starkware's increased throughput with Ethereum enabled us to switch to cross-margin (multiple positions can be collateralized by a single margin account). This enabled us to build better liquidity and launch more trading pairs. We now have about 30 instead of 3. Shortly after launching L2, our trading volume surged about 5x to about $30 million per day.

$65 million Series C funding

In June 21, we raised a $65 million Series C round at a $215 million valuation, led by Paradigm. In addition to a great new lead investor, we also brought in some high-quality investors.

dYdX Foundation issues $DYDX

In the summer of 21, the Swiss independent foundation dYdX Foundation was established. In August 21, the foundation released DYDX, the dYdX protocol token.

I think the incentives are set up very well - better than any other DeFi protocol to date, I think. After the token launch, dYdX trading volume soared to over $2B/day.

2022

We opened our second headquarters in New York!

V4

Work on V4, the fully decentralized version of dYdX, began in earnest. With V4, we have a clear mission and reason dYdX can achieve its goal of becoming the largest cryptocurrency exchange - a fully decentralized and open source professional exchange that is potentially 10x better than existing financial platforms. We published a blog post detailing our plans for V4. This remains a top priority for the company…

V4:

https://dydx.exchange/blog/v4-full-decentralization