While some financial derivatives like futures trading are slowly coming to Bitcoin, we’re still a long time away from these financial products being widely available for the entire cryptocurrency asset class.
So dydX is building a decentralized protocol for derivatives, built on the Ethereum blockchain and the 0x protocol. The protocol lets you take out peer-to-peer short sells, long positions and options on any ERC20 token. It also provides the ability for traders to make fully-collateralized loans, which are used to to fund short sellers.
As a refresher, a decentralized protocol means that no single entity controls the process. No one can cancel your order, steal your funds or rip you off as long as the smart contracts powering the protocol are securely written and properly vetted. There are already a few examples of decentralized exchanges like EtherDelta, where you can exchanges crypto assets peer-to-peer. But most of these platforms limit you to exchanging one token for another, which is why dYdX’s focus on more complicated financial positions is unique.
When the platform launches in the spring there will be a decentralized open protocol that anyone can access, as well as a centralized relay built by dYdX that acts as a user interface to the protocol.
The UI will look like a traditional trading site but will never take control of user funds, and dYdX will charge a small fee on all trades that use their interface. Of course anyone else can also build private or public interfaces to interact with the dYdX protocol for free. Order books will be off chain with on-chain settlements, which allow for faster trading, especially during times of network congestion.
At first you’ll only be able to trade with ERC20 tokens (and Ethereum itself) but technologies like cross-chain atomic swaps may enable trading of non-Ethereum-based tokens in the future like Bitcoin.
dYdX was founded by Antonio Juliano, a former software engineer at Coinbase and Uber. The startup has raised a seed round led by Andreessen Horowitz and Polychain Capital, with participation from Coinbase founders Fred Ehrsam and Brian Armstrong, Elad Gil and others.
Juliano plans on using the funding to build out a team of engineers (it’s currently a one-man shop) and undergo extensive third-party security audits on the protocol before launching. As explained earlier the only thing that could bring down a decentralized protocol is flaws in its code, making crypto security audits very important for any serious decentralized protocol.
Both the decentralized protocol and centralized relay are expected to launch around April, with the independent security audits being the biggest roadblock before launch.
You can check out dYdX’s white paper here.