DyDx is a decentralized exchange that allows users to trade leveraged perpetuals of various crypto currencies. Trades happen instantaneously and transparently via smart contracts on an Ethereum Layer 2 that utilizes Starkware’s roll up technology.
This article, will unpack that sentence above. By the end of reading you will understand what DyDx does, why it is a ground breaking technology, and how to use DyDx to trade crypto derivatives.
We’ll cover key terms, ideas and even a bit of strategy when it comes to trading crypto on DyDx.
What is DyDx? (The Basics)
DyDx is a decentralized exchange that uses layer 2 scaling technolgy to allow users to trade perpetual contracts on a variety of crypto currency pairs.
- Decentralized and Non-Custodial: DyDx allows users to trade perpetual futures in a decentralized, non custodial manner.
- Minimal to no gas fees: Money is deposited into the layer 2 scaling solution on Ethereum. DyDx will often refund the deposit fee. Then users can trade gas free using the StarEx layer 2 scalability engine.
- Perpetuals: Perpetuals allow users to open long and short futures positions on coins, without an expiration date
- Leveraged trading: Users can trade a variety of crypto paired against USDC at 20x leverage.
Note: dYdX perpetual contracts are unavailable in the United States.
Is dydx a Decentralized Exchange?
DyDx works through a set of decentralized Ethereum smart contract on a layer 2 solution. This means that funds are transparently held on the blockchain rather than an opaque centralized exchange.
A completely decentralized exchange means that there is no centralized control or points of failure. The entire platform is community run and transparent.
On top of running dydx as a popular derivatives DEX – the team is doing it using layer 2 scaling technology via a partnership with Starkware.
Looking for more Decentralized Options? Best Decentralized Derivatives Exchange (Crypto Perpetuals)
What is Starkware and Why is Layer 2 important for DyDx?
Starkware has a popular zkStakes technology that uses ZK rollups to significantly increase trading speed and efficiency while maintaining the underlying security of Etehreum.
DyDx uses starkware technology to create their own ethereum layer 2 scaling solution. The benefits of this are many. Primarily it saves users on gas fees, and increases throughput and privacy.
Benefits of DyDx using Layer 2 technology
The fact that DyDx runs on a layer 2 rather than Ethereum main net enables
- Lower Fees
- Reduced minimum trade size
- Instant trade settlement
- Faster oracle prices
- Higher leverage and lower liquidation prices
- Greater Privacy
- Each individual trade is not logged to the public blockchain only the balance change between deposit and withdraw
- Cross Margin
- Traders can trade with leverage across multiple cryptocurrencies using 1 margin account.
Can You Use dydx exchange in the United States?
As of now, individuals based in the United States can not use DyDx to trade cryptocurrency derivatives.
It is possible to mask your IP address using a VPN. However, we can not recommend that in good conscious. Using a VPN to spoof your IP address is against the terms of service and adds the risk of your positions being forced to closed if the exchange discovers that you are using a VPN to trade on DyDx.
What are Crypto Perpetuals?
Crypto perpetuals are an agreement to buy or sell (long or short) a given cryptocurrency at a specific price. They differ from futures in that the agreement has no expiration date.
In simple terms, opening a perpetual trade at the current market price is a bet that the price will go up or down in the future. Let’s look at simple examples for a long and short perpetuals.
Example of a Long Perpetuals contract
Let’s pretend ETH is currently trading at $2000. You would open a long perpetual position if you think the price of ETH is going up. You open a long position by “borrowing 1 ETH at $2000” using the money in your margin account as collateral.
If ETH goes to $2500 – you can close your perpetual position. Closing your position automatically sells your one borrowed ETH at it’s current market price of $2500. This automatically returns the borrowed ETH at $2000 and deposits the remaining $500 into your account.
Note: We will get more into margin accounts, funding rates and more later in the article.
Examples of a Short Perpetual Contract
Pretend now that ETH is trading at $2500. You would open a short perpetual position if you think the price of ETH is going down. To open a short position you sell 1 “borrowed” ETH. Again using the money in your margin account as collateral.
If ETH drops again to $2000 – you can close your short perpetual position. Closing your position means you automatically returned the 1 borrowed ETH (which costs you $2000) and you are left with the remaining $500, as it was now cheaper to pay back the ETH that you borrowed at a higher price.
How To Trade Perpetuals on DyDx Exchange
To trade perpetuals on dydx you have to deposit money into yoru margin account. Your margin account is a smart contract that sits on dydx’s layer 2 scaling solution. From there, you use your margin account as colalteral to open up long and short positions on various crypto currencies.
The above example was a bit over simplified and used to explain the difference between a long and short position. Keep that example in mind and now work in some basic terms and concepts when it comes to trading perpetuals on dydx.
Related article: Best hardware wallet to keep your crypto safe
Key Terms on dydx Exchange
Trading crypto perpetuals on the dydx exchange is not overly complicated, but it is risky. To better understand the process we shoudl cover some key terms and concepts that are displayed within the dydx trading UI.
Buying Power is how much you could theoretically buy if you leveraged your collateral to the maximum. You’d never want to use your full buying power though, because if the price moves even just a little bit not in your favor you’ll be liquidated.
Equity is the total value of your account. It includes what you have deposited and the unrealized profit and loss of your open positions.
Margin usage denotes what % of your total margin are you using. The lower the safer. If you get to 100% you are liquidated.
Account leverage in the top left denotes how leveraged your entire account is across all positions. Remember, you can trade across multiple currencies (cross margin) so if you are 5x long on btc and 2x long on ETH – those will both factor into the total margin on your account.
1 hr Funding
This is your cost (or reward) based on your open positions. This rate is set algorithmically by dydx and the open interest long or short. The prurpose of the funding rate is to help boost liquidity and ensure that longs and shorts trade at the market price.
So it incentives users to open long and short positions.
When the funding rate is negative the shorts pay the longs. So you actually receive a small amount for having an open long position and lose a small amount for having an open short position. When the funding rate is positive, the reverse is true.
The funding rate is updated every hour.
Unrealized P & L
This is your profit and loss on open positions. I.e what you would make or earn if you were to close your positions and have whatever is left deposited into your margin account.
Realized P & L
This is what you have actually earned and it already sits in your margin account. These funds can either come from the funding rate or having closed positions – thus “realizing” an “unrealized” loss.
Liquidation price is perhaps the most important metric! If the market price of the coin dips (or rises if short) to the liquidation price your entire account will be liquidated and you will lose all of your deposit that was being used as collateral to trade.
Be very careful and ideally you never even come close to your liquidation price. If you are trading a variety of coins, cross margin, your liquidation price can shift up and down slightly – so play it safe and don’t get close to the liquidation price if you can help it.
Liquidation on dydx exchange – A Cautionary Tale
Trading perpetuals with high leverage is incredibly risky. Crypto itself is risky enough. What leverage does is essentially expose you to the volatility by the multiple you are leveraged.
So if you are 5x long ETH, a 10% price movement will be a 50% swing in your position. This is great if you time it right, but pretty disastrous if you time it wrong. To illustrate the downside, I’m going to tell you a short cautionary tale.
I leveraged ETH at roughly ~$4000, thinking ‘number can only go up’. We were in a bull market. Well, number kept going down. But not massively at first.. slowly.
Each day down a little bit and down a little bit more. Until I was sitting quite underwater and nearing my liquidation price of ~2800. So I added in a bit more to pad the price. Down a bit more. Added in more.. and more.
The thinking was if I just continued to play defense – eventually the price would rise and my “unrealized loss” meant nothing until I closed the position and “realized the loss”. Well, then the Terra Luna / UST crash happened. And while I wasn’t trading Terra and Luna it caused a massive plummet in all coins and my ETH & BTC positions were liquidated.
Here is what really sucks about liquidation, it’s not just that you lose more money. You lose your entire deposit. So that ETH I sent into dydx is completely gone. The smart contract had to take it to cover my unrealized loses. So even if ETH goes up again, which I have faith it will (not financial advice, none of this is financial advice), I don’t have the ETH. It’s gone, not just “down” the way it would have been with spot trading.
So, yes perpetuals and margin trading are a rush and fun, and could pay off big – but BE CAREFUL.
Different Types of Orders on dydx Exchange
Here are the different order types that traders can use on the dydx perperutal exchange:
A market order is a buy or sell order that executes immediately as the order is placed based on the best available price on the order book.
A limit order is a buy or sell order to take a position on a coin at a specific (or better) price. A limit order will only execute if the market moves in the direction of your order. For instance, if ETH is at $2100, and you place a limit order to buy at $2000 – the order will only execute if the price of ETH drops to $2000 or below.
By default a limit order is “open” for 28 days. You can change the duration an order is open by clicking on the advanced tab.
Stop Market Order
A stop market order executes a market order once the price of the coin crosses a specific “stop price.” A stop market order is often used to limit losses.
For example, if you are long ETH at 2000, you may put a stop market order to sell ETH if the price touches 1800. Once the index price of ETH hits 1800 (or whatever price you set) your market sell order will execute instantly at the best available price.
Stop Limit Order
A stop limit order places a limit order on a coin once the price crosses a specified stop price. As a limit order is placed, the order only executes at the price of the limit or better. This type of order is also typically used to limit downside.
Trailing Stop Order
A trailing stop order helps a trader to lock in gains, without missing out on too much more potential upside.
Essentially, you can set a stop price that fluctuates with the movement of the underlying coin. As long as the coin is still moving in your favor, the stop price will update accordingly to further lock in gains.
For example, if you go long ETH at $2000 and ETH goes to $2250. You could set a trailing stop order at 10% below the market. This sets a stop market order at $2025 (2250-10%). If the price continues to move up to 2500, the trailing stop order will update your stop market order to be 10% below the new $2500 price, so $2250. Locking in more gains.
Take Profit Market Order
Take Profit Market orders allow traders to automate a position so that a market order is executed at a specified price to take profit.
This is similar to how a stop market order automatically closes a position that has moved against you, only it automatically closes a position that has moved in your favor – locking in your gains.
Take Profit Limit
Take Profit Limit order activates a limit order once a specified price has been crossed that favors a traders position.
Looking to automate your trading? Learn about 3Commas trading bots
Dydx trading pairs
Dydx is constantly evolving and adding more trading pairs to their platform. As of the time of this writing their are nearly 40 coins that can be traded as leveraged perpetuals against their usdc value:
- and more…
Fees on DyDx Exchange
DyDx has no fees to deposit or withdraw but does charge maker and taker fees between 0 and .05% depending on your trading tier. Traditionally taker fees are higher than maker fees and fee discounts are given depending on your volume of trading and the amount of dydx tokens you have. There is also an additional fee discount for holding a dydx NFT.
Below is a table of the dydx fees and trading tiers:
Dydx does have a token (dydx) that was launched through an airdrop in August of 2021. The dydx has a current marketcap hovering around $105 million.
The dydx token is primarily a governance token that can also be staked by users to earn rewards and lower trading fees on the trading platform.
There is a total supply of 1 billion dydx coins and a circulating supply of around 70 million. Roughly 50% of the current tokens are released to the community via an airdrop and incentivized dapp usage.
Dydx Token Airdrop
A dydx token airdrop took place in August of 2021 and was granted to traders on the dapp and those staking USDC in the dydx pools. Tokens continue to be released each trading epoch to users of the platform and those staking dydx in their smart contracts. Meaning you can earn dydx by trading.
If you plan to stake dydx token on dydx you will have to do through through a non-custodial wallet like metamask. Note, we highly recommend that you use a Ledger hardware wallet as well.
What is the DyDx token price and price perdiction
Dydx hit an all time high of $27.86 in september of 2021. dydx hit an all time low of 1.48 in may 2022.
As of now the token price is trading more near to it’s all time low. None of this is financial advice.
DyDx Trading Leagues and Competitions
dydx runs weekly trading competitions with cash prizes up to $350,000. dApp users are placed in leagues based on their trade volume and consistent winning performance.
If you are trading on dydx and meet the minimum requirements your account will automatically be entered into a trading competition.
Dydx Hedgies – NFT
Dydx Hedgies are a colelction of 4200 NFTs that can be won through dydx trading competitions and bought on secondary nft markets like opensea.
The NFT features a 3D hedgehog and holding an NFT in your wallet further increases your trading fee discount by boosting your tier by 1.
Holding multiple dydx hedgie nfts does not further increase your trading tier and fee discounts on dydx.
Should You Leverage Trade on Dydx Exchange?
Leverage trading perpetuals on dydx is a high risk high reward opportunity in the crypto space. Dydx uses state of the art roll up technology to give users a low fee, capital efficient strategy to trade crypto perpetuals.
Whether you trade crypto perpetuals on dydx is up to you. If you do, please be VERY careful. Trading leveraged crypto perpetuals is highly risky and you run the risk of being liquidated of your entire margin account.
Thank you for reading, best of luck and stay safe.