Here’s how the dYdX V4 protocol could prove to be a game-changer for DeFi crypto trading

In the crypto trading world, security, speed, and trading fees are three major factors that traders most care about, which makes sense — you’d want your exchange to be able to handle transactions in the most efficient way.

From the trading exchange’s point of view, that’s only really possible if they have full control over their product and for a decentralised exchange, the solution is right there in the name — being as decentralised as possible with a sovereign chain that processes transactions quickly and communicates with other blockchains in the ecosystem, making it optimal for the world of open finance.

Into the Cosmos

This simple principle led dYdX, the leading decentralised derivatives exchange, to announce in June, 2022 that the latest version of their platform, which the company is calling V4, would be developed as a standalone blockchain built on the Cosmos ecosystem. At the time, Antonio Juliano - Founder, dYdX said, “This may seem like a risky and surprising decision, but I'm confident it's the best way to achieve our long term goal of becoming one of the biggest exchanges in crypto.”

The decision to build their platform on a Cosmos network lets dYdX create a fully decentralised and customised product that doesn’t rely on any external blockchain system’s governance, with the dYdX community fully in control of the stack.

Calling itself the “Internet of blockchains”, Cosmos is an ecosystem of blockchains that are built independent of each other but are all interconnected with its Inter-Blockchain Communication (IBC) protocol. This allows DeFi products such as dYdX to facilitate the transfer of assets with little-to-no transfer fees and without the network congestion that have come to plague mainstream blockchains.

Better in every way

With the current protocol looking at approximately 10 trades per second and 1,000 order places/cancellations per second, dYdX needed to look at scaling their product. “No blockchain — Cosmos included — is even close to a thousand transactions per second right now. We didn’t feel … that whatever could be done on decentralising the sequencers is necessarily more decentralised than what we could achieve with our own base level validators on the dYdX chain,” Antonio told Bankless Shows around the time of the announcement.

The exchange says that V4 will feature an in-memory order book that runs off-chain, with orders and cancellations stored by validators consistent with each other as with regular blockchain transactions, and corresponding trades executed on-chain. This gives V4 a higher throughput for quicker transactions.

V4 will also have the protocol’s current feature of having no gas fees, thanks to the customisation offered on Cosmos.

dYdX also says that its current DYDX governance token, being a layer 1 (L1) token, would be the “natural fit” to be used as the L1 token that V4 is based on as well, but would let its community of users make that decision — in line with its policy of being fully decentralised and governed by users. The community would also be able to vote and decide on the introduction of new features such as spot trading, options, multi-collateral, or improving core underlying technology.

Karan Ambwani - India Lead, dYdX Foundation says, “dYdX V4 will further enable the control of the protocol by its participants, along with making it more faster, transparent, and robust for the future of finance. dYdX Foundation is fostering the community in achieving this vision and aligning the ecosystem for accelerating its growth and development.”

Scaling for the future

Aiming to go live by the second quarter of 2023, development of the dYdX V4 protocol is already underway and has met its first milestone target of rolling out a Developer Testnet, that allows for basic trading and testing.

Antonio added, “One of our values is ‘Think 10x bigger’, and the way I articulated that is we should focus on what we can achieve rather than protecting what we have … If you look at the reputation, the brand we’ve built, we think we can go out and build a very decentralised system, in at least order of magnitude, that will be on a similar level of censorship resistance.”

If you’d like to help dYdX define its vision for a truly decentralised platform as it builds V4, join the discussion and share your ideas on the community forum.