After the community decided to adopt DYDX as the L1 token of the dYdX Chain, the utility functionalities of the token have expanded so that once migrated to the dYdX Chain, the DYDX token may now be used for staking and contributing to the security and governance of the dYdX Chain. This is a significant change from ethDYDX, which is solely a governance token in dYdX v3, to DYDX, a native token powering the dYdX Chain, a standalone PoS blockchain network.
On the dYdX Chain, all fees (trading fees denominated in USDC and gas fees for DYDX-denominated transactions or USDC-denominated transactions) collected by the protocol are distributed to Validators and Stakers.
Trading on the dYdX Chain is gas-less (only maker and taker trading fees in USDC apply).
On October 26 at 17:00 UTC, the Operations subDAO with Genesis Validators announced the first block of the dYdX Chain was created (“Genesis”) by the dYdX Chain Validators. Following the creation of the first block of the dYdX Chain and the adoption of DYDX as the Layer 1 token of the network, the DYDX token may, once migrated, fulfill new roles within the dYdX Chain. In this blog post we describe the evolution of the DYDX token from a governance token in dYdX v3 to the Layer 1 protocol token of the dYdX Chain, the specific utility of the DYDX token, and the distribution of fees to Validators and Stakers on the dYdX Chain.
The dYdX Chain is a proof-of-stake blockchain network built using the Cosmos SDK and leveraging CometBFT for consensus. The dYdX Chain requires a Layer 1 (“L1”) protocol token that can be staked to Validators to secure the chain and to assist with governance of the network.
The dYdX community, through dYdX governance, voted (Snapshot and on-chain) in favor of adopting DYDX as the Layer 1 token of the dYdX Chain. On the dYdX Chain, all fees (trading fees denominated in USDC and gas fees for DYDX-denominated transactions or USDC-denominated transactions) collected by the protocol are distributed to Validators and Stakers.
dYdX Chain DYDX
In September 2023, the dYdX community voted in favor of governance proposals to adopt DYDX (hereinafter, “ethDYDX”), the current governance token of the dYdX Layer 2 protocol on Ethereum (“dYdX v3”), as the L1 token of the dYdX Chain for staking to Validators in order to secure the chain and for Stakers of the L1 token to participate in the governance of the network.
Further, on September 1, 2023, the dYdX community voted in favor of four key elements related to the dYdX Chain:
Adopting the dYdX Chain (v4) open-source software as the next version of the dYdX protocol;
Adopting DYDX as the L1 protocol token of the dYdX Chain;
Adopting the Ethereum smart contract open-sourced by the dYdX Foundation that enables a permissionless and autonomous one-way bridge for the ethDYDX token to be migrated from Ethereum to the dYdX Chain (the “wethDYDX Smart Contract”); and
Recommending that dYdX Chain Validators reference the wethDYDX Smart Contract when distributing DYDX on the dYdX Chain.
Moreover, on September 23, 2023, the dYdX community voted to upgrade the GovernanceStrategy Smart Contract to give wethDYDX the same governance utility and functionality as ethDYDX on dYdX v3.
The dYdX community is encouraged to review the overview of the wethDYDX Smart Contract in detail. Token holders who send ethDYDX to the wethDYDX Smart Contract shall receive wethDYDX on a 1-1 proportional basis on Ethereum, and dYdX Chain Validators may also read and ingest the information from the wethDYDX Smart Contract such that corresponding DYDX tokens can be distributed to token holders’ dYdX Chain network addresses. For more details, refer to these two migration blog posts. Note, token holders should refrain from interacting with the wethDYDX Smart Contract without proper knowledge of how to derive private keys on the dYdX Chain.
Expanded utility of DYDX on the dYdX Chain
The utility functionalities of a token reflect the usability of that token within a given protocol. In the case of the dYdX Chain, the utility of the network’s L1 token is apparent in three areas: Staking, Security and Governance.
In any proof-of-stake (PoS) blockchain network, the role of Stakers is pivotal in shaping the security and strength of the network, and the dYdX Chain is no exception.
On the dYdX Chain, DYDX holders have the option to serve as Validators or to delegate their stake to existing Validators. Such delegation increases the likelihood of the chosen Validators entering or staying in the active Validator set, thereby becoming a participant in the network’s consensus process. In essence, staking to a Validator increases such Validator's weight, thus increasing their probability of being chosen by the consensus algorithm to validate blocks.
On the dYdX Chain, Validators undertake multiple responsibilities, including storing orders in an in-memory orderbook (i.e., an off-chain, decentralized orderbook that is not committed to consensus), gossipping transactions to other Validators, proposing and producing new blocks through the consensus process, and participating in governance. The consensus process has Validators take turns as the proposer of new blocks in a weighted-round-robin fashion (weighted by the number of tokens staked to their node). The proposer is responsible for proposing the contents of the next block. When an order gets matched, the proposer adds it to their proposed block and initiates a consensus round. If two thirds (⅔) or more of the Validators in the active set (by stake weight) approve a block, then the block is considered committed and added to the blockchain.
Validators’ participation in proposing blocks is determined by the CometBFT consensus mechanism. In this setup, the weight of a Validator’s vote is directly proportional to their stake; the higher the stake, the greater the influence wielded by the Validator in consensus outcomes. Conversely, those with less or no stake have a correspondingly reduced influence in consensus outcomes. Read more details about the consensus mechanism on the dYdX Chain here.
On the dYdX Chain, utility is created via staking to Validators and as an incentive for abiding by the rules of the protocol and contributing to the network’s security. All fees generated by the dYdX Chain protocol are distributed to Validators and Stakers every time a new block is committed.
dYdX Chain Validators are entitled to set their individual commission rates, which currently range from a minimum of 5% to a maximum of 100%. The Cosmos x/distribution module is a simple mechanism to allocate rewards earned by Validators and Stakers. For a detailed understanding of the Cosmos rewards mechanism, read here.
At Genesis of the dYdX Chain, the staking parameters include a maximum number (cap) of 60 Validators in the active set, a minimum Validator commission rate of 5%, and a 30-day un-bonding period, among other parameters. The un-bonding time specifies the duration of the un-bonding process, during which staked tokens are in a locked state and cannot be transferred or delegated (other than redelegated); this is, the tokens are still “at stake”. These staking parameters may change based on applicable dYdX governance processes.
Proof-of-Stake blockchains gain their security by assigning the verification and confirmation of transactions to one of their main stakeholder groups: Validators. With significant economic value at stake, Validators are incentivized to maintain the integrity of the ledger, lest they suffer substantial losses. However, even such a system isn't entirely immune to threats like so-called ‘+2/3 attacks’, where a person or group of persons controlling a majority of staked assets could destabilize the network.
In an open-sourced, permissionless, and decentralized blockchain network like the dYdX Chain, anyone is free to operate as a Validator. However, this openness could invite malicious Validators or other bad actors aiming to compromise the network or initiate fraudulent transactions. Because of the Proof-of-Stake dynamics, any person or entity pursuing malicious activities would first need to accumulate a certain level of stake in the network for their actions to have an influence in the consensus process.
Staking DYDX directly contributes to dYdX Chain security. As more DYDX holders choose to stake their tokens across a diverse range of Validators in the network and the total amount of stake on the network increases, it becomes increasingly difficult for a coordinated attack to influence a consensus decision. Simply put, the more native DYDX tokens that are staked or “bonded” and the more distributed the stake across multiple Validators, the more secure and resilient the network becomes.
Staking serves a dual purpose: it aligns the interests of Validators with those of the dYdX Chain through staking collateral and ensures infrastructure performance. Moreover, the PoS mechanism aligns economic incentives to encourage correct participation by Stakers. A larger and more diversified set of Validators further bolsters the network's resilience against vulnerabilities.
It's crucial to note that staking DYDX is not without risks. The slashing parameters establish punishments for detrimental behavior. At launch, the slashing parameters include a ~3-hour signed blocks window, a 20% minimum signed per window, downtime jail duration of 7,200 seconds, a slash fraction double sign of 0%, and a slash fraction downtime of 0%. Specific detail on the meaning and boundaries for each of these parameters is available in this Rewards and Parameters blog. These slashing parameters may change based on the applicable dYdX governance processes.
Lastly, as with any public, permissionless blockchain, Maximal Extractable Value (or “MEV”) is a risk. However, on the dYdX Chain this risk is being tackled head on. Through ChorusOne’s research paper, types of MEV were contextualized; and with Skip Protocol’s MEV dashboard, Stakers should be able to better identify malicious MEV behavior by Validators. If MEV or malicious activity occurs, this may carry a risk of social slashing, where the Validator can lose all or part of their stake weight and/or no longer be able to participate in validating blocks on the dYdX Chain. Please note that slashing (including social slashing) can affect Validators as well as Stakers of those affected Validators.
In dYdX v3, the governance powers of ethDYDX (also applicable to stkDYDX and wethDYDX) grant holders the ability to propose and vote on changes to community-controlled parameters and to delegate such powers to another Ethereum address.
On August 23, 2023, dYdX Trading Inc. published a blog post describing the rewards and parameters for the dYdX Chain open-source software. Below we highlight some of the governance parameters included at Genesis of the dYdX Chain, discuss DYDX utility for dYdX Chain governance and how governance may become more accessible than dYdX v3 governance.
Compared to governance in dYdX v3, there are several notable differences in how governance works on the dYdX Chain:
Proposing power is not required to create a vote. Instead, dYdX Chain requires a minimum deposit.
The Cosmos SDK x/gov module allows stakers of the native token to submit proposals (when the minimum deposit is reached proposals go live) and to vote on proposals.
Validators inherit the voting weight of their Stakers unless a given Staker decides to vote on a proposal themselves.
dYdX Chain governance introduces new voting options. On the dYdX Chain, the voting period is currently 4 days. During the voting period, participants may select a vote of either 'Yes', 'No', 'Abstain', or 'NoWithVeto'.
Only staked DYDX may be used to participate in governance.
The table below contains a general overview of the current functionalities of ethDYDX, stkDYDX, and wethDYDX in dYdX v3, as well as of the utility of DYDX in the dYdX Chain.
With the genesis of the dYdX Chain on mainnet, it is essential to understand the change in token mechanics for the DYDX token, as the L1 token of the dYdX Chain.
The ethDYDX token has played an important role in the governance of the dYdX v3 protocol, enabling a robust governance system. dYdX Chain DYDX is expected to continue to play a critical role in governance of the dYdX Chain, whilst also enabling security of the network and a self-sustainable rewards mechanism for Validators and Stakers of the network.
dYdX Foundation’s purpose is to support the current implementation and any future implementations of the dYdX protocol and to foster community-driven growth in the dYdX ecosystem.
The dYdX Chain software is solely open-source software to be used or implemented by any party in accordance with the applicable license. At no time should the dYdX Chain software be deemed to be a product or service provided or made available in any way by the dYdX Foundation. Interactions with the dYdX Chain software are permissionless and disintermediated, subject to the terms of the applicable licenses and code. Users who interact with the dYdX Chain software (or any implementations thereof) will not be interacting with the dYdX Foundation in any way whatsoever. The dYdX Foundation has no control of any kind over the use that people make of the dYdX Chain software, including, without limitation, with regard to: (i) potential deployments of such software, (ii) potential adaptations, forks or modified versions of such software, and their deployment, or (iii) users’ interactions with such software or deployments of such software. The dYdX Foundation does not make any representations, warranties or covenants in connection with the dYdX Chain software (or any implementations thereof), including (without limitation) with regard to the technical properties and performance of such software, as well as its actual or potential usefulness or suitability for any particular purpose. The dYdX Foundation will not operate any part of the dYdX Chain software (or any implementations, versions or adaptations thereof) nor will it be responsible for their continued availability.
Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone. The dYdX Foundation makes no recommendation as to how to vote on any proposal in dYdX governance, or to take any action whatsoever. The dYdX community is sovereign to make decisions freely and at its sole discretion, in accordance with the governance rules, principles, and mechanisms adopted by the dYdX DAO. dYdX community discussion and interaction on the contents of this post are encouraged. The dYdX Foundation does not directly participate in governance decisions to be made by the dYdX community, including, without limitation, by making and/or voting on governance proposals. The dYdX Foundation may alter or update any information in this post in the future and assumes no obligation to publicly disclose any such change. This post is solely based on the information available to the dYdX Foundation at the time it is made and should only be read and taken into consideration at the time it is made and on the basis of the circumstances that surround it. The dYdX Foundation makes no guarantees and is under no obligation to undertake any of the activities contemplated herein.
Legitimacy & Disclaimer
dYdX Foundation’s purpose is to support and grow the dYdX protocol ecosystem by enabling communities, developers, and decentralized governance.
Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone. The dYdX community is sovereign to make decisions freely from time to time, in accordance with the governance rules, principles, and mechanisms adopted by the dYdX DAO. Community discussion and interaction on the contents of this post are encouraged. The dYdX Foundation does not directly participate in governance decisions to be made by the dYdX community, including, without limitation, by making and/or voting on governance proposals. The dYdX Foundation may change, update or complement its analysis or opinions expressed in this post in the future and assumes no obligation to publicly disclose any such change or update. This post is solely based on the information available to the dYdX Foundation at the time it is made and should only be read and taken into consideration at the time it is made and on the basis of the circumstances that surround it.
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