MT Capital Insight: Appchain migration and economic model updates drive DYDX price flywheel growth

TL; DR

• The dYdX token economic model has been updated so that token holders, such as teams and early-stage investors, must stake DYDX tokens in order to capture dYdX's fee income. This will increase the staking rate of DYDX, reduce the amount of DYDX in circulation, avoid a large number of token sell-offs, and improve the value capture ability of DYDX.
• The migration of dYdX to the application chain avoids the redistribution of profits with StarkWare, and the performance improvement and customizability brought by the application chain can also strengthen the market's expectations for the future performance of dYdX.
• dYdX's new early-stage incentive program, Noble's upcoming native USDC launch, and the recent surge in liquidity and volatility in the secondary market will all bode well for dYdX's fundamentals.
• December will see a huge number of token unlocks, but we don't expect this to cause a massive token sell-off, and it is possible that the team and early-stage investors will choose to capture dYdX's growth expectations in the form of staked tokens.

Introduction

dYdX recently completed the migration from StarkWare to the Cosmos appchain and completed its first transaction on November 13th. dYdX has also updated the token economic model of V4, giving DYDX a stronger ability to capture value. We expect that under the dual impact of these two events, the fundamentals of dYdX will improve greatly, and DYDX will also be able to capture greater secondary market gains.

Token economic model updates empower DYDX's ability to capture value

1.dYdX income goes to the staker

dYdX founder Antonio announced that dYdX Trading Inc. has officially become a Public Benefit Corporation and does not generate fee income from the operation or trading of dYdX V4. dYdX Chain will distribute all protocol fees, including USDC-denominated transaction fees and DYDX-denominated gas fees, to validators and stakers. It is worth noting that the dYdX team also needs to stake tokens to obtain dYdX's fee income, which also avoids the team holding a large number of tokens from selling and smashing to a certain extent. dYdX currently has an average annual revenue of about $105.47m, and the distribution of protocol revenue between validators and stakers will improve DYDX's ability to capture value.

! [MT Capital Insight: Appchain Migration and Economic Model Updates Drive DYDX Price Flywheel Growth] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-0d2f6f28e3-dd1a6f-cd5cc0.webp)

dYdX Daily Fees

2. DYDX Token Model Update

Previously, DYDX tokens were primarily used for protocol governance, fee discount reductions, and staking capture token inflation incentives. dYdX V4 brings changes to the protocol governance and staking modules, expands token governance authority, and enables token stakers to capture real yields.

First of all, DYDX holders are now able to vote on the key parameters and key functional modules of dYdX, including but not limited to transaction fee parameters, trading reward mechanisms, third-party price sources, adding/removing existing markets, etc. The expansion of governance rights enables DYDX holders to dynamically adjust trading parameters and protocol functions to adapt to market changes according to market demand, making governance rights more valuable.

Second, DYDX holders staking tokens will receive a source of revenue consisting of transaction fees and gas fees, instead of the previous token inflation incentive, which will increase the real yield of stakers. The DYDX token will also be transformed from a mining coin into a dYdX Chain generic token with value capture capabilities, wealth effects, and governance rights. The increase in dYdX trading volume, the improvement in fundamentals will increase dYdX's fee income, amplifying the attractiveness of DYDX holders to stake tokens. This process will further reduce the number of DYDX tokens in circulation, amplify the market demand for DYDX tokens, promote the price increase of tokens, and form a positive upward flywheel.

! [MT Capital Insight: Appchain Migration and Economic Model Updates Drive DYDX Price Flywheel Growth] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-59b371ede6-dd1a6f-cd5cc0.webp)

The chart above shows the performance of the token price and protocol fees of the DYDX token model that have not been modified. We expect the new token model to further strengthen the growth of the token price and protocol fees

Appchain migration reinforces dYdX's future performance expectations

1. Pursuit of higher performance on par with CEXs

One of the important reasons why dYdX left StarkWare is that StarkWare has been upgraded, and the existing performance and cost overhead are not enough to support dYdX's growth plan to compete with centralized exchanges. The specially designed application chain allows dYdX not to compete with other protocols, and can exclusively enjoy the performance of the application chain, reduce on-chain transaction costs, and better meet dYdX's high TPS requirements for order books and matching engines. Before the migration, dYdX was only able to process about 10 transactions per second and 1,000 order/cancellation requests per second, whereas after the migration, dYdX is capable of processing up to 2,000 transactions per second. In addition to the performance improvements, dYdX will no longer need to share profits with StarkWare after independence, which will greatly increase the expected income of the stakers mentioned at the beginning for the future revenue distribution of the protocol.

! [MT Capital Insight: Appchain Migration and Economic Model Updates Drive DYDX Price Flywheel Growth] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-25366925a7-dd1a6f-cd5cc0.webp)

! [MT Capital Insight: Appchain Migration and Economic Model Updates Drive DYDX Price Flywheel Growth] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-2b4ac4fc3b-dd1a6f-cd5cc0.webp)

2. Customized appchain for a better trading experience

Another big benefit of migrating to appchains is that dYdX can achieve greater customizability to the workflow of blockchains and validators to meet the needs of decentralized derivatives trading.

In dYdX v4, each validator will run an in-memory order book that will never reach consensus off-chain. Orders placed and cancelled will be propagated through the network, and only transactions that are successfully matched in real time and confirmed by consensus will finally be submitted to the blockchain to ensure that the order book data stored by each validator node is uniform. Based on the above operating logic, the behavior of users placing and canceling orders is off-chain behavior, and there is no need to pay gas fees. Only when the order matching transaction is completed and uploaded to the chain, the user needs to pay the gas fee for the order completion.

In addition, dYdX has also partnered with Skip Protocol to develop MEV dashboards to expose harmful/dishonest nodes. The community will punish such nodes to ensure the fairness of the dYdX transaction network. Migrating to the appchain allows dYdX to optimize the user's actual trading experience at a deeper level and increase the user's willingness to trade on dYdX.

! [MT Capital Insight: Appchain Migration and Economic Model Updates Drive DYDX Price Flywheel Growth] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-67d4ae2812-dd1a6f-cd5cc0.webp)

MEV Dashboard on dYdX

Other positive and future risk warnings

1. Early Incentive Program

The dYdX community has approved a startup incentive proposal for dYdX v4, which will allocate $20 million in DYDX from the dYdX Chain community treasury for a 6-month startup incentive program to be deployed on v4 to incentivize early adopters. The early incentive program can strengthen users' willingness to trade funds across the chain to dYdX Chain, and promote the increase of dYdX trading volume and fee income.

2. Native cross-chain USDC

The Circle Cross-Chain Transfer Protocol (CCTP) will be launched on November 28 on Noble, an Cosmos ecosystem appchain, enabling users to cross-chain native USDC from Noble to dYdX Chain in a single transaction. The launch of CCTP on Noble makes it simpler, safer, and more efficient for users to send USDC to dYdX Chain.

3. Token unlocking in December

The biggest risk event facing dYdX V4 in recent times is the unlocking of a large number of tokens in December. According to TokenUnlocks, 15% of the total dYdX token will be unlocked on December 1. However, this unlock does not necessarily cause a lot of selling pressure. As mentioned earlier, staking DYDX tokens can earn a significant fee and gas fee share. Most of the tokens unlocked this time belong to teams and early-stage investment institutions. Affected by the recent hot secondary market and changes to the dYdX token model, teams and institutional investors may also choose to capture the subsequent value growth of dYdX in the form of staking tokens.

! [MT Capital Insight: Appchain Migration and Economic Model Updates Drive DYDX Price Flywheel Growth] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-8497b7a0d6-dd1a6f-cd5cc0.webp)

DYDX Token Unlocks

To sum up, we believe that under the influence of the completion of the migration of the dYdX application chain and the upgrade and update of the token economic model, the fundamentals of **dYdX have a steady and positive growth trend, and the DYDX token can further capture the value growth of dYdX. At the same time, since October 25, the overall crypto market has recovered, with a significant increase in volatility and liquidity. The sharp increase in the price of DYDX tokens also reflects the market's optimistic expectation that the market will continue to continue, the trading volume of the platform will continue to expand, and the fee income will continue to grow.

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