dYdX Protocol’s “expo” Enables a new Way to Margin Trade on Ethereum’s Blockchain
Ethereum-based blockchain project, dYdX, is developing open-source protocols for decentralized margin and derivatives trading for cryptocurrencies. The project’s first platform, expo, will enable trustless margin trading for Ethereum tokens.
Expo – a Trustless Margin Trading Platform on the Ethereum network
On September 18, 2018, dYdX’s Head of Operations, Zhuoxun Yin, announced the launch of expo, the first platform that provides traders with a completely trustless way to margin trade on the Ethereum blockchain.
expo is being developed on top of the dYdX protocol and will enable the trading of so-called “margin tokens.” An example of a dXdY margin token would be ETH, which is an ERC-20 token pegged to a short ether (ETH) position.
Trading on expo will be an easy three-step process, once the traders have set up their MetaMask wallet.
Traders first choose the type of margin token they want to buy. These can be short tokens or leveraged tokens. Next, traders need to decide on the amount of ETH they want to invest in a specific trade and, finally, they need to click the “Buy” to confirm the transaction.
The key benefit of trading on expo over other margin trading platform is that “the mechanics of the protocol (obtaining a loan, spot trading) are abstracted away from the trader, significantly simplifying the margin trading experience,” according to Yin.
That means that expo will automatically source lending liquidity in the underlying asset from dYdX lending partners, source liquidity from decentralized exchanges (DEXs), handles collateral management, and mints new short or leveraged tokens to provide users with margin exposure.
Expo will streamline margin trading for Ethereum tokens so that anyone who wants to short Ethereum or ERC20 tokens or leverage long positions can do so with only a few clicks of a button. The expo trading platform will officially launch on October 2, 2018.
Decentralized Derivatives Trading on the dYdX Protocol
Expo will not be dYdX’s only product. After offering traders the ability to go long and short using leverage, dYdX is also planning to develop a decentralized options trading platform on the Ethereum blockchain.
Options provide traders with the right but not the obligation to buy or sell an underlying asset at a specific price at a predefined future date. Options, thus, enable traders to buy (or sell) an asset using leverage but also to hedge its trading positions.
For example, if you are long ten ERC20 tokens but are concerned that a drop in the price of ETH will affect your ERC20 token portfolio, you could buy a put option on ETH that will be “in-the-money” once the ETH price drops below, say $200. At that point, you would start profiting from your hedge while your ERC20 token portfolio’s value suffers from a drop in ETH.
As the example shows, there is an in-demand use case for cryptocurrency derivatives while the supply of such financial products is currently meager. Moreover, the vast majority of platforms providing digital asset derivatives are centralized and provide very little liquidity.
Through the use of smart contracts, dYdX will enable anyone to create, buy, or trade options on any ERC20 token. Each option will be represented with its own ERC20 token, which will make cryptocurrency options trading easier and, thanks to decentralization, more secure than ever before.
The dYdX Protocol
According to the project’s white paper, the team behind dYdX is developing “a set of protocols that allow several types of financial products to be created, issued, and traded for any pair of underlying ERC20 tokens,” to achieve their mission of “creating truly open markets that are not governed by a central authority.”
For its trading infrastructure, the dYdX protocol uses a hybrid approach that decentralized exchange protocol 0x has pioneered. That means that market makers will sign and transmit orders on an off-blockchain platform (i.e., an off-chain order book) while trade settlement will occur on the blockchain.
More specifically, that means that dYdX protocols will allow traders to trade Ethereum-based financial products at an agreed upon price on a peer-to-peer basis. There will be no need for their smart contracts to be aware of the market price of the underlying asset. Traders will provide orders of their choosing, which are then executed on the exchange. Since it is in the best interest of traders to execute at the best possible price, no orders with better prices will exist, the white paper explains.
“dYdX is fully trustless, so you’ll never need to trust your coins to an exchange or anyone else. dYdX utilizes the 0x Protocol for decentralized exchange functionality, as well as its own fully collateralized peer-to-peer lending protocol. dYdX uses off-chain order books with on-chain settlement to enable efficient markets. Using 0x orders for token exchange allows dYdX derivatives to use existing 0x buy/sell liquidity,” says Antonio Juliano, the founder of the dYdX Protocol, in a blog post.
To aid in the development of its decentralized trading protocols, dYdX was able to raise seed capital from a range of high-profile blockchain investors, including Chris Dixon from Andreessen Horowitz and Olaf Carlson-Wee from Polychain Capital. Other investors included Fred Ehrsam and Brian Armstrong from Coinbase, among others.
For crypto traders interested in margin and derivatives trading but want to avoid the pitfalls of centralized exchanges, future developments coming from dYdX will be interesting to follow.