How Antonio Juliano plans to make DeFi platform dYdX ‘one of the biggest crypto exchanges, period’

Fresh off a $65 million fundraise, derivatives exchange dYdX founder Antonio Juliano is focused on all the normal stuff: hiring, product innovation, geographical expansion.

But there is also a bigger, more esoteric goal: decentralization.

“One of the big things we’re going to be working towards in the next year or two is full decentralization of the platform,” says Juliano, in an interview. “Our goal really is to get to a point where we’re only publishing open-source code and all of dYdX is run natively on the blockchain.”

Today, dYdX is a sort of hybrid. While it is built on Ethereum smart contracts, it also runs a centralized order book and matching engine.

Decentralization drives are typically associated with idealism rather than profits. But Juliano thinks that being a DeFi platform is the key to unseating the competition: centralized crypto derivatives firms such as Binance, Huobi, BitMEX and FTX.

“All of these people have a huge amount of resources,” says Juliano. “The big bet that we’re taking is that decentralized exchanges will be really big, first of all, and second really big for trading derivative products, which I think is looking more and more likely all the time.”

Juliano says he has given himself three to five years to make dYdX “one of the biggest crypto exchanges, period.” 

DeFi speedbumps

Recently, though, dYdX has spent much of its energy on overcoming technical constraints associated with public blockchain networks. Like many DeFi platforms, dYdX is built on Ethereum — and has been held back by the inefficiencies that have tormented the wider network.

“A huge problem that’s plagued decentralized exchanges on the whole, dYdX included, was gas fees and transaction fees on top of Ethereum,” says Juliano. In March this year, gas fees — levies attached to transactions on the Ethereum network — reached on average $100 per trade on the dYdX platform. 

To reduce those costs, dYdX has launched a new Layer 2 protocol for cross-margined perpetual swaps using a platform called the StarkEx scalability engine. StarkEx is the brainchild of StarkWare, which creates scaling technology for blockchains that use zero-knowledge proofs.  

Users of dYdX’s new Layer 2 protocol pay no gas fees at all, thanks to StarkWare and its technology, which is based on ZK-Rollups. The basic idea behind rollups is that while transaction data remains on-chain, transaction computation is shifted to a cryptographically secure environment off-chain, where they can be processed more efficiently and don’t contribute to network congestion. 

There are still gas fees to pay with dYdX’s new Layer 2 solution. But dYdX itself picks them up — and they are roughly 100 times cheaper than what the platform’s users were previously paying, according to Juliano.

“From the user’s perspective we’re able to offer very competitive fees now in terms of what users are used to on centralized exchanges,” Juliano adds.

The StarkWare integration also enabled the launch of “cross-margined” perpetual swaps. dYdX customers can now use a single account to fund and collateralize positions in bitcoin, ether and other cryptocurrencies. Previously, they would have had to open five different accounts to trade five different tokens.

The platform is also faster, according to Juliano. “Now when you make a trade on dYdX, because of StarkWare’s system, it settles immediately — like as fast as a centralized exchange, which is really different than any other decentralized exchange that’s running on Layer 1,” he says.

The other big change brought about by the StarkWare integration is that dYdX can offer traders higher amounts of leverage — up to 25x on bitcoin and ether perpetuals. This was made possible because of improvements to the way the platform tracks the prices of different cryptocurrencies.

“The thing you care about if you’re a leveraged exchange is how fast your system can react to price changes. For example, if the price falls, how quickly can you liquidate people? And that informs how safe it is to offer a given amount of maximum leverage on the system,” explains Juliano.

Before the Layer 2 launch, dYdX’s price oracles — which connect the blockchain to real-world data sources — had five to ten minutes of latency, meaning they could be five to ten minutes behind a big crash in the price of a token. Latency has now been cut down to a few seconds.

The case for DeFi

Armed with a more efficient toolkit, the hope will now be that dYdX’s community builders can spend more time drawing attention to the benefits of trading crypto derivatives on a DeFi exchange. Juliano sees a couple of key selling points — first and foremost security.

“It’s just much more secure to trade crypto on a decentralized exchange and own your own private keys the entire time you’re trading on the exchange,” he says. “This is especially important for more sophisticated products like derivatives because when you’re trading derivatives you must store your coins on the exchange you're trading them on the entire time you have a position open.”

His comment drives at the heart of the crypto ethos: that blockchains are “trustless” systems, meaning there are no people with the ability to subvert them, and so no need to take on risk by placing trust in people. 

“We can code exactly the roles of these complex financial transactions that our traders are entering into directly into smart contracts that live on the blockchain,” Juliano says. “So the settlement is no longer, ‘trust us, we’re a reputable company, we’re dYdX.’ Look at our smart contracts that are open-source, audited. It’s a really good way for us to bootstrap trust and transparency on the platform.”

Several months removed from the launch of dYdX’s Layer 2 platform, there are hopeful signs for the firm.

Cumulative trading volumes across perpetuals, margin and spot trading on dYdX reached $2.5 billion in 2020, up from just $63 million in 2019. By January 27 this year, the protocol had already surpassed $3.5 billion in total trading volume.

In the past five months, the Layer 2 protocol has supported over $2.2 billion in volume from over 11,000 traders.

And those volumes — although modest by the standards of the world’s largest centralized derivatives marketplaces — have been driven by a dYdX team that is just 16-people strong (there are plans to double it over the next year).

The leanness of DeFi operations is known to make venture capitalists salivate over the prospect of low-cost bases and huge margins. But Juliano is not focusing on profits. Not yet, at least. 

“There are a lot of technical challenges, there are a lot of growth challenges — like it’s always hard to build a two-sided marketplace up from zero — to overcome,” he says. “But it’s important for us to build for the five-year future rather than just trying to maximize our profit at every point along the way.”