DeFi Upstart dYdX Briefly Overtook Coinbase in Crypto Trading

(Bloomberg) -- In the blink-and-you’ll-miss-it world of decentralized finance, the cryptocurrency exchange dYdX stands out for more than just its unusual name, which is derived from the mathematical notation for a derivative. 

Using a combination of low fees, coin rewards and perpetual futures contracts that fueled demand on some of the pioneering crypto exchanges, the autonomous trading platform overtook industry behemoth Coinbase Global Inc. in trading volume for one day last month. While supplanting so-called centralized exchanges such as Coinbase has long been a goal of DeFi advocates, the milestone for dYdX was even more noteworthy in that Coinbase co-founders Brian Armstrong and Fred Ehrsam are among the high-profile crypto investors in the San Francisco-based startup that began in 2017.

Trading volume began to explode in August when a foundation created earlier to spur adoption of the protocol -- which uses software to directly connect buyers and sellers -- began distributing tokens via reward programs. The dYdX token became transferable on Sept. 8, causing volume to skyrocket as speculators sought to take advantage of the high degree of leverage available to users wanting to make big bets on future returns with little money down. 

This type of high-stakes gambling in the crypto world started in 2016, when BitMEX became the first exchange to offer so-called perpetual swaps that allow users to hold exposure indefinitely. Daily trading volume on dYdX has swelled to more than $2 billion, up from around $100,000 in early March. The firm only offers perpetuals to traders outside the U.S. Coinbase doesn’t offer trading in futures, which now account for more than half the daily volume in the crypto market. 

Decentralized exchange Uniswap helped pioneer the idea by issuing tokens as an incentive, and to let users vote on various exchange-related matters. Since then, incentives, like earlier “airdrops,” have become commonplace in DeFi, with the Avalanche network recently offering $20 million of token incentives to users of a decentralized exchange called Trader Joe. As with other novel DeFi programs, the question remains whether an exodus will happen just as fast if incentives were to diminish. 

“It’s hard to say, but I’m very optimistic that the growth will be sustainable,” said Antonio Juliano, the 28-year-old chief executive of dYdX Trading Inc., which built the exchange. Juliano, who worked at Coinbase and Uber Technologies Inc., added that “the thing I’ve been most encouraged by is that the growth we’ve seen hasn’t just been one temporary boost followed by dropoff -- instead it’s been continuous exponential growth.”

Under the incentive program, prior users of the exchange could score free tokens by executing new trades. One user on Twitter, who declined to be interviewed, claimed to have received $900,000 in free tokens -- a claim Juliano, said is likely genuine. Traders also get rewarded with news coins based on how much they trade, and based on the amount of open interest on the derivatives exchange. Market makers earn rewards, too. 

Some of the biggest winners are actually equity investors who received tokens when taking a stake in dYdX Trading. The firm raised $65 million from the likes of Ehrsam’s Paradigm Operations, QCP Capital and Kronos Research in June. The market value of the dYdX token has more than doubled since early September to about $1.3 billion, according to CoinMarketCap.com data.  

“We get the same tokens as everybody else on the network,” said Avichal Garg, co-founder of Electric Capital, who first invested in the project in 2017. “We have the same rights as all other users.” 

The exchange executes hundreds of thousands of trades a day, but it only has between 5,000 and 10,000 weekly users -- mostly larger investors known in crypto as whales, Juliano said. Coinbase has more than 68 million registered users. Despite the difference, the select clientele makes some observers optimistic about dYdX’s future prospects.

“I think it will continue to see success in the DeFi derivatives landscape, similar to how Uniswap cemented itself as the leader in the spot market,” said Jack Purdy, an analyst at Messari, a crypto research firm. “The rewards system is similar to how many DeFi projects bootstrap initial activity and is easily replicable. However, there are various factors that provide moats for protocols enabling them to not only capture, but retain value longer-term.” 

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