dYdX is one of the main open-source lending protocols for DeFi, in other words, decentralized cryptocurrency loans. It is a non-custodial trading platform based on Ethereum and designed for experienced traders.
This platform allows lending and margin trading with supported assets, currently consisting of ETH, DAI and USDC, although there are plans to add others. dYdX is a decentralized application (dApp), and all the assets it holds are stored on the blockchain by special smart contracts, without intermediaries. In addition, anyone can use the platform, anonymously, without having to register an account or trust a third party, maintaining full ownership of their assets.
The interest rates that are applied vary depending on the asset and the relationship between supply and demand. Interest accrues and is paid continuously, while the platform retains and sets aside 15% as an insurance fund. In order to be able to take out a loan, it is necessary to lock up collateral equal to at least 125% of the value of the loan, and if the value of the collateral falls below 115%, it will be automatically liquidated to pay it off. This liquidation involves a 5% penalty, allowing other users to benefit from the purchase of the liquidated assets.
As far as margin trading is concerned, it is possible to open long positions with leverage up to 4x, while for short positions the maximum leverage is 3x. However, open positions, both in margin trading and lending, must be closed within 28 days, otherwise, they are automatically closed and the automatic liquidation of collateral takes place.
dYdX does not charge fees and does not have a native token.
As a result of the lending feature, the platform allows those who deposit cryptocurrencies to earn interest every second that the funds are locked in the protocol. As it is a decentralized, non-custodial platform, this is a relatively low-risk way to passively earn interest on crypto assets while always maintaining full control over them.
The interest earned by locking assets originates from the interest paid by those who borrow them, as dYdX actually creates a single pool of liquidity where on the one hand, it brings all the locked assets together, and on the other, it allows those who are in need of a loan to borrow as much as they want. Thanks to the over-collateralization of loans, for which a minimum collateral of 125% is required, the platform guarantees that all those who borrow assets are able to repay them, and with automatic liquidation when the ratio of the collateral to the borrowed funds falls below 115%. All this is process occurs automatically.
Those who borrow or open a leveraged trading position have the obligation to return the amounts received within 28 days, whereas those who lock assets to earn interest can leave them on the platform for as long as they wish, and are also totally free to withdraw them at any time.
To use dYdX it is necessary to have a compatible crypto wallet (MetaMask), ETH tokens to pay transaction fees (at least $5 in ETH is recommended), and a sufficient amount of supported crypto assets to use within the platform. So far these include two stablecoins anchored 1:1 to the US dollar value, DAI and USDC, as well as the ETH itself. To earn interest it is necessary to connect the wallet and deposit USDC, DAI or ETH, paying the fee in ETH. There is no minimum limit, which means it is possible to actually deposit any amount.
Since every transaction to and from dYdX is recorded on the Ethereum blockchain, there is a fee that must be paid in ETH, thus the more transactions are made the more ETH must be held in the wallet in order to pay for the transactions.
A wallet compatible with dYdX is MetaMask, which allows interacting directly with the protocol. After depositing the necessary funds into the wallet, the “Connect Wallet” button on the dYdX interface must be clicked to link the wallet to the platform, after that it is possible to proceed with the deposit.
In the “Balances” tab, simply click on “Deposit” to proceed with depositing the assets from the wallet to the platform. After the deposit procedure is completed, it is possible to see the updated balances with the interest earned every second, and it is always possible, with the same procedure, to deposit additional funds. Using the “Withdraw” button it is possible to withdraw the assets by sending them to the connected wallet.
Taking out a Loan
Here as well the wallet is connected to the platform, after which it is possible to use the “Borrow” function where the asset to be borrowed, and its quantity, can be indicated. It is also possible to specify the asset to be locked as collateral, entering an adequate amount so that its value is at least 125% of the value of the desired loan.
Obviously, it is necessary to have deposited on the connected wallet a sufficient amount of funds to provide as collateral in advance, consequently, it is possible to obtain loans equal to a maximum of 80% of the total value of the assets held in the connected wallet. Once the loan is granted, the funds put as collateral are transferred to the platform’s smart contract, whereas the user receives the requested assets on their wallet.
The interest calculation starts immediately, and within 28 days the user must return the borrowed assets plus interest to retrieve the funds put as collateral. If this does not happen, the collateral is automatically liquidated, with a 5% penalty. In other words, the previously locked funds are automatically put up for sale until sufficient funds have been recovered from these sales to repay the loan, the interest and the penalty. Once this has been achieved, any unsold collateral is returned to the owner who used it to collateralize the loan.
Margin trading functions in a similar way, as it consists of opening a leveraged position by providing sufficient collateral to cover what is borrowed through leverage. However, this is a more complex process, mostly suitable for experienced traders, as it introduces a new level of risk, related to any losses that may be generated by the same open position, whether long or short.
The collateral that is required from those who open a leveraged position varies depending on the type of position (long or short), the size, the amount of leverage and the asset prices at the time. For example, a long 2X position must be collateralized at 200% after opening, according to the prices of the oracle.
On help.dydx.exchange it is possible to find a lot more technical information for those who want to trade on the platform in an advanced way, considering that it is to all intents and purposes a platform suitable especially for experienced traders.
The amount of total assets locked on dYdX is over $20 million, making it one of the top 10 DeFi platforms in the world. The vast majority of the funds are locked in ETH, while DAI and USDC currently cover only a very small part.
dYdX was launched in late 2018, but until May 2019 it had attracted little interest. However, since May 2019 interest in DeFi platforms has exploded, and dYdX has clearly benefited from this explosion. In November 2019 it peaked in terms of amount of locked assets, exceeding 30 million dollars, and then dropped to 13 in December. From the end of January 2020, it began to grow again, rising to 28 million at the end of February, before falling back to just over 20 million.