Tougher Regulations = Boom for On-Chain Derivatives Market? Online Review of dYdX Token Design and Market Outlook

Chinese regulators have strictly banned cryptocurrency trading, prompting a shift towards decentralized trading in spot and derivative markets. Following the ban, the dYdX decentralized derivatives platform saw a significant increase in trading volume and a doubling of token prices. Chinese media outlet "Wu Blockchain" tweeted, "A huge number of Chinese users are entering the DeFi world, with a large growth in MetaMask and dYdX users. All Chinese communities are discussing how to use DeFi." While this phenomenon lends some support to the hypothesis that "regulation leads to a rise in on-chain derivatives concepts," some believe that the popularity of the token itself may not be directly related to the platform.

dYdX token prices, trading volume, and profits have all seen significant growth:

Ranked third in protocol profits:

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dYdX is a good product, but when it comes to tokens...

"I like dYdX as a product, it showcases the immense value of on-chain perpetual contracts. However, I feel that its potential has been overestimated," said Adam Cochran, Partner at Cinneamhain Ventures.

He believes that the crackdown on centralized exchanges in China has added momentum to the on-chain derivatives space, but this is just the beginning. However, unlike other projects, dYdX's governance token DYDX can only be used for voting governance, with no fee sharing, no other use cases, and no buybacks. Fee income goes to equity holders, and this regulation currently seems unlikely to change through governance. Cochran points this out because dYdX founder Antonio Juliano has stated that they have never considered nor will share fees with DYDX token holders:

Looking at dYdX's Fully Diluted Value (FDV), which refers to the total market value of circulating + uncirculated tokens, it has already reached $20 billion and surged to $24.7 billion before the deadline. For comparison, the recent valuation of FTX exchange is only $18 billion. Cochran believes that unless dYdX's trading volume can continue to grow and maintain the same trading depth, it will be considered overpriced.

Cochran thinks that some may compare DYDX to UNI. While Uniswap's governance token UNI, like DYDX, only serves for voting with no further utility, Uniswap already has a substantial trading volume to support its token price and has the opportunity to bring more niches through governance. He also cites MakerDAO's governance token as an example, which also only serves governance functions, but due to the various locked assets on the MakerDAO platform and its integration with different platforms, users are motivated to maintain its value. However, he believes that even if DYDX suddenly becomes worthless, it will not affect the large traders using dYdX for trading.

He believes that dYdX's smarter incentive design is the "Trading Rewards", which provides DYDX token rewards based on a certain period of trading volume, but this only offers short-term benefits. In addition, dYdX's excellent user experience, liquidity mining program, and integration of layer-two solution StarkWare are what make it the best decentralized derivatives platform at present.

Nevertheless, some users point out that dYdX is not completely decentralized at the moment, and the token design intentionally avoids profit sharing to mitigate compliance risks. Once it moves towards decentralization, it could bring more value to the token.

Bullish on the on-chain derivatives market?

Cochran mentioned that he is very optimistic about the on-chain derivatives market, which still has a lot of room for growth. These observations also help in creating the correct incentive model for tokens in this market to achieve long-term success. He also mentioned other market competitors: PERP, INJ, MCB, DDX, FST, based on the market value that dYdX can achieve, he believes they have even greater profit potential. Please note that Cochran stated he holds the above-mentioned tokens, including DYDX, and this is not investment advice.

"No KYC" and "regulatory resistance" seem to be selling points of on-chain derivatives, especially with recent actions between China and the U.S., further increasing people's interest in this area. These platforms also have some basic self-protection measures, such as banning specific region IPs or you will see dYdX's trading rewards, with a disclaimer that the rewards are provided not by the development company dYdX Trading Inc., but by the dYdX Foundation.

Whether the on-chain derivatives market can become mainstream depends on whether regulations will completely crack down on centralized exchanges, and whether on-chain experiences such as speed, liquidation mechanisms, margin mechanisms, fees, etc., can meet the needs of off-chain users; furthermore, DeFi regulation is another potential risk.