Place/Date: - October 6th, 2021 at 2:13 pm UTC · 5 min read
The issue facing the blowing DeFi application dYdX is one which typically concerns investors throughout the cryptosphere: Despite the huge growth of, and gains posted by the protocol recently, is there an inherent risk that the phenomenon is a bubble that is ready to burst?
dYdX’s total market capitalization reached $26 billion, comparing with the best growing exchange in the cryptocurrency industry, FTX is only $19 billion for the latest round of valuation. It is crucial, then, that we rationally analyze the protocol from different angles to discover if there is a huge bubble risk hidden behind the dYdX’s astonishing growth story.
From the perspective of its economic model, the dYdX token does not have any deflation mechanism; with its white paper clearly stating that a 2% oversupply will be made each year for a period of five years. In addition, the total amount of dYdX will remain in circulation. More worrying, dYdX will release 5 million tokens to the market on October 5, freeing up roughly $120 million, and new round of releasing will happen every 28 days. If funding, market consensus and the efforts of dYdX’s marketing team fail to support this heavy selling pressure, then it seems inevitable that the price of dYdX will plunge.
Beyond even these pressures, the entire design of the whole dYdX itself is at risk. According to news released by the dYdX team, the revenue of the platform is fully owned by the team behind the platform, and there are no additional measures such as the repurchasing of platform tokens. The team makes profits through the platform’s native cryptocurrency and is facing accusations of tax evasion. In addition, since the token is directly issued by the company and there remains the question of dealing in illegal derivatives, the company also faces accusations of illegally issuing securities.
However, US legal regulations pose a far greater risk to dYdX. According to the relevant US Securities and Exchanges Commission (SEC) regulations, exchanges that are non-compliant with SEC regulations are prohibited from providing cryptocurrency trading services to US users; however, a large number of US users are involved on the dYdX platform. Furthermore, dYdX has a designated operating body in the form of a company called dYdX Trading Inc, whose office address is 300 Broadway, Suite 29, San Francisco, CA 94133, United States. Due to the outstanding questions regarding the firm’s position vis-à-vis US legal regulations, supervisory authorities may demand that the company ceases trading at any time.
As an American company, dYdX also offers lending services, which the cryptocurrency exchange Coinbase is prohibited from offering in the United States. On the surface, dYdX claims it operates as a DeFi platform, but there is a huge risk that this may simply be a cover for evading regulation. From a regulatory perspective, it is extremely risky for companies to offer lending services without adhering to legal requirements.
As a decentralized exchange (DEX), dYdX’s performance from a technical perspective is also fairly prosaic. The dYdX protocol is set on Starkware, a second-layer network of Ethereum, using the StarkEx trade engine, meaning that it does not possess its own core technology. People in the industry know that it uses this type of alliance chain system; and the layer one protocol developed by dYdX has failed to impress for a year now.
At present, the tokens generated by dYdX trading mining are essentially the same as the concept of “trading is mining”, which appeared in 2018. The process of mining itself needs support from rapid flow growth: after developing to a certain point, if the growth of flow cannot cooperate or keep up with the circulation of platform tokens, the whole economic model will collapse and those who have profited simply abscond with their gains, leaving both users and the project’s owners out of pocket. This, essentially, is similar in nature to how a Ponzi scheme operates.
dYdX is an Order Book Dex, which conducts point-to-point transactions between traders, and a three-party game between market makers, whether they are bull or bear traders. Decentralized exchanges are actually franchised by designated market makers, providing market liquidity and depth. Huge market fluctuations allow market makers to remove most of the depth and profit from the price difference, which causes retail investors to either incur losses, or worse. On September 28, the combination of bad behavior among market makers and problems related to the dYdX matching engine led to a purchase price which was almost $1000 higher than the selling price. This resulted in many retail investors losing their money, and users with charges going broke.
The above analysis clearly indicates that dYdX’s current valuation is artificially high, which is the result of operating entirely in the secondary market through limited early-stage liquidity. Such a situation will likely lead to users making losses and this is illustrated by the user liquidation data of the dYdX platform over the past 30 days, which shows that a large number of platform users are either broke or have incurred losses. Users may look to retrieve these losses by reporting the situation to the relevant departments of America’s SEC.