dYdX – the open trading protocol for DeFi – announced their plans to establish a business model around their product which includes elements of DEX trading, lending and derivatives.
We’ve published an update with regards to our business model at dYdX:https://t.co/lD6Orzq4CF
— dYdX (@dydxprotocol) March 3, 2020
The permissionless margin trading platform will introduce trading fees starting on March 10th with the goal to earn revenue as a company and incentivize liquidity on dYdX. The fees will derive from a percentage of trade volume with two different tiers based on volume.
Makers, users whose trade orders add depth and liquidity to the order book, will not incur fees across any trading pairs. Instead, takers will incur fees as there trade orders remove liquidity from the exchange.
Takers with orders over 0.5 ETH will pay 0.15% and 0.50% if it’s less than 0.5 ETH. In addition, the DAI/USDC pair will have a separate fee model where takers in excess of 0.5 ETH will incur a 0.05% trading fee compared to 0.50% for takers of less than 0.5 ETH.
Graphic via Announcement Post
Historically, dYdX has stated plans to capture value either through the protocol or a product. The new revenue stream is an attempt to monetize their exchange product while a value capture mechanism on the protocol level is continually being explored.
In practice, tokenizing the protocol layer is a common move for crypto projects at large, allowing a native token to play a role in governance (0x, Maker, Compound), collateral of last resort (Maker), or fee reduction/rebates with buy/burn models (Binance, FTX, Huobi, etc.).
The ability for dYdX to monetize comes after a significant amount of growth in recent months. In February, the dYdX exchange product experienced over $150M in monthly volume – allowing the company to explore potential revenue models with the surge in volume.
Graphic via Announcement Post
dYdX officially has the highest volume DAI market of any exchange 📈🚀 pic.twitter.com/3h9OR253O1
— dYdX (@dydxprotocol) March 3, 2020
Since 2018, dYdX has consistently shipped new products built on top of the protocol. In 2018, the development company released the P2P lending protocol + front-end for minting and burning short/long margin tokens. The following year in 2019, they released its pooled lending protocol, the dYdX exchange, native order books and liquidity. Lastly, the team hinted at a new product announcement in the coming months – expanding the potential for the permissionless trading protocol.
We’ve launched an updated Balances page!
Now it’s easier to track your portfolio and earnings on dYdX 📈🎨 pic.twitter.com/rL14AOsRDA
— dYdX (@dydxprotocol) March 2, 2020
The team shared that trading fees will help cover the transaction costs that the company has been fronting since its inception – costing the team $40,000 in the month of February alone. By not requiring dYdX users to pay any transaction fees to sign messages to create orders or executed the matched trades on-chain, the product offers a smoother user experience for its traders.
Key Takeaways
With this announcement, it is becoming clear that DeFi projects are beginning to explore the implementation of sustainable business models in a web3 world. In the past month, we’ve seen Compound tokenize its lending protocol, Dharma integrate a revenue model on their savings application, and Blocklytics leverage an NFT redeemable for advertisement on its Uniswap Pooling dashboard.
The common theme? Get traction first, establish a business model later. Moreover, it is becoming clear that tokenizing the protocol layers and monetizing the product layer is becoming common practice among DeFi projects.
This is a prime example seen in both Compound and now dYdX. With Compound soaking up over $100M in its lending market and dYdX generating over $150M in monthly trading volume, both protocols established significant liquidity and a dedicated userbase before looking to capture value (one on the protocol layer and the other on the product layer).
In the coming future, we can expect more projects to explore value capturing mechanisms once they’ve retained a significant user base and the DeFi ecosystem as a whole grows in tandem.
If you’re interested in learning more about dYdX’s business model, read the official announcement post here. To get started trading on dYdX, you can visit the exchange dashboard here.
Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.