Here’s a brief history of dYdX so far! I think it should be great context for anyone interested in dYdX. Likely the journey we’ve gone through will be useful to understand for anyone working in the broader DeFi/crypto space as well!
Last updated: April 10th, 2023
Antonio Working at Coinbase
Before joining Coinbase, I didn’t know anything about crypto. Soon after starting working at Coinbase, I got super excited about the future of cryptocurrencies. It was impossible not to. There were so many brilliant and passionate people that were all super excited about Bitcoin. At the beginning of my time at Coinbase basically the only legitimate thing in crypto (that we knew about) was Bitcoin. We were all 100% convinced that Bitcoin would be the only interesting thing in crypto, because if any other chain did something interesting, Bitcoin would just integrate it and use its superior network effects to crush the other chain (😂). Of course that ended up being wrong.
I was especially excited once I eventually wrapped my head around Ethereum: I realized that this was a new paradigm of computing — for the first time programs could be run totally autonomously, deterministically, and without being controlled by anyone else. I was convinced there must be something to build on top of Ethereum that would eventually be huge.
Prior to founding dYdX, I’d been working fulltime on a search engine for decentralized apps. I worked on this for 4–5 months, and nobody ever used it — I had ~10 users ever.
The idea was waay too early. There were only tens of dApps in the world at the time. What is the point of a search engine if there’s nothing to search for?
Learning: This taught me the importance of timing in startups. Being too early or too late is the same as being wrong.
dYdX Founded — July 27
After Weipoint, I resolved to build something that was useful in the market right now. The main way crypto was being used at the time (and still to this day) was for trading and speculation. Around this time was when the very first decentralized exchanges (0x, Kyber) were coming out. I looked at this and thought this was something actually useful being built on top of Ethereum.
Given this, I figured the logical next thing to build would be decentralized margin trading and derivatives. It seemed logical because at the time margin trading (led by Bitfinex) was taking off in crypto, and financial markets evolve over time from spot → margin → derivatives. It didn’t seem like crypto should be any different.
I came up with the name (my main contribution to dYdX 😅) and solo founded dYdX.
I wrote the first version of the dYdX whitepaper (now super outdated, but here it is) and the first basic versions of smart contracts (that version never shipped to production). The initial whitepaper had protocols for margin trading and covered (fully collateralized) options.
I decided to build margin trading first as that was empirically working with Bitfinex.
$2M Seed Round
dYdX raised a $2M seed round @ $10M valuation led by Andreessen Horowitz and Polychain. We were fortunate to also bring on 15–20 top angel investors. dYdX now started to seem like a real company!
Brendan (now Chief Architect), Zhuoxun (head of operations, now left & founded Magic Eden), and Bryce (staff software engineer) joined the team!
Going from one to multiple people helped us move a lot faster!
We initially worked out of a private WeWork office in Soma, and mid-2018 moved to our first office near Jackson Square.
$10M Series A Round
We raised a $10M Series A @ $40M valuation. The round was again led by Andreessen Horowitz and Polychain. This gave us 5x more capital and a much longer runway (we were still not making revenue).
V1 Margin Protocol
Brendan and I built the first version of the margin trading protocol. tldr; while it was impressive technology for the time (we invented both flash loans and dex aggregators) it was massively overcomplicated, and tried to be way too general. It took almost a year to ship from when dYdX was founded.
Learning: we should have built something much more special purpose / MVP and iterated
dYdX’s first product, Expo, was built on top of the V1 margin protocol. It was a brokerage (simple trading app) that could be used to buy leveraged tokens. Leveraged tokens were tokenized versions of short/long margin positions on ETH.
The idea was that we would make a much simpler way for users to margin trade — just buy a token and get leverage! We thought that this would expand the market of leveraged trading and drive users who found full on exchanges (like Bitfinex) too complex to dYdX.
At its peak, about $50k a day was traded on Expo.
Learning: We were wrong. We found our users didn’t want a simple trading product, and the abstractions we’d built to make trading simpler made it harder for them to do what they wanted. Our users were not simple, they were complex. They wanted a full on exchange.
We built and launched the second version of the dYdX margin trading protocol, codename “Solo”. This version was more powerful and based on a pool based lending approach (which Compound popularized, and we replicated) which solved some issues with the original protocol.
Margin Trading Exchange
Taking our learnings from Expo, we launched an exchange product targeted at more sophisticated traders.
This went pretty well, and pretty much immediately increased our volume to ~$1m / day.
I encourage you to read this review of the product by Su Zhu to get a sense of where it was at.
Tahoe Summer Offsite
We took our first offsite to Tahoe over the summer. We did some hiking and general hanging out 🍻
dYdX Order Book
Up until this point dYdX had not built its own trading system. Instead, we integrated with a third party DEX, 0x to source buy and sell orders for ETH. Our users experienced a number of issues with this, including high revert rates (eg a user would place a trade and then later would find out it failed) and low liquidity.
So we decided to build our own orderbook based trading system. This allowed us to build our own liquidity, and address a number of the product issues. This worked well and allowed us to quickly become one of the most liquid DEXs at the time.
Learning: Vertically integrating more of the stack under our control can often result in a better product experience
Tahoe Ski Offsite
We got a big Airbnb together in Tahoe, and went skiing!
In March, we turned on trading fees and started making revenue for the first time!
In April, we launched a brand new protocol for Perpetuals on BTC. We soon after launched perpetuals for ETH and LINK.
The decision to move into perpetuals was driven by an explosion of volume on perpetuals that was driven by Bitmex at the time. Bitmex had rapidly surpassed Bitfinex and others in trading volume driven by leveraged trading of perpetuals. We (correctly) saw this as an important emerging trend in crypto trading and felt the time was right to shift into derivatives trading.
Before us, nobody had built perpetuals trading on a DEX before. At the time, it was unclear if we would be able to successfully build perpetuals in a decentralized way. Obviously the bet paid off huge for us in the long term.
Launching perpetuals also allowed us to support trading of cross chain assets (eg BTC). We initially thought trading BTC on a DEX would be the killer use case, but were proven wrong and our ETH perpetual ended up having a lot more volume.
At first the trading volume of our perpetuals was lower than our margin trading product. One issue was that the V1 perps protocol only supported isolated margin (users had to deposit collateral separately for every market). This made it really hard for us to build liquidity and launch new markets. For this reason, we only ever had 3 markets on our v1 perps.
Learning: Being early (not first, but early) on trends, and not being afraid to throw out / deprioritize everything we’ve built before can have huge benefits
The Rrise of COMP & Uniswap
Most people don’t remember this, but dYdX was the #1 DEX by volume in early 2020 by a lot. At times we were approaching 50% market share. We were doing ~$10m trade volume / day at the time.
Compound’s launch of COMP, and the subsequent explosion of liquidity mining & DeFi tokens changed all that. The exponential success of COMP & its liquidity mining (leading to a 100x increase in TVL for Compound almost overnight) rapidly spurred a huge amount of new DeFi tokens.
Naturally people wanted to trade these tokens. But many of them were only available to trade on Uniswap (which could easily add new markets extremely quickly). This led to a massive 100x increase in trade volume and adoption for Uniswap again almost overnight.
We were left in the dust, and completely missed out on this trend. We were totally unable to add new markets and only had 3 while Uniswap had hundreds. Our market share rapidly dropped from ~50% → < 0.5%.
Learning: it’s important to predict, or at least be able to quickly respond to dramatic changes in market conditions
Crushed by Gas Fees
A major side effect of the rise of DeFi was a 100–1000x increase in gas costs on Ethereum. At this point, we were subsidizing (paying) gas fees for our users. Up until this point, this was fine as the gas fees only amounted to a few cents per trade, and the trading fees we were making more than covered them. Now, executing a single trade was costing us $100+ in gas fees, and our trade fees nowhere near covered them.
We started hemorrhaging money at an alarming rate. On the highest volume days we would lose tens of thousands of dollars as people traded on the exchange. This caused our runway for the whole company to drop to an alarming 9 months (ie we would totally run out of money in 9 months if we didn’t take action).
So we did take drastic action. We raised our minimum trade size to upwards of $10,000 (the minimum amount you could trade on dYdX), and eventually imposed a flat trade fee proportional to the gas fees per trade (so our users had to pay $100+ fees for a single trade). This dramatically hurt volume and adoption, just when the rest of DeFi was exploding.
$10M Series B
We needed to raise more money or the company was looking like it’d go out of business.
At this point, our long term plans were to never fully decentralize, but rather remain a profit generating business with a central orderbook on top of the protocol forever. I did not believe that it was possible to build a fully decentralized product with the current technology that could support the demands of professional traders (our core users).
This led to an existential question for us: if we never became fully decentralized, what was our competitive advantage over Binance & FTX? What could we do 10x better than them? Honestly, I didn’t really have a good answer at that point.
And so we got rejected to lead the round by basically every major crypto investor in silicon valley (a16z, Polychain, Paradigm, etc all declined to give us terms to lead the round). Luckily we still ended up raising on decent terms from Three Arrows Capital. We raised $10M at $80M valuation (we intentionally sold less % than before, as we knew we were in a rough spot and that’s not an ideal time to raise). Three Arrows was initially a strong partner before getting liquidated (RIP). Even in retrospect, I think it was a solid decision to raise that round from them given the circumstances, though it did reinforce to me the importance of finding high integrity partners that can stand the test of time alongside you.
New Office in SF
After COVID, we moved into a new office in SF in March! We’re still there today.
Layer 2 — Starkware
We needed to make a significant change to our product as our business was getting hammered by gas fees and we were unable to keep up with Uniswap, FTX and others from a product perspective. We determined it was time to move off of Ethereum L1 and onto a more scalable chain/rollup.
After considering a number of different options (Starkware, Solana/Near, building our own optimistic rollup chain), we landed on Starkware. It offered us relativeley easy on/offboarding from Ethereum, high throughput, low latency, and was by far the most production ready.
We initially planned for the Starkware build to take 3 months, but it ended up taking 7. The Layer 2 product launched in April ‘21.
Importantly, the increase in throughput of Starkware vs Ethereum allowed us to switch to cross margining (multiple positions could be collateralized by one margin account). This allowed us to build much better liquidity, and launch many more markets. We now have around 30 markets, up from 3.
Soon after launching L2, our trade volume spiked up about 5x to around $30M per day.
$65M Series C
In June ’21 we raised a $65M Series C @ $215M valuation led by Paradigm. In addition to a great new lead investor, we brought on a number of high quality trading firm investors.
We took an offsite to LA and stayed in a Castle 😅 Lots of fun and great to meet the whole team post-COVID
dYdX Foundation Releases $DYDX
In Summer ’21, the dYdX Foundation, an independent Swiss foundation, was created. The Foundation released DYDX, the dYdX Protocol token, in August ’21. I encourage you to read the launch post, and understand the retroactive mining, trade liquidity mining, LP liquidity mining, safety staking pool, and liquidity staking pool.
I think an excellent job was done setting up the incentives — I’d argue better than any other DeFi protocol to date. After the launch of the token, dYdX trading volumes skyrocketed to over $2B / day.
Bear Market Begins
Things started to turn from bull to bear market pretty quickly in crypto. This caused a massive (often 90%+) collapse in asset prices over the next year+. This caused a large decline in trading volume across all crypto exchanges, including dYdX. The bear market continues still to this day.
This time though, we were as well prepared as we could be. We had (and still have) a very high amount of cash on our balance sheet (from fundraising and being very profitable) giving us 6 years+ of runway. Our long term focus and past years of experience with crypto cycles let maintain great momentum and morale for the team despite the downturn.
We opened up our second HQ in NYC in SoHo!
The team took an offsite to Vegas in February! It was a blast 🃏🤩
Work on V4, the fully decentralized version of dYdX, started in earnest. We released a blog post detailing our plans for V4. This continues to be the highest priority project for the company.
NYC Becomes HQ
In June, I decided to move to NYC. A lot of the team in SF decided to move as well which was awesome. With this, our de facto HQ had moved to NYC. Today over half of our team is here in NYC.
Up to this point we had been spending a lot of effort on growth. This included things like: paid marketing, affiliate programs, trading competitions, and deposit bonus campaigns.
At the height, almost half of the company ended up being focused on it. But, to be honest, we didn’t have a lot to show for it. Our user growth showed to still be mostly organic and most of the campaigns were not effective. I was getting quite frustrated with the amount of focus me and a lot of the company were spending on it.
So one week, I decided to abruptly cancel it all. Full stop. We went from half the company being focused on growth to 100% being focused on core product. This was a tough decision at the time, but we now all agree it was the right one. We still need to achieve strong product market fit, and need to be long term focused on building the best possible product rather than short term growth.
This was probably the most shocking day I’ve had working in crypto. Almost immediately one of the biggest (both in usage and brand) exchanges in crypto just blew up. It’s important to remember how people in the industry (including me) thought about FTX pre-collapse. Most people saw them as moving incredibly fast, a dangerous competitor, and having arguably the best brand in crypto.
And then it just went down in flames. The morning it happened, I felt an incredible sense of conviction that what we’re building is incredibly important. I knew that DEXs must be the future — there just really seem like any other way to build an open, transparent, and safe financial system for the world.
We had an all hands that day that we recorded. I would encourage you to take a listen.
St Lucia Offsite
We took an offsite to St Lucia in October! By this point the company had grown to over 35 people. Everyone had a great time bonding over spikeball, volleyball, and more than a bit of drinks 😅
By the end of Q1 the team had grown to 50! We had a big influx of strong engineering hires. We continue to basically only hire in engineering and product.
Tech Market & Bank Collapses
Interest rates spiking caused a huge collapse in tech valuations, especially for growth stage companies (of which we are one). This caused a ton of well documented turmoil in most tech companies. However, because of our long term focus + many years of runway + intentionally keeping the team at a small headcount, we did not have to do layoffs and actually kept hiring.
Interest rates also led to some high profile bank collapses. Luckily we’d had the foresight to not hold any significant company assets on any of the collapsed ones, so we’re unaffected. However, this also caused a good amount of uncertainty in most stablecoins, including USDC depending to $0.90. It recovered fairly quickly, but the banking uncertainty continues to be an issue.
We took an offsite with the whole team to Vail! This time we had to get 10 airbnbs to fit us all 😯 everyone had a blast skiing, chilling, and connecting with coworkers in person 🎿🍻
The entire team continues to be focused on building and shipping V4. Building a pretty novel sovereign blockchain is a challenging task. Consequently, the mainnet launch deadline is pushed back to September.
V4 Private Testnet Launches
In March, the private testnet for v4 launches! This includes the core trading experience running on external validators for the first time.