Exploring the Future of DYDX

Background

On 3 August 2021, dYdX Foundation launched $DYDX, a governance token that allows the dYdX community to govern certain aspects of the dYdX Layer 2 protocol on Ethereum (“dYdX v3”) to align incentives between traders, liquidity providers and partners. The DYDX token enables a robust ecosystem around governance, rewards, and staking – which is designed to drive future growth and decentralization of dYdX v3.

The dYdX ecosystem is rapidly approaching the potential mainnet release of the dYdX v4 open-source software – the “dYdX Chain”. The dYdX Chain will be a proof-of-stake blockchain network and, as such, if and when deployed on mainnet, it will require a Layer 1 (“L1”) protocol token for staking to validators in order to secure the chain and for stakers of the L1 token to govern the network.

The dYdX community could elect to use DYDX, the governance token of dYdX v3, as the L1 token of the dYdX Chain (if and when deployed after mainnet release). If such an election were to materialize, given that DYDX is an Ethereum-based ERC-20 token, the DYDX token would need to be migrated from Ethereum to the dYdX Chain.

In furtherance of its mission to support and promote the dYdX ecosystem by enabling communities, developers and decentralized governance, the dYdX Foundation has undertaken two activities in connection with a potential migration of the DYDX token from Ethereum to the dYdX Chain. First, it commissioned the development of an Ethereum smart contract (the “Ethereum Smart Contract”) that, if deployed, would enable a permissionless and autonomous one-way bridge for the DYDX token to be migrated from Ethereum to the dYdX Chain (as further described below). Second, it commissioned the development of source code that will be open-sourced such that others may use it to implement a user interface (also sometimes referred to as a “front-end”) to interact with such Ethereum Smart Contract (the “User Interface Code”).

Overview of the Potential Migration of DYDX from Ethereum to the dYdX Chain

When interacted with, the one-way bridge Ethereum Smart Contract would carry out the following functions in a fully permissionless and automated manner:

  • Step 1: Receive and permanently lock the Ethereum-based DYDX tokens sent by the user to the Ethereum Smart Contract;
  • Step 2: Send a wrapped version of the Ethereum-based DYDX token (“wethDYDX”) to the user on a 1-1 proportional basis on Ethereum; and
  • Step 3: dYdX Chain validators can also read and ingest the information in the Ethereum Smart Contract such that corresponding DYDX can be distributed to users by validators on the dYdX Chain (if and when deployed) once there is confirmation that Step 1 above is complete and the Ethereum-based DYDX is permanently locked in the Ethereum Smart Contract.

Neither the Foundation nor any other party will be able to influence or update the Ethereum Smart Contract once it is deployed on the Ethereum mainnet.

The dYdX Foundation plans to coordinate the open-sourcing of the source code for the one-way bridge Ethereum Smart Contract and the User Interface Code and to deploy the Ethereum Smart Contract on the Ethereum mainnet in the near future and, presumably, before the potential mainnet genesis of the dYdX Chain (“Genesis”).

It is important to note that the DYDX token and dYdX Governance are entirely controlled by the dYdX community and it is ultimately up to the dYdX community alone to discuss and decide, through dYdX governance, (1) whether DYDX should be the L1 protocol token of the dYdX Chain or not, (2) whether wethDYDX should have the same governance and utility functions as DYDX on dYdX v3, and (3) if the dYdX community decides DYDX should be the L1 protocol token of the dYdX Chain, then how to organize and carry out any required token migration and/or any other necessary actions.

Disclaimer

dYdX Foundation’s purpose is to support the current implementation and any future implementations of the dYdX protocol and to foster community-driven growth in the dYdX ecosystem.

The Ethereum Smart Contract and the User Interface Code referred to in this blog post (the “Relevant Software”) are solely open-sourced software to be used or implemented by any party in accordance with the applicable open-source license (including, potentially, by the dYdX ecosystem), if desired, and not a product or service provided or enabled by the dYdX Foundation. To interact with the Ethereum Smart Contract, each user would have the choice of using a user interface (if any are provided by a third party, as set forth below) or to connect directly to the Ethereum Smart Contract. The dYdX Foundation will not provide a user interface or front-end related to a potential migration of tokens to the dYdX Chain. Interactions with the Relevant Software are permissionless and disintermediated, subject to the terms of the licensing and code. Users who interact with the Relevant Software will not be interacting with the dYdX Foundation in any way whatsoever. The dYdX Foundation has no control over the use that people make of the Relevant Software, including, without limitation, with regard to (i) potential deployments of the Relevant Software, (ii) potential adaptations, forks or modified versions of the Relevant Software, and their deployment, or (iii) users’ interactions with the Relevant Software. The dYdX Foundation does not make any representations or warranties in connection with the Relevant Software, including (without limitation) with regard to its actual or potential utility or fitness for any particular purpose. The dYdX Foundation will not operate any part of the Relevant Software (or any versions or adaptations thereof) nor will it be responsible for their continued availability.

Due to the open-source nature of the User Interface Code, it is possible that there will be multiple third parties that leverage such open-source code to provide front-end solutions in connection with a potential migration of the DYDX token from Ethereum to the dYdX Chain (“Bridging Solutions”). The dYdX Foundation will not audit and therefore will not be in a position to make, and does not make, any representations, warranties or disclosures with regard to any potential Bridging Solutions. Any Bridging Solutions will have no connection to and are not endorsed in any way by the dYdX Foundation. We encourage readers to conduct their own research and due diligence on the Relevant Software and on any Bridging Solutions that may exist, now and/or in the future.

We explicitly note that, while the dYdX Foundation expects that open-sourcing the Relevant Software and deploying the Ethereum Smart Contract on the Ethereum mainnet will occur in the near future, the Ethereum Smart Contract has not been deployed and is not live on the Ethereum mainnet as of the date of this publication. The dYdX Foundation will provide an update through its official channels if and when the Ethereum Smart Contract is deployed on the Ethereum mainnet. We encourage readers to remain vigilant and only rely on information coming from legitimate and official sources, as we anticipate an increase in potential scams and phishing attacks via social media, messaging apps and websites.

This blog post contains one of many multiple approaches that can be considered in connection with the subject matter hereof. Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone. The dYdX Foundation makes no recommendation as to how to vote on any proposal in dYdX governance related to a potential migration or otherwise, whether to migrate any assets to the proposed new dYdX Chain, or to take any action whatsoever. The dYdX community is sovereign to make decisions freely and at its sole discretion, in accordance with the governance rules, principles, and mechanisms adopted by the dYdX DAO. dYdX community discussion and interaction on the contents of this post are encouraged. The dYdX Foundation does not directly participate in governance decisions to be made by the dYdX community, including, without limitation, by making and/or voting on governance proposals. The dYdX Foundation may alter or update any information in this post in the future and assumes no obligation to publicly disclose any such change. This post is solely based on the information available to the dYdX Foundation at the time it is made and should only be read and taken into consideration at the time it is made and on the basis of the circumstances that surround it. The dYdX Foundation makes no guarantees of future performance and is under no obligation to undertake any of the activities contemplated herein, including but not limited to the direct or indirect open sourcing of any commissioned code.