The skeptical Crypto rejoice! A new way to shorten the cryptocurrency market comes from dYdX, a decentralized financial derivative start-up. In two months he will launch his protocol to create short and leverage positions for Ethereum and other ERC20 tokens that allow investors to boost their bets for or against these currencies.
In order to get there, dYdX recently closed a $ 2 million round seed led by Andreessen Horowitz and Polychain, and flanked by Kindred and Abstract plus angels, including Coinbase CEO Brian Armstrong and the co-founder Fred Ehrsam, and the serial investor Elad Gil.
"The main use for cryptocurrency so far has been negotiation and speculation – purchase and participation, not so sophisticated financial institutions exchange," says dYdX founder Antonio Juliano. "The derivatives market is usually an order of magnitude larger than the spot market or the buying / selling market." The cryptocurrency market is probably in the order of $ 5 billion to $ 10 billion in volume, so you'd expect the derivatives market to be 10 times bigger. "I think there's a big opportunity here."
How does dYdX work?
The idea is to buy the short Ethereum token with ETH or a stable currency from an exchange or dYdX. The short price of the Ethereum token is inversely anchored to the ETH, so it increases in value when ETH drops and vice versa. It is therefore possible to sell the Ethereum token shortly if a decline in ETH prices is expected.
On the backend, creditors earn an interest rate by providing ETH as a tied up guarantee to smart contracts that support the short token of Ethereum. Only a small number of actors must work with the smart contract to coin or close short tokens. Meanwhile, dYdX also offers leveraged Ethereum tokens that allow investors to borrow their profits if the price of ETH increases.
The plan is to offer short and lever tokens for any ERC20 currency in the future. dYdX is building its own user application to buy tokens, but it is also working with exchanges to offer margin tokens "where people are already trading," Juliano says.
"We believe that it is more than simply shorting out your favorite shitcoin.We think of them as mature financial products."
The infrastructure to attract large funds in the crypts
Coinbase has proven to be an incredible incubator for startup blockchain founders. Juliano was hired as software engineer after working briefly in Uber and graduating in computer science at Princeton in 2015. "The first thing I started was a decentralized app search engine. I worked for months full-time. , but no one was building decentralized apps, so no one was looking for them, it was too early, "Juliano explains.
But along the way he noted the lack of financial instruments for decentralized derivatives, despite the consumers' interest in the purchase and sale of cryptocurrencies. He imagined that the big hedge funds would end up knocking if someone had built a bridge in the blockchain world.
Juliano built dYdX to create a protocol to start offering marginal tokens. It is open source, so technically anyone can launch it to issue the tokens themselves. But dYdX expects to be the standard bearer, with its version offering maximum liquidity to investors seeking to buy or sell margin tokens. His team of five people in San Francisco with experience from Google, Bloomberg, Goldman Sachs, NerdWallet and ConsenSys is working to find as many investors as possible to secure tokens and trade for trade. "It's a race to build liquidity faster than anyone else," says Juliano.
So, how will dYdX make money? As is common in the crypt, Juliano is not exactly sure, and just wants to build up the use first. "We expect to gain value at the protocol level in the future probably through a value-added token," says the founder. "It would have been easy for us to rush to add a questionable token as we have seen in many other protocols, however, we believe it is worth reflecting on the best way to integrate a token into our ecosystem in a way that creates rather than destroys the value for end users. "
" Antonio and his team are among the best engineers in the cryptographic ecosystem to build a new software system for peer-to-peer financial contracts. We believe this will be immensely valuable and used by millions. of people, "says Olaf Carlson-Wee, partner of Polychain. "I'm not interested in short-term revenue models, but rather the opportunity to permanently improve global financial markets."
Timing the decentralized revolution
With the launch less than two months, Juliano also runs to safeguard the protocol from attacks. "You have to take the security of smart contracts very seriously, we almost finished the second independent security check," he tells me.
The security provided by decentralization is one of dYdX's strengths compared to centralized competitors such as Poloniex, which offer margin trading opportunities. There, investors must block ETH as a guarantee for long periods of time, putting it at risk if the exchange is violated, and do not benefit from shared liquidity as dYdX will do.
Could also compete with crypto haters with the CBOE which now offers futures and trading on Bitcoin margins, although it does not yet manage Ethereum. Juliano hopes that, since the dYdX protocol can beat short tokens for other ERC20 tokens, one can bet for or against a certain cryptocurrency related to the entire encrypted market by mixing and matching. dYdX will have to nail user experience and appropriate partnerships if it wants to beat the convenience of centralized exchanges and the market of institutional futures.
If all goes well, dYdX wants to enter the options or swap offer. "These derivatives are more often traded by sophisticated traders – we do not think there are too many traders like that at the moment," explains Juliano. "The other types of derivatives we will move into in the future will be really great once the market has matured." That "once the market matures" is a refrain sung by a lot of blockchain projects. The question is: who will survive long enough to see that future, if it ever arrives.
[Featured Image via Nuzu and Bryce Durbin]