Understanding dYdX — Your Top Exchange for Professional Traders

6 min readDec 31, 2021

Growing up, we were told that education is the key. The key to the future we so desire. Where we have what we want and when we want them. This education cuts across all types of human endeavour and could be formal or informal.

My journey to crypto was laced with many mistakes along the way. A quick survey around would show you that it’s the case for many blockchain and crypto enthusiasts out there. We all tried to follow the trend and got drowned because we knew nothing about what we were going into. Blockchain adoption is on the rise and rightly so but there’s one rule I learnt the hard way. “Education comes before Adoption”. If you’re going to trade, you need to understand what you’re going into before you do.

In this article, I would be letting you in on the dYdX platform and you should start using this high profile exchange for your swaps.

dYdX

Yea…dYdX was a common term back then in school. Maths classes were pretty boring back then and we wondered how those tutors gathered all the knowledge they were trying to pass across to us. Differentiate X with respect to Y. That’s how simple it was. Coming to blockchain technology, I was thrilled to see that same formula that scared me, years back. One of the most sophisticated exchanges I’ve seen out there. A thing of beauty that is targeted at professional and sophisticated traders in the space. At first glance, I felt intimidated by the user interface but as I scrolled through the features, I started feeling at home.

With dYdX, you are looking at the biggest open trading platform for crypto assets. They are looking at bringing more advanced financial products for everyone to use. The thing is that with the advances being made in the space daily, users now seek better tools for their trades and dYdX is there to deliver. We’d be talking about some of these features and why professional traders are rushing to use the platform.

dYdX Trading Tools

With dYdX, the aim is to provide traders with some of the best tools for using leverage and trading perpetuals. We’d take a look at these tools and help everyone on their part to become great traders on the dYdX trading platform. First we would talk about Margin Trading and then Perpetuals. Don’t be scared.

Margin trading

When you talk about Margin trading, it’s difficult to leave out leverage from it. With Margin trading, you are depositing a certain collateral amount on the platform. Leverage is derived from Margin. Here, the user is increasing the buying power of a segment of the deposit. Now with leverage, you’re able to place a higher trade value than you normally can. It’s not a one way street however. It comes with much more risk than normal spot trading as you could lose much more if things go South. Basically, you have more rewards and also more risk.

I’d be making an example with two of my friends who both had $2000 in their portfolio

Ebube went for a 10x long leverage with a $100 margin deposit. This simply implies that the total trade size for Ebube’s trade was $1000 (10 x $100). However, she had put 5% of her portfolio at risk if things didn’t go as planned.

Daisy, however, went for a 2x long leverage with a $500 margin deposit. This means that the Daisy had a total trade size of $2000 (4 x $500). The difference here was that she had put 25% of her portfolio at risk. Lower leverage but still more risk.

So what does this imply?

Ebube is closer to liquidation if things head South. When you select a higher leverage, you require a smaller margin deposit and the closer the trader to liquidation. When you select a lower leverage, you’d require a higher margin deposit but you’d be far much farther from liquidation. Now it’s up to you to decide your risk properly

On dYdX, you have two super leveraging tools that you can use to make sweet returns. You have the isolated margin and the cross- magin. We’d take a brief look at the two of these tools.

Isolated Margin

With this, you’re isolating a part of your funds for a trade you wish to take. You then use a certain leverage of choice and trade easily. It’s basically the type of trade we talked about in the examples above. The amount of margin deposit is determined by the leverage you wish to use and this in turn, determines the size of your loss if things don’t go according to plan.

Cross Margin

With cross margin, it’s not as straightforward as you would want. Unlike the isolated margin where you isolate a portion of your portfolio for what you want to do, the cross margin is much more different. Here, all the assets in your dYdX account would serve as collateral. Do not run away just yet. It looks very risky as you wouldn’t want to lose all your assets.. We all understand but there are reasons why you might want to try it out. Definitely sure you would like it. As regards the rules of collaterization, users doing cross margin trades are similar to those who carry out lending and borrowing via the Account Balances page on dYdX. You earn interest when you have a positive balance and you owe interest when it’s negative.

So why would I carry out margin trading? There are some features that come with it.

Easy spot trades: Here let’s say that there are two assets in your portfolio. ETH and USDC. In this situation, let’s say that you have deposited (collected) your ETH but spot a bigger return rate on USDC. You can immediately turn your ETH to USDC and start to earn the interest in USDC.
Margin Long ETH: This is another great feature of the cross margin and what traders can use it for. Let’s say that my friend Daniel has 2 ETH, 100 DAI and 0 USDC. Based on the example, we are assuming that 1 ETH = 500 USDC. He can take leverage and increase his ETH position by making use of a cross trade. What is the implication? This trade would borrow USDC and sell it for ETH. By longing ETH, his balances at the end would then be 2 ETH, 100 DAI and -500 USDC. You might be wondering why there’s a negative balance on the USDC. It is easily as a result of the amount borrowed and this is collateralized by the ETH and DAI balance.
Margin Short ETH: We just saw what happened with the Margin Long ETH. With the Margin short, it is the other way round. Let’s say Felix has 0 ETH and 100 USDC. Felix can go short on his ETH position by performing a ‘sell’ cross trade. Our assumptions would remain that 1 ETH is $500. If Felix decides to sell 0.1 ETH which will be 50 USDC, his account balance would now read -0.1 ETH and 150 USDC. ETH is now short.

Just imagine the beauty of margins on DYDX. The platform for margin trading is usually on Layer 1 (ethereum). The trades are covered for in ETH and you can enjoy leverage up to 5x. You can trade your assets easily and there’s no expiry unless you are in the US where it expires in 28 days. The cost incurred is usually based on interest. Liquidation ratio is usually 115% and there are stop limits

Perpetual Contracts on dYdX

Trading perpetuals on dYdX is just like trading BTC futures contracts. The seller and buyer reach an agreement to trade BTC at a specific time and price with the seller winning if BTC is lower. With the perpetuals on dYdX, it’s similar but there’s something extra. There is no fixed date so the positions are not static but dynamic. If a trade goes against you, you wouldn’t be stuck with a loss. You would flow with the tide by continuously funding until the market favours you again.

These perpetual markets would be on Layer 2 and fees would be paid for in fiat and you can enjoy up to 25% leverage. Assets here are usually synthetic based. The collateral asset is usually the USD-pegged token, USDC. Unlike the isolated margin, liquidation depends on the pair market but is lower than 115%. Perpetuals are unavailable to US citizens.

dYdX Layers

Presently, dYdX works on two layers. The layer one is the more common type that we are all used to. The future however seems to belong to layer 2 as most platforms are looking to find a way around the high ETH fees. We’d be seeing more asset classes with time. Let’s push the narrative for trades on dYdX.

This article is made to educate people on the why they should try the professional trading tools and embrace the beauty of dYdX.