It's not hard to believe that any financial instrument in the existing financial system will be created in crypto (and then some). An early and successful example is dYdX, a popular derivatives decentralized exchange (DEX).
In dYdX’s original whitepaper, they propose two products: margin trading and options for crypto. Through their journey, they ended up with margin trading and perpetual futures being their core products.
Margin trading is when a trader borrows money to execute trades, the amount borrowed must be repaid usually with additional interest at a later date. Note, this is a legacy feature as dYdX is now going all in on perpetual futures.
How does decentralized margin trading work:
Lenders have deposited various tokens into their respective pools
A trader gives a buy order to a dYdX margin smart contract. The trader’s margin deposit (which is over collateralized by 125%) is added to the pool, and the contract then fulfills the trader’s buy order (at the leveraged rate the trader requests)
The trader closes the position by giving a sell order to the margin contract with enough tokens to cover the amount owed to the lender (including interest)
dYdX offers isolated and cross-margin trading: isolated allows the trader to leverage one asset while cross allows them to leverage all assets in their account
Perpetual futures are a type of futures contract (an agreement between a trader and an exchange to transact an asset at a specific price and time), except perpetual futures don’t ever expire (these don’t exist in tradfi).
dYdX offers 4 types of orders: market order (trader chooses buy or sell and leverage amount), limit order (like a market order with a limit price), stop limit order (a limit order is placed once the index price touches the stop price), and trailing stop (instead of a set stop price, the stop price will update to trail the index price based on a trailing percent if prices are moving in favor of your trade, this is to protect profits)
Perpetual futures on dYdX are not available to US traders
Very interestingly, dYdX is a mix of decentralized and centralized. While the core exchange protocol is built on Ethereum smart contracts and STARK rollups, the orderbook and matching engine are centrally run by dYdX Trading Inc (in order to accommodate primarily the throughput and finality speed needed for futures).
As part of their efforts to fully decentralize, they announced in June 2022 the creation of their own chain which will power their decentralized (decentralized node operators) yet off-chain (meaning not consensus-driven) orderbook and matching engine.
Neither GC nor any of its advisory clients, including all GC-managed investment vehicles, holds any form of ownership or financial interest in the cryptocurrency or digital asset described in this post. GC has not performed any due diligence, research, analysis, or evaluation of the potential merits, if any, of this cryptocurrency or digital asset project and GC cannot verify any claims made by any promoter or supporter of the cryptocurrency or digital asset described. Nothing in this post should be seen as, nor is it intended to be, a recommendation or suggestion to invest in, purchase, sell, hold, trade, or participate in this or any cryptocurrency or digital asset project. GC in no way endorses or encourages anyone to circumvent or violate any applicable laws, rules, and regulations, including any applicable Anti-Money Laundering/Know-Your-Customer (AML/KYC) and related banking and financial regulations. (See Disclaimer below for further details.)
Disclaimer
Views expressed in “posts” (including podcasts, videos, newsletters, and social media) are those of the individual GC personnel quoted therein and are not the views of General Catalyst Group Management, LLC, “GC”) or its respective affiliates. GC is an investment adviser registered with the Securities and Exchange Commission. Registration as an investment adviser does not imply any special skill or training. The posts are not directed to any investors or potential investors, and do not constitute an offer to sell — or a solicitation of an offer to buy — any securities, cryptocurrencies, or any financial instrument or property, and may not be used or relied upon in evaluating the merits of any investment.
The contents in here — and available on any associated distribution platforms and any public GC online social media accounts, platforms, and sites (collectively, “content distribution outlets”) — should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Any projections, estimates, forecasts, targets, prospects, or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Any charts or figures provided here or on GC content distribution outlets are for informational purposes only, and should not be relied upon when making any investment decision. Certain information contained in the content has been obtained from third-party sources. While taken from sources believed to be reliable, GC has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. In addition, posts may include third-party advertisements or links to websites not associated with GC in any way; GC has not reviewed such advertisements or websites and does not endorse any content contained therein. All content speaks only as of the date indicated and is subject to change at any time.
Under no circumstances should any posts or other information provided on this website — or on associated content distribution outlets — be construed as an offer soliciting the purchase or sale of any security or interest in any pooled investment vehicle sponsored, discussed, or mentioned by GC personnel. Nor should it be construed as an offer to provide investment advisory services; an offer to invest in an GC-managed pooled investment vehicle will be made separately and only by means of the confidential offering documents of the specific pooled investment vehicles — which should be read in their entirety, and only to those who, among other requirements, meet certain qualifications under federal securities laws. Such investors, defined as accredited investors and qualified purchasers, are generally deemed capable of evaluating the merits and risks of prospective investments and financial matters.
There can be no assurances that GC-managed investment vehicle’s objectives will be achieved or investment strategies will be successful. Any investment in a vehicle managed by GC involves a high degree of risk including the risk that the entire amount invested is lost. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by GC and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by GC is available here: https://www.generalcatalyst.com/portfolio/. Past results of GC’s investments, pooled investment vehicles, or investment strategies are not necessarily indicative of future results. Excluded from this list are investments (and certain cryptocurrencies or digital assets) for which the issuer has not provided permission for GC to disclose publicly. GC has no special role in any of cryptocurrency or related projects or power over their management. To the extent any GC-managed investment vehicle has any form of ownership or financial interest in a cryptocurrency, digital asset, or related project, GC does not undertake to continue to have any involvement in these projects other than as an investor and token holder, or holder of a form of economic or ownership interest, or right to a future ownership interest, and other token holders should not expect that it will or rely on it to have any particular involvement.
For other GC site terms of use, please go to https://www.generalcatalyst.com/terms-of-use/. Additional important information about GC, including our Form ADV Part 2A Brochure, is available at the SEC’s website:
http://www.adviserinfo.sec.gov