Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Charles d'Haussy: dYdX V4 - Decentralised Perpetual Exchange on a Cosmos Appchain

Episode Date: November 10, 2023

Leading decentralised perpetual exchange, dYdX V4 recently migrated to Cosmos to build its own sovereign appchain, in order to provide its users a much better trading experience, while continuing to deliver DeFi innovations (e.g. permisionless markets). By having full control over the appchain’s parameters, the dYdX DAOs can shape the future of the protocol, starting from the very bedrock, ensuring proper distribution and incentives for the validator set. From early adopter of L2 zero knowledge proofs (STARKs), to building its own Cosmos appchain, dYdX has proven once again to be a trailblazer for new technologies.We were joined by Charles d’Haussy, CEO of dYdX Foundation, to discuss dYdX V4’s recent migration to a Cosmos appchain and what challenges it solves in terms of: order book decentralisation, validator distribution and user experience.Topics covered in this episode:Charles’ background, from Asia to CEO of dYdXdYdX’s history and V4’s transition to a Cosmos appchainHow perpetual futures workdYdX supported assets and permissionless marketsDeFi innovations vs. CEX UXThe current state of dYdX V4’s alpha mainnetdYdX validator dynamics & order book decentralisationdYdX’s DAOs & governanceMitigating MEV (feat. Skip Protocol)Migrating to CosmosAstropolis The intersection of crypto & AIEpisode links:Charles d'Haussy on TwitterdYdX on TwitterdYdX Foundation on TwitterCharles' Astroprolis Keynote (Cosmoverse Istanbul)Cosmos on TwitterThis episode is hosted by Sebastien Couture & Meher Roy. Show notes and listening options: epicenter.tv/521

Welcome to Epicenter. The show which talks about the technologies projects and people driving decentralization and the blockchain revolution. I'm Sebastianique Gitu and I'm here today with my co-host. Mayer Roy. Today we're speaking with Charles Dose. He's the CEO of the DYDX Foundation. They just launched the V4 app chain. And we'll be speaking in the Charles about DYDX, the decision process that went into evolving DYDX into its own app chain. We'll talk about the launch. how things are going. We'll also talk about perpetual markets, space, MEV, and so much more. Before we get started, quick disclaimer, this is a sponsored episode, and some of us at Epicenter hold DYDX tokens. So Charles, thanks for joining us. How are you doing? Thanks for having us. Seb, me here, I'm really pleased to be here. I'm a very early fan of the show for many, many years. So I want to start with a big thank you for your hard work for the community years after years, bare market, bull market

you've been educating the community, giving the stage to many, so I'm very grateful. I've learned a lot along the years and I'm sure most of the audience has as well. Congratulations for the artwork and thanks again. So Charles, you're one of these guys who

left France early in your career to move to Asia. What have you been doing for the last 20 years? Oh Yeah, I've been studying in France and Canada and eventually did an internship in India

and I felt the energy in Asia was just really addictive So I wanted to get my first job in Asia And long story short I ended up in China Then in Hong Kong

I started a business in Hong Kong I sold this business A few years later to one of my customer I decided to kind of private and make time to upskill myself in finance, which was a topic I really liked beside my everyday work. I was invited later on by the Hong Kong government to join them as the head of FinTech,

working on growing the ecosystem of FinTech in Hong Kong. Hong Kong is one of the leading financial center, and it has went through its kind of reinvent itself into a FinTech hub, and I was leading this together with central banks, regulators over there. So great, great experience at building and shaping ecosystem. And one of the vertical I was focusing on was blockchain. So one of my early love. So I've been helping a lot of leading companies at the time to set a foot in Asia and start their expansion in Asia from among them was consensus, which eventually I joined. I was head of Asia for consensus for a few

years, helping Metamask, helping central banks to build early CBDCs, DFI projects, all over Asia, from Japan to Hong Kong, Singapore and Australia. And fast forward, I join the DiDX Foundation now where I am the CEO and where I work with a team of 20 plus people which are spread all over the world very close to where most of the users and builders around the YDX are. How did you come into this role as CEO of the DYDX Foundation? And what was that transition like? I spent a lot of time at Consensus, right?

So Consensus is a great company where there is essentially supplying and providing infrastructure for the space. Should it be inferon the RPC nodes or Metamask for wallets and many other services. So I spend a lot of time on Ethereum. I spend a lot of time building infrastructure for various projects and, and, and, and, and, institutions and i wanted to kind of go out and spend more time at the application level and dydx was very interesting project defy is a very confirmed use case within defy perpetuals are also having tremendous tractions and essentially exist in the in defy and because of crypto exploring the cosmos stack was also interesting i i started my journey on in crypto in uh with

With Bitcoin, obviously, like many in 2011, spend a lot of time on Ethereum. But the Cosmos stack is definitely a super strong candidate for our global infrastructure in the coming decade. So spending time on DeFi on Cosmos, also getting more interactions with Daoz. There was a lot of kind of new topics I wanted to go deep diving in. And kind of leading the DiDX Foundation team is there is never a done. a lot of activities, obviously, the migration from version three of of the YDX to now the DYDX chain and version four is extremely, extremely intense, but highly rewarding. So we're having a lot of fun.

So DYDX announced last year that it would essentially move to its own chain. And this really sent waves through the cosmos industry. I think it was some of the biggest news. and certainly very positive news in the market conditions that we've been in for the last year or so. And it's something I've thought about a lot in terms of how chains evolve from smart contracts to moving to L2s, to graduating essentially, to becoming fully sovereign from the consensus layer all the way to the application level. And so I'm curious What was that graduation path like? And before we actually before that maybe What was the decision making process of moving to a cosmos chain?

What were their criteria that were you looking for? Were there other platforms or protocols that were contenders here? And then yeah, what was that graduation path or that that upgrade path look like? Absolutely. Maybe to cover this question, the best it would start with the history of the YDX. The YDX was funded by Antonio Giuliano back in 2018. Antonio is a former count-based engineer. So he got very early exposure to the space in general to the technology

and decided to fund DYDX. So he's the original founder behind the technology of DYDX. DYDX started on Ethereum Mainnet. Later was one of the very early mover to, layer 2s with Starkex and is up to today one of the largest contributor to the number of transactions

and level of activity on layer 2s in general. But I guess the product team over there at DYDX trading has been always very independent and focus on product and user experience rather than trying to accommodate some technology which was evolving.

So when you get your application to sit on someone else blockchain, you can get essentially, you can move faster, and you can benefit from innovation from others and services from others. But it also brings you some kind of challenges and pride of. Sitting on general purpose blockchain means that you will be sitting on one infrastructure, which is number one not use, and also designed to accommodate many different types of use cases.

And DYDX has always been laser focused on one use case, which is essentially D5 for perpetuels, being a leading decentralized exchange for perpetuals contract. So progressing with the product and getting more and more traction, as the team at the YDX started to look at how they could essentially keep evolving and deploying more innovations and more features for the product in general, and also kind of mitigating the dependencies they add from other teams building this layer tools. And we all know it's very hard work, and everyone has been doing a fantastic work,

But when your application is growing at very fast pace, sometimes you just need to find whatever will be required to feed your work. So there was a few trade-off the number of transactions. Some layers of two were still not there compared to the growth of the YDX. A few components were not able to be decentralized. So on version 3 of the YDX, this is public information.

The Order Book, which is one of the core, the core modules of a decentralized exchange is actually off-chain. It's running on AWS servers. There is not enough capacity and throughput within any layer two today to host an order book. So I think this product evolving, but still having some kind of avenues for progress, the team at DYDX has been essentially exploring the different technologies available at the time. I think the process started 18 months ago or so.

And they looked at many different stacks, at the different layer two technologies, ZK, Solana, probably PolkaDOT. I guess the team has been really looking all around. And where it was all starting, it was kind of a reverse engineering exercise, thinking what do you need for another book type of exchange? And something people don't necessarily know is that within an order book type of exchange,

there is a lot of market makers and users which are essentially placing orders, counseling orders. Sometimes this order match and they will get settled. So there is a very high velocity on the order book overall. So how can you get the experience all these systematic traders need on technology and what kind of technology can essentially adapt

and provide this? And the choice of architecture for this new DIYDX chain, which was launched a few weeks ago now, was to essentially host the order book not on chain because you will get the constant latency of the block time, which is not providing a good enough experience for traders. So the order book is not on chain, but technically the order book is still decentralized.

And the way the decentralization is happening is actually by hosting the order book in the memory of the validators. So the D.DX chain has been launched. The DYDX chain is used for settlement of orders. But at the order book layer, the order book is technically not on chain, but within the memory of the validators. So this can really provide a very high frequency and high velocity order book, similar to what predators experience in a centralized type of crypto exchanges. And also providing a full control of the stack for the engineers involved in DYDX.

not having to depend on the progress of a roadmap of a layer two or ZK, being able to really integrate the full technology and keeping the pace of innovation, the product deserves and the market pools. Yeah, this is really interesting that DYDX is a project that is starting with the product experience first and then the blockchain follows from the product experience. rather than the other way around where you're part of some blockchain community and you build your product experience there.

It's the opposite way around. And the power of a cosmos chain is exactly that. You can basically tell the validators to do whatever is needed for the optimal product experience. So that's actually interesting. So this cosmos chain, it is not going to be EVM. compatible or what are its EDM compatibility properties like and is it an issue that it is not

not come if it lacks some forms of compatibility that's a great question for for the dydx use case which is trading perpetuals perpetuals contracts essentially we don't have the same requirements of composability as some other type of use cases in defy so if you are a lending protocol or if you are, for example, an AMM, you will need to have all kinds of assets around you and a very large ecosystem. When you focus on the derivative like the YDX is essentially every trade at the YDX starts with USDC. And from this USDC collateral, you will be able to express your opinion on a synthetic

product which will represent a bullish view or a bearish view on any kind of crypto assets, Bitcoin and Ethereum and so on. So we don't have the same requirement. of composability as some others. To come back to the EVM compatibility question, in this early days of the DYDX chain, all the business logic is actually on the chain itself. The goal was really to design a Formula One

of trading for perpetuels, and all the layers we could essentially simplify our abstract and get the business logics integrated into the chain itself was essentially helping to get the performance closer to be optimal for the users. There might be a time where EVM compatibility will come, but at the moment the chain is starting with really this focus on performance and this focus on the sole use case, which is the use case of the YDX. Essentially, the YDX chain is not like many other layer ones,

which will invite a lot of builders building on the chain. people will be building around the chain and the core application. But the goal is really to keep as I will say the leadership we have on the market as a protocol in derivative market. For people who don't know, a crypto derivative market is 10x larger than spot crypto trading. So every time there is one big coin or one is being traded in the spot markets. About 10 times larger amounts is being traded on derivatives. So that's a very, very large use case, mostly used by market makers, institutions or prosumers. And being focused on this since 2018 has essentially helped DYDX to grow as today.

The world's largest decentralized exchange for crypto derivatives, which represents about a billion dollar of trading every day, about $80 million of fees collected on the version 3 of the YDX. and market shares which are going every month versus the centralized crypto exchanges. And if we want to project ourselves a little bit in the future, if you think of the journey of Uniswap, which started two or three years ago,

obviously Uniswap started from zero and today represent between 5 to 7% of the spot trading market. There is the potential for DYDX to really expand from this 1.5% market shares today in crypto derivative even growing, knowing that I think the market in general start to realize the limitations of centralized exchanges and start to look at expanded the different venues for expressing their opinion on the market. So when I was looking at DYDX a couple of years ago, one of the big revelations I realized

was when you think of a uniswap, for the uniswap to succorpe to support, do an exchange or an exchange like experience for a user, it needs to have control over the asset that the user is interesting. So if it's like MQR and ETH, somebody has to provide an MQR, somebody has to provide it and eat. So those things have to be there. But with DYDX and actually the entire perpetuals market, what seems like a crazy property is that you can have the entire market exists with only USDC or a stable coin as a base.

You don't actually need the assets themselves in the exchange. And so basically like the market can stand on its own without even a lot of bridges to any place else.

As long as there's a stable coin the market can exist even if the bridge even if the bridges to other ecosystems maybe weak. That seems like really interesting. And so how does that work? Like, how is that possible? And how does a perpetual work underneath that makes it possible? So a perpetual is a certain type of futures contract. So the futures contract is essentially a kind of an adjacent market to the spot market where people will be able to express their

opinion should they be bull or bears on one type of assets. Historically, the futures market exists in the equity world for quite some time now, and they usually kind of expire within the end of the loss, so within three months, you can buy futures sometimes up to six months or more. And then the market will be able to take a bet on and defining a price of an asset in the future. So the future contract. The innovation, which clearly, in 2018 via Bitmex, the centralized crypto exchange out of Hong Kong, was essentially to create a new type of futures contract, which were not expiring at the end of the months anymore, but kind of updating themselves on the price on the underlying assets on the hourly basis. So these type of contracts are called perpetuals contract, because they kind of bring the perpetuity and the kind of constant liveliness of these future. contract. So it gives to traders an opportunity to quickly enter into one market without having

to move the underlying asset. So you can start with USDC and starting to say, from my USDC, I want to express my opinion on the market on Bitcoin, on if there is hundreds of different perpetual market available. And being able to enter this market and exit them very quickly without, I will say, the underlying logistics. As a world of futures and derivatives, as I was mentioning earlier a very large market, way larger than the underlying asset, should you think of equity derivative or commodities derivative and crypto derivative as well. So it's a very elegant and efficient way for essentially traders and the market to define a price and accelerate and make more optimal the price discovery of any assets. So in my mental model, so if I go to

D-D-X and I go long Eth. When I make the trade happen let's assume actually you are the counterparty on the other side with whom it's past so you have gone short each I've gone long each.

Now mine is a purpose and yours too so I should be able to hold it for years if needed whereas our durations may not match so you on the other side might want to get out of the position, you know, maybe 30 seconds later or 30 minutes later.

So how is that gap covered? How can I have something permanent while you being my counterparty and you are not actually permanently there? Yeah. What is it that the exchange the way? So there is a complex mechanism which people can document themselves about at the YDX Academy, for example. essentially working around the funding rate and the open interest overall, or where actually traders will be compensating or being compensated for variations between their contract as it is today and the underlying demands for this contract.

So all of this works with the funding rate around the derivative contracts, which essentially every hour will kind of check as a level of buyers and sellers, and if you've been too optimistic or not enough, there will be a rebalancing made every hour. So what kinds of assets can people trade on DYDX today? And what is the roadmap for supporting more assets? Absolutely. So DYDX offers perpetual market. Today there is about in the version 3 of DYDX sitting on the top of Ethereum,

Layer 2 from Starkex, about 30 different trading pairs. So people can trade Bitcoin, Ethereum, kind of a long tail of assets. As every market, Ethereum and Bitcoin represents, roughly speaking, 80% of the value. And what is very interesting with the now-born D-D-X chain

is the upcoming upgrade of the D-YDX protocol itself, where the number of trading pairs will expand up to up to 100, and people will be in the near future being able to launch permissionless market. So the type of innovation we've seen on the crypto market with Uniswap where people were able to start

some trading pairs and essentially starting a market in a permissionless way as the same is happening in the near future at DiDX where people will be able to launch perpetual markets on their own following a risk framework

as well as a liquidity framework which is being designed and voted by the DIYDX DAO's but that's a great innovation which I think the market has been expecting for a long time, making sure that you can get essentially market launched at high velocity, but also in a safe and highly liquid way for new perpetuous contracts. So this idea of permissionless markets is pretty interesting.

Let's dive into that a little bit. What does it mean to be able to create a permissionless market? So what it means is first and foremost, probably, more trading pairs. So the users will define that. It's a little bit sort of the magic of crypto when you define software, you define a recipe, and then you let the market express themselves with this kind of new innovation. So where I'm excited about is about the unknown about this kind of innovation. So many people are thinking, okay, there will be no more min coins, there will be more shit coins market. That's one thing. And if people want some more of this, they will be

able to launch those market. Where it's more interesting in my opinion is permissionless markets really open a new avenue for truly new markets and defy only market to exist. I think if we really want to see the defy market to expand and to keep, I will say, getting mine shares and kind of overtaking as a legacy systems which have limitations, we need to make sure that we essentially set the defy market for permissionless innovation. as well. And where we've seen some kind of peaks of growth in the crypto market in general is when this kind of innovation and this kind of new market came about without being able to be replicated by centralized type of infrastructure. So think of Uniswap in the for the D5 summer.

Think of NFTs. Think of different type of innovations which came to life and gave this kind of pump of growth and herbs of new users coming into our space. With the permissionless market at the YDX, I think we have potentially a very strong set of components to really call for this new innovation. Defi will keep expanding if we keep inventing new products which can only exist in DFI. If we only replicate or optimize whatever exists in the traditional systems, we can have defined the growth and cap the growth we can get access to. So permissionless market means that users will be able to define a risk framework around this asset. The risk framework will be considering, for example, the liquidity, the age of the asset, the type of the asset, as well as a market-making kind of framework as well, making sure that when a market is launched in a permissionless way,

it does not become toxic. That's also very important. Be remaining open to innovation, but making sure innovation is not burning fingers of users too much. So as I said, we probably see a long tail of new crypto asset coming up, but also we can think of new indexes as starting to be traded in the relative market, as much as they are in the traditional market as well. Thinking of new type of asset, if you want to express, for example, your opinion on the price of rice, corn, cocoaa, or some other commodities. Today, some of this market are very much, I will say, close to a, a little fuse, for example, in the Chicago Exchange, where you can trade commodities.

And if you want to express your opinion on this market, you quote today. And I think that's the power of defy is giving really the kind of internet distribution to markets which used to be very, very kind of constrained in terms of geographies. And where permissionless market can possibly impress us and surprise us is by defining this kind of new products, which will be exclusively available. in defined markets and kind of creating this new demand and bringing additional value, additional volumes, additional users, new type of users as well on the market. So as I mentioned earlier, commodities is probably something which is interesting to explore.

Some people mentioned the insurance market, which were also expecting to kind of build some age with permissionless, permissionless derivative market and the permissionless setup at IDX might be something they will be exploring. If you want to look at building some new type of indexes for all type of real world asset or crypto assets and defining them in a derivative way, this will be also a very fair type sword for every financial engineers to express themselves

and leverage the capabilities of defy. So, I mean, the one product I'm really looking forward for is we have the Indian stock exchange is called like Bombay Stock Exchange and there's a index of that stock exchange, the BSC Sensex. I'm like, I'm really bullish on the India story. I want to buy that index.

I can't, I'm living in Switzerland. I can't send money to India because once you send money to India, your money is trapped. It's very hard to get it back outside. And if you buy an index fund for the BAC census in Switzerland, the cost structure of those funds is extremely high. Like these funds are 50 times more expensive than your typical S&P 500 fund.

So I actually, being an Indian, wanting to bet on the India story, have not. And I'm just waiting for the day I can go along on some kind of BAC Censex on Bitcoin. I'm sorry on D-YM-E-X. So, like, that's kind of one of the things that that excite me the most. I don't know whether this market will take off or not. You should create it. You should build this permissionless market on Dyn X. Yeah, exactly, right?

Like, there's no index I can buy today. So I actually need a long-peraturedus contract on the BC sensitive. We will see how things get to shape and how people, decide to go. I think the governance will be also important around this product, making sure not all kinds of products get to happen. We still evolve into a world with some regulations and some compliance issue which we don't want to do shortcuts on. But there is definitely a ground for a lot of innovations and helping better distribution to financial opportunities, essentially. Do you think it's possible for for for defy?

I mean, we've been talking about DYDX and and and you to swap. And I think, you know, in the context of what happened last year with FTCS, a lot of people were thinking, certainly I was thinking about, you know, how can we get DFI to arrive to a point where it can compete and be indistinguishable from the experience of centralized exchanges? I know this is the DYDX kind of. mission and this is what the product aims to be. But I mean, what are the biggest challenges in terms of making that happen? And do you think that it is possible for Defi to get to a point where

it's indistinguishable from fully centralized exchanges and really compete sort of on par with the type of performance, with the type of U.S., with the type of onboarding experience that we get with centralized changes? I think we define it's to keep having a lot of. his own identity and his own mission. If we are just running after replicating and kind of matching the experience of centralized exchanges or experience in traditional finance, I'm very confident we will get there, but will this be sufficient to bring a lot of new users to the space? I don't think it will.

Do we have in our hands the technology and the capabilities to create new products, which will be really unique to defy and brings people into our own? space the same way ICO has been bringing a lot of people in our space back in the days. The same way NFTs have been bringing artists and collectioners in our space. And now people in the video games industry are building digital asset out of NFTs within the video game space because it's very unique and only only blockchain or crypto infrastructure can provide that. So I think it's very important to keep innovating and focusing on this kind of innovation.

D-YDX focusing on purpose is one illustration of that. The other things to keep thinking about is also how you keep building public blockchain and infrastructure, which can get different points of entries. I am a strong believer that not everyone will start his crypto journey with a Metamask wallet. Some people will come to crypto via their existing financial service providers. So if you think of your banker today, he's probably for the most part that his core business is deposit so you drop your salary every month and they make a little bit of money out of your deposit. And then banks, for the most part, are all doing the same. What they do is they

package services from others. So I think the distribution also of Defi will evolve. Some people will keep going directly maybe to the services they use, should it be Uniswap, DYDX or some others. And some others will be essentially been offered access to DFI. Via via some hybrid gateways. So I strongly believe that the new wave of fintech will essentially be sitting on DFI infrastructure, so DFI as a back end. And the fourth end will be some kind of a fintech user interface

where they will provide customer support, they will provide simplify U.X and just simplify the onboard and offboard of users and phones overall in the space. So really the way I feel Defi will keep progressing in the years to come is via really sole Defi type of innovation, as well as being a little bit more open to a variety of entry doors into Defi and having this kind of hybrid and gateways to Defi, which should be the traditional players, which will be coming with their ears of customers. And I think we see that already happening slowly but surely. Some years ago, Cornbase was offering the old program, which was essentially allowing account-based users to get access to compound and simplifying the experience for them.

And I think it was very, very meaningful in terms of products' experience. If you think of what Robin Hood is doing, we were thinking that the world of equity trading was kind of stuck at the Charles Schwab or whatever bank experience. And yet they came and they provided better experience for stock trading and they also started to onboard their users on crypto. And this is really a big impact in terms of consumption of DFI. So I think the traditional finance and decentralized finance will overlap. And I think also the distribution of DFI will evolve very quickly.

The same way the Internet was initially distributed by a handful of Internet service providers. and nowadays we get access to the internet via our phone, via our fridge, via our laptops. There is multiple ways for machines and ourselves to access the internet. So Charles is a thing that I find quite crazy about the perpetual story and the permissionless listing of markets in the IDX is that the idea of the perpetual's contract was, actually invented by the economist Robert Schiller in 1992 because prior to that

CFD's contracts for a difference existed but they would have they would have you know defined time limits and he invented the perpetual and then the perpetual was summarily ignored by traditional finance for 26 years there was this no rat-fai perpetuals market that you can do anything mean meaningful with. And then it's the rise of crypto that gave life to the first perpetuals market, which was centralized, and then D-Y-D-X centralized and now decentralized. Robert Schiller, meanwhile, himself is a prominent crypto-sceptic and the inventor of the perpetuables. And now kind of like with the permissionless markets, it's like crypto-perpetuals markets are just

around the corner of integrating what would be traditional assets, indexes, and stocks and commodities. And it's really an interesting story that, like, how crypto can take an idea from TratFi and actually bring it to success,

hopefully in TratFi itself, right? For shares and commodities and things like that. So it really demonstrates the power of permissionless innovation that our industry has. So DYDX just launched mainnet. It's in the alpha stage currently. Give us an overview of the current state of DYDX in these early weeks. What is the activity on the chain, staking, tokens being bridged over.

What's the snapshot of DYDX right now and what should users expect when they go to DYDX? as the platform has just launched what kind of features are live and what kind of things seem they do with the platform. So the DYDX chain was launched a few weeks ago by the Genese validators

together with the DYDX operation now. So right now, the kind of migration of the EFelium DYDX token to the DYDX chain token is undergoing. We have at the time of recording about 3 million tokens which have been already stake

and there is millions of tokens coming on daily basis to the chain to essentially prepare and prepare the chain and secure the chain further. The community will vote in a few days to move away from the alpha period to the beta period where a limited type of trading activities will be allowed for a limited number of trading pairs as well as limited trading value and the full launch of the chain should be happening in the coming weeks. The big proposition for token holders, if they decide to migrate from Ethereum to the DYD exchange

is to stake their tokens with DYDX chain validators. So what the community decided some weeks ago was to essentially distribute 100% of the fees collected by the DYDX protocol to the validators and therefore to the stakeholders. And the fees are coming in the form of USDC. So that's also something which is quite new in our space. Usually when you see a new chain being launched, it's essentially secured by validators, and these validators are rewarded with inflation of new tokens.

In the case of DYDX, DYDX is already an application which is a great level of success, leader in its space, and all the fees collected by the protocol will be rewarded to stakers for the DYDX chain in the form of USDC. So that's a very strong proposition. And I think a nice and interesting twist of business models for many people in our space where when you have reached a certain level of growth and certain level of operations essentially, and you decide to totally open source and decentralize,

all the people contributing to the security of the chain gets rewarded. And that's really why we see so much interest right now in people bridging over to the device. IDX chain and staking with validators. There is about 60 validators which can be active today within the chain, and there is a set of about 120 validators, which are kind of competing to be within the active set of the chain. So one thing that we noticed was that there's currently a lot of the voting power, the validator voting power that's concentrated in a small number of validators.

I believe the top three validators have something, close to 50%, and the top validator has, I think, over 30%. What's going on here? And how are you dealing with some of the challenges of distributing that validator set? Because I believe that there aren't any, for the moment, there aren't any plans to have a delegation program from the foundation. So how will you deal with some of these growing pains? So that's something we pay attention to.

the chain is only a few weeks old. It's not totally active yet. So this kind of voting power rebalancing is something to pay attention to, but it's not representing a risk at this moment since the chain is not totally active and the trading has not been activated yet. And there is, the Ford,

the DiDX Foundation will be sticking in the coming weeks. So we are defining exactly the kind of policy around that. But what is interesting to see is that there is a different type of validators coming up, different type of token holders also migrating. And the Dow, D-YDX DAO and the community has also voted an incentive program for the coming months

where essentially traders will be incentivized to use as a newly launched D-D-X chain and D-YDX protocol. And this will be essentially increasing the number of fees distributed to validators. One dynamic we keep an eye on, is also the localization of validators. When you are in the world of trading,

as you can probably see in the world of equity trading, there is a certain type of optimization, large trading house will put in place is to be co-located or located the closest to the marketplace. And it's interesting to see here in the topology of the DYDX chain and the new DYDX protocol, that the order book is now totally disqualification. centralize. So we will probably see in the coming months some interesting dynamics and I

absolutely no idea where it's going to go exactly, but probably at some point the localization of the servers will might be kind of trying to be not too far from one another just for the optimization of latency and making sure that you can get the best and the most optimal information. So one more time, the order book on DYDX chain is distributed. It's sitting on the hard memory of validators. And the validators keep whispering and updating each other's the order book. When two orders match, if there is two orders matching at the same time, or more or less at the same time, at the time of consensus,

the chain will check exactly the kind of timestamp and let's the right trade happening. But the chain is young, the chain is growing fast, and we have also some very professional validators, which is also interesting to see how these industries of validators is getting more and more professional. And I'm very confident that things will balance right. The only days are just showing a strong interest and some early moves,

but things will balance in a healthy way in the coming weeks. Yeah, this is really interesting because, like, you know, DYDX is decentralized as a protocol. The governance is decentralizing. We want to have permissionless markets. And I think that sort of aligns with the ethos of crypto and certainly is something that's quite encouraging. But at the same time, there's this, you know, as you mentioned, there is this pressure for validators to be close to where their customers are, where customers are initiating trades from. And I have a feeling that with DYDX at least, you know, large trading firms that are using DYDX are going to want to interact with validators that where the servers are close to them. And that might lead to some amount of centralization. Let's say that there are a lot of DYDX traders or institutional users, say, like in New York, we might see a lot of the validators moving to that area or having sort of like validators being co-located in areas close to where the users are. you know, what kind of risks does that present in, I mean, both in terms of, I think,

governance of the chain, running the chain, things like power grid failure, you know, because we're moving, we're moving in a decentralized way from the protocol governance side, but at the same time, you know, some of the infrastructure might have some aspects of centralization that we need to deal with. How do you deal with that and how do you balance that out? Sure, maybe just a quick, a quick decision. There is no, users from the US are, geoblocked from the early days of the YDX. So the example of traders in New York does not apply to DYDX. But just to take the concept, we have the world of finance, which is having different

kind of hubs. You think of London, you think of Singapore, you think of Hong Kong, you think of Tokyo, you think of India. So finance is a global industry today. Some of these markets are kind of close to outsiders, but the world of DFA is actually open. I think we will see some probably clusters, but eventually the world of trading, and we see that in the crypto market, crypto market are operating 24-7,

and we see part of the world. Asia is one of them, Europe is another one, where we have, like, a big clusters of activities. So will validators kind of clusterize in a way, possibly that's something we will see in the future. But at this moment in time, the set of validators of the DYDX chain is well spread. There's something interesting to see how the kind of topology of the network will evolve over time. We see this kind of concentration also for, I will say, legacy networks such as Bitcoin or Ethereum, where you will see big hubs of validators being for the most part in Europe, in some part of Asia. So we should not deviate too much from this.

But it's interesting to see how the layer of the trading firms will kind of shape this type of clusters we might see in the coming years on the DYDX shape. I know there is DYDX grants program which is working on a lot of dashboards for the new chain. So users and everyone will be able to really keep the pulse on the protocol, understanding how things are evolving, where the trades are happening. So that's very interesting to see also a new infrastructure. literally at the opposite of the centralized crypto exchanges being totally transparent where data will be able to be consumed and to drive decisions

or to drive kind of governance decisions or trading decisions depending who you are as a user. I think this might be a good time to talk a little bit about the different entities that govern DYDX. We talked about the Dow already. There's the foundation. What are the roles of all of these entities

as it relates to DYDX. Absolutely. So the original company behind DYDX is DYDX Trading Inc. created by Antonio Giuliano. He's a CEO of a reserve. The foundation was created two years ago. I am the CEO of the foundation. We are registered in Zug in Switzerland.

And the foundation is really we're focusing on decentralized governance and enabling the DAO's, doing a lot of go-to-market activities in general to activate and connect with the digital. different users and builders of the DYDX protocol. And we have also two DAOs. So the DYDX grants DAO has been built by the community. It's funded by the community.

Most of the wealth in the YDX ecosystem is in the end of the community. The foundation is not the Lord as you can see in some other blockchain ecosystem. We don't have the majority of the tokens at all. The vast majority of the tokens are owned by the community treasury. So besides the grants, there is also since early January this year, the D-YDX operation now, which one more time was created by the community following a series of votes, as well as funded by the community. So they receive about $6 million USD dollar of funding.

And their role as the OursDAO is ready to run some core infrastructure for the DYD exchange, such as the indexer, for example, they are running a front-end. and making sure that the operation of the chain are fully functional. Technically, the chain is run by validators, but the operation now is making sure that all validators get the right level of service and the right distribution of updated software whenever they want. So that's the four entities which are visible outside of the DYDX ecosystem. But overall, there is probably 20 to 50 different companies building and co-building around the YDX.

So if you look at the number of personnel involved with the YDX today, if you bring together people doing research, people doing different dashboards, the validators team, you probably have 500 to 600 people working on the YDX today. The YDX is a protocol of builders for traders. And there is a lot of builders we need. Should they be software developers, validators, dashboard, indexers, full load providers, people doing research on MEDs and some other strategic topic for the protocol? So it's a very fast-going ecosystem, which is very interesting also. I would say the different type of engineers you will get to meet within the ecosystem. Obviously, you've got blockchain engineers, which are specialized in building and operating blockchain

systems, but a lot of financial engineers also, which will have a very good understanding of APIs, very good understanding of pace of consensus and how an order book should be read and optimized, people which are focused exclusively on MV, for example, doing research or building code dedicated to that. So there is really a large panel of talents, which is super energizing. So Charles, I'm actually curious, given that the order book, is being run with with validators itself

and it's a decentralized order book and it's as far as I know a new construction for the industry how will the M-AV landscape shape up in D-Y-D-X because of this new construction or is there something like M-EV

at all in it? So there is obviously M-EV potentials within the chain as that's a question which has been a focus for many since the early days. So the IDX protocol has been working with a

skip protocol to put in place some first, I will say, mitigations and first data collections, infrastructure in place with a new chain. CoriSwan also has been doing some research via the grants program of

the DIYDX grants now on how MIV could be impacting the protocol overall. The reality is everything has been put in place for the early days of the chain to exist and to mitigate as much as it can and EV. But MEV is an ongoing topic. I think just the forces of the market, the traders, everyone involved with the chain will keep optimizing, we'll keep exploring this topic. But before you get enough data and data collection infrastructure put in place, you can't really

go further too much. So there will probably be MEV. on the DYDX chain as there is on Ethereum for example. But all talents are really in place to make sure that this will be identified and mitigated as well. The DIYDX community has been really vocal about being tough with MIV practitioners. So should the validator misbehave eventually there is a lot of conversations right now on how they can be slashed and possibly kicked off of the chain very quickly so that all the marketplace in general stays as healthy as possible. Tell us about how you're integrating with Skip

and what's the technology that, I mean, they're providing this block SDK that allows chains to construct their blocks in ways that really serve the purpose of their use case. What are some of the ways that that Skip can benefit DYDX. And also, you know, in terms of how MEPV should be handled, I know it's ultimately up to the community, but what is your opinion about how MEPB should be distributed

or what types of MEV should be allowed to be utilized by validators and what other types of activity should DYDX ultimately prohibit? So the skip program is run by. the DYDX Grand Dow team. So this is an independent group of the foundation.

But essentially Skip has been already publishing as some kind of a dashboard which scanned constantly the order books

of the different validators to understand which validators will get the latest and most updated order book

as well as which validators will start to misbeave. I think maybe put a trade in place having some

kind of information they should not be leveraging. So that's always something where you look at the kind of trade flow of a validator as well as you put this trade flow against the order book and you start to try to identify if there is some kind of trade practices which are unfair and not healthy. So that's really what Skip is able to put together today. The foundation is not involved directly with the building of the software itself, but more in the ecosystem.

overall. The way I see MV being evolving over time is I think it should be very highly monitored. NMEV is not necessarily always bad, but it has to be kind of constraint and understood to make sure it remains something which does not become unhealthy within the marketplace overall.

We've seen in some other protocols within Cosmos where NMEV was redistributed either to stakers or maybe to some community treasury and that's some thing which can probably be explored with the community. Once again, the protocol is fairly young. There is a lot of attention on MV and I'm confident that overall the right decisions,

the right upgrade of software will be made so that it's not counterproductive within the protocol. So what has it been like working with the cosmos ecosystem? what is your impression of the state of cosmos? And I think from my perspective, like DYDX very much, it utilizes the cosmos stack, but it doesn't really identify itself as a cosmos chain. You know, I sometimes describe it as,

Apple uses the Unix and a lot of the Linux components, but it doesn't brand itself as a Linux operating system. Yeah, how do you see that relationship with the UID IDX and Cosmos and yeah, what are your thoughts on like the Cosmos ecosystem generally? The Cosmos ecosystem has been

as you said, very, very much welcoming the YDX. So we got a lot of helpful support for many different teams within the Cosmos ecosystem. And that's something which goes beyond the crypto Twitter where people I kind of argue on different things.

The reality is when you come as a builder in the Cosmos ecosystem, you're more than welcome and there is no competition. It's basically about growing the pie of crypto in general, and we happen to be working on the same stack. So a lot of support from various projects, really welcoming the YDX overall. Something we've been noticing is a different level of,

I would say, of tools around the Cosmos ecosystem versus the Ethereum space. So if you need multi-sig, if you need different things, there is not so much choice. yet within cosmos, but good products are coming in, definitely. I think there is also this specific identity of cosmos. Sovereign chains means that not every project is dedicated the same way and has the same kind of culture as you will get if you're coming from Bitcoin or Ethereum.

Some Cosmos chain have been running their own things without being too much involved with the community itself. It does not mean there is no interest, but it means, means these teams are not arranging the software in a different way. Some people say DIYDX is really a product-focused team and not kind of blockchain agnostic, and I would not disagree with that. The same way, if you think of your users and you want to keep improving the experience for your users, if an engineer from WhatsApp or an engineer from Zoom wants to move away from a certain type of database to another one,

they should do it for their users and their business overall. But overall, the relationship with Cosmos is great. We are connecting. We are also, I guess, enabling quite a few projects with DYDX coming within the Cosmos ecosystem. I'm thinking of NoBOR. I'm thinking of some other projects which are building together with DYDX, different infrastructure.

So overall, it's a very positive experience, and we're glad to contribute and being a good citizen of the cosmos ecosystem. Are we branding ourselves as a cosmos stack? No, because our users don't really care. The same way, I have no idea exactly what is the software behind the podcast. I'm listening today.

I just care about the content, the team and the people producing this. So I think that's the most important and eventually this brings more people having this kind of product, sole focus, rather than trying to get the full stack as a tribe. Yeah, I mean, I think that makes a lot of sense.

you know, if we zoom out, right, if we zoom out crypto and all of the, you know, sort of like communities that exist within crypto and sometimes, you know, the rivalries between different stacks of the tech, it really doesn't matter in the end. In the end, like we're all trying to build a more decentralized, more permissionless, more trust minimized version of the web and certainly of the financial system. And I think that that approach makes more sense, right? I mean, we want to build products that work. Who cares what technology is underlying those products as long as users are able to use them. The user experience is good, and they reap the benefits of that technology being open and permissionless and troughs minimize.

Which I think brings me to my next question, which is this talk that you gave at a Cosmoverse, which was about this concept of Astropolis. So for those who didn't see the talk, I'll put the link in the show notes. But yeah, what is this idea about can you sort of break this down and so like your vision for the future? Absolutely. The goal of this exercise was really to kind of project myself, the foundation, the teams into what could be the YDX in 10 years. So it's really some kind of fiction exercise projecting ourselves in in 233 and thinking, okay, how is the world around us and how these technology stacks and tech tribes are evolving. So in essence, it's more about looking at how the community have been evolving and how the

users are evolving around around Q2 and Defi in general. Obviously, we will see more and more machines as they are already today, but not always visible to us more and more machines using Defi. Should they be AI allies or AI agents and starting to manage? manage their own smart contracts, manage their own payment systems, going and kind of put assets to work on defy systems. So that's something I think which is coming. And we'll kind of come slow and burst into our face very quickly

thinking that showing that it brings value. And also looking at how our community of builders will be competing maybe amongst each other. I don't think we will compete on technology so much anymore, but we will more compete on ethos and the way we implement things. I think this is really given that all the technology we are building is open source. The things which will make us trust this project or this brand or this community will be really the ethics and the reasons and the values we are putting into our works and projects. So yeah, I really invite everyone to kind of look at these talks.

and hopefully find some inspirations. When I look at the YDX more closely within the context of projections in 10 years, I see the DYDX chain ossifying the same way Bitcoin or Ethereum, have osified or are ossifying, and more and more applications, thousands of derivative markets happening,

and more and more index, and probably more and more and more overlaughts with AI and, and the crypto market in general, being able to enable, for example, DAOs and humans behind the DAO's with providing better reports, helping them to take decisions, automating a certain level of decisions, getting more kind of neutral access to data, and seeing also more and more users of the YDX, should they be institutional or large users, starting to invest with their own resources and deploy personnel on the protocol.

So not only kind of using the software, but contributing to the software and open-sourcing the software they are using and the innovation they put into the software. That's something we see also here and there. We see some large companies deploying resources, deploying engineers for Ethereum, for Bitcoin, for Solana. we start to see also signals that users or major users of the YDX are deploying resources, deploying Mindshare to make the software evolves, to provide feedback, to bring additional tools around the protocol itself.

So that's very interesting to see also how this concept of public good can be much more closer to business and eventually kind of accelerating the flying wheel. and making sure it keeps growing and helps the protocol to keep dominating its markets such as the Perpetuals for the YDX. Yeah, it was a really inspiring talk.

You know, for me, it resonated with because it is very sort of forward thinking and it is sort of a fiction, right? It's kind of like sci-fi future, like the doc. And it reminded me a lot of this talk by Mike Hearn that he gave him.

like 2014 I think at Google or something where he's talking about the future of crypto and how crypto will be used to sort of power this army of self-driving cars and it gave me the same sort of vibe so I really enjoyed it.

I encourage people to go check it out. And you mentioned Erbit in your talk and so I'm curious like how you see Erbit tying into all this yeah. I guess your bit is a bit of sci-pie also as it is today. There is some bits and pieces which are concrete, but it's not exactly ready.

So that's probably why it's inspiring, at least for me. I see the ingredients are there. The product experience is not exactly here, but it's a good inspiration. It's probably, at least it makes sense to me on how computing is evolving and how we will be able to consume networks and being part of networks in a different way. So decentralization comes with crypto,

but there is the overall decentralization of the Internet, which needs to make some progress as well, and how much progress we've been making so far is questionable. More and more big firms are open sourcing, but it's still like very much, very much in the end of a selected few. So community is making a bet on decentralizing further. The Internet resonates with me,

so I'm paying attention to orbit to that extent. And I have to say I'm very impressed by how much things are happening. It's often stuff like this with some people or a small group of builders having an idea and it looks a little bit random but yet interesting. So you try to pay attention. And eventually you see them making progress and it surprises you. So when I see, for example, people being able to deploy their own front end of uniswap

or osmosis within their. their orbit instances without having too much conflict aversioning and making sure this is the right front end they are running. I think that's interesting. Is it ready for mass market? I don't think so. Will it be ready at some points? Probably.

Well, I would say the jury is out on the timeline, but there is definitely something happening there and I'm paying attention. So on this topic of the intersection of AI and crypto, then there are kind of like, many business leaders, many strategic thinkers that, you know, okay, somehow these two areas are going to have an intersection. There's going to be a merger. And there'll be AI agents which might be running on top of LLMs and they are transacting on on blockchain. So the common element is always, okay, there's an LLM or a model that's huge, that's intelligent, that there's some software written or top of the duplicates. model, there's an agent that behaves intelligently.

And then that agent can plug into a crypto blockchain and it can do some transactions on the blockchain. And then we can go to kind of Valerie, the company that's like building, this blockchain agent integration and Konoces is doing similar things. That piece feels clear. Okay, there can be agents, they can transact onto crypto. agree what I've never felt clear about is

what will these AI agents like maybe an individual agent or maybe even a swarm of AI agents as acting with crypto what will they do for the user

like what is my what do you think is your unmet need today that is swarm of crypto AI agents will be solving in 10 years. I think the needs are not clear yet because there is a lot of needs which will come up from there.

The way I start my thinking about AI and blockchain, blockchain is creating very high quality data sets. That's number one, which is like super easy for AI to kind of digest and produce value out of this data set which come clean and very well labeled. So that's number one. So probably a faster kind of processing of data in general. One way I see AI is more AI allies, not only independent and autonomous kind of agents,

but agents which are my own ally to whatever I'm doing within my day. So if I'm participating in governance, for example, within a DAO, today the DAOs are still very young and are still making decisions based on sometimes proper data sets and proper flows and sometimes it's only a lot of politics, right? So what I hope to see and what I feel will be coming in due time will be a Dow governance for this blockchain ecosystem which will be based on much more data-related reports

and kind of helping people to take decisions or helping entering DAO's to kind of avoid the politics or avoid the kind of latency of human coordination. So essentially enabling humans further into this world of blockchain DAOs. It will help also to give identity to agents in general, making sure they consume the right data, they don't get corrupted by flow of information. So there is many use cases,

but the way I kind of find myself comfortable, thinking of what could be AI in five to ten years, will be just a companion, which will help me as an individual if I am part of a DAO in crypto, or maybe which will help my DAO or a DAO and part of to essentially provide more accurate

and updated report, helping to measure whatever KPI we've been putting together and mitigating the weaknesses humans have from time to time. So really seeing AI as an ally rather than autonomous, junts or competitors with us. Cool. Well, Charles, this has been a really fascinating

episode, really fascinating conversation. And yeah, thanks so much for being here with us at sharing all the interesting things happening in the DYDX ecosystem and also opening our minds

to the future of DFI and what things might look like in the next decades to come. Certainly really excited to see DYDX. moving closer to its sort of moving out of alpha and beta and into a more like production phase and really excited to see all of the interesting perpetual markets that people will be building there when when professionalist markets become go online so yeah thanks again and we'll look for to see you soon thanks I appreciate the talk thank you cheers

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