Derivatives exchange dYdX will be “100% decentralized by EOY”

Ethereum Layer 2-based crypto derivatives trading platform dYdX has vowed to become “100% decentralized by EOY” via the protocol’s V4 update.

dYdX primarily offers perpetual contracts, which are derivative products that borrow elements from both spot margin trading and futures trading, but have no expiry date.

Currently only certain components of dYdX are decentralized, including the Ethereum smart contracts, governance and staking. However, the “order book and matching engine” is managed by dYdX Trading Inc. – the team that developed the platform.

dYdX announced the V4 update on Twitter yesterday with a new roadmap stating, “You’re not ready.”

In a blog, dYdX explained that the “main aspect” of the platform’s full decentralization focuses on the order book and its matching engine. The team determined that the main challenges will be decentralized scaling throughput (transaction processing power), finality (off-chain trade matching), and fairness (operators unable to extract value from legitimate trading activities).

“With V4, dYdX will be fully decentralized. There will be no more central checkpoints or errors in the protocol; All aspects of the protocol that can be controlled are fully controlled by the community,” the roadmap reads.

dYdX explained why the platform will be fully decentralized and highlighted the “fundamental improvement” that decentralized finance (DeFi) offers over centralized financial services:

“DeFi offers a massive improvement in transparency. For the first time, the financial system itself is no longer a black box for users. With DeFi, users can trust code instead of companies.”

With the V4 update, dYdX Trading Inc. will no longer receive trading fees in the future. In addition, the platform will also launch other products and services such as synthetics and spot and margin trading.

While many DeFi projects often tout that they are “decentralized” due to smart contracts and their automated setups, they are often controlled by a small core team with access to a multisig admin key that grants them “god-mode” power over the protocol there. This is often a useful strategy for recovering from failures in building the platform, but introduces centralized risks.

US Securities and Exchange Commission Chairman Gary Gensler argued that DeFi is largely centralized during an interview last August, noting that:

“These so-called ‘decentralized finance’ platforms actually have a lot of centralization. There is a group of entrepreneurs running these platforms.”

Another DeFi project touting the transition to full decentralization or “full self-sufficiency” was DAI stablecoin creator and protocol pioneer MakerDAO in mid-2021.

Related: DeFi token AAVE expects a 40% rally in May, but risks of a “bull trap” remain

Rune Christensen, CEO of the Maker Foundation, noted in a blog post at the time that “the protocol and the DAO are driven by thousands, maybe millions, of dedicated, enthusiastic community members.”

However, critics note that MakerDAO has 5.1 billion centralized USDC stablecoins backing its DAI reserves, leaving the true extent of its decentralization in question.