I think $DYDX has dramatically changed the market behavior.

It puts some critical new strategies on the table, and has a huge impact on the actions many market makers and bots seem to be taking. 👇

First, what's important to note is that DyDx has a different funding rate structure than a lot of the futures products in the market.

It's a more aggressive, but in turn much safer for the system, kind of calculation.

But, this makes for a huge delta in the rates, as can be seen in the 30 day avg chart below from Defi Rate.

Over 30 days, longing $ETH on DyDX 29x the FTX rate.

That number may not seem like a lot, but it's actually fairly relevant, as right now on DyDx the hourly rate of 0.024% means the annual rate is 216%.

You can get paid 216% APY to short ETH.

That annualized number on FTX is only 21%.

So if you went long 100 ETH on FTX, and short 100 ETH on DyDx then currently you'd be earning at a rate of 195% APY while being delta neutral.

BUT, that's not all!

Because DyDx also has its trading rewards in the $DYDX token.

Which, unlike most liquidity mining models doesn't pay you directly for volume, as it has no interest in wash trading. It instead pays on a formula of fees paid and open interest.

Why is this relevant?

It's the first time that you are getting paid for the length of time a position is kept open, because the openInterest is based on your average open positions across the entire epoch.

It motivates users to keep longer positions open rather than scalp

Based on my on results, it's not hard to get around an additional 10% - 20% APY out of the trading formula depending on your fee rate and position size, and I'm sure there are people who have optimized it even further than that.

So if you factored that in above you'd have still been earning the equivalent of a 200% APY on a neutral position at the peak funding rate spike this morning.

That's absolutely insane.

Now obviously these rates aren't always this high, but there is usually a small price difference and a huge funding rate difference between FTX and DyDx, and the behavioral difference of average open interest changes the market game a lot.

If market makers can get even 30% APY while being in neutral positions or while covering a large part of their position risk (either upside or downside) that dramatically changes the type of positions they are willing to take on.

My guess is that it has actually led to them holding more of these assets as they can accumulate with better downside protection, but that just adds to the funding rate issues.

For most people it likely won't change the way they interact with the market a lot but I think it opens up some really interesting new strategies.

I'll also be really intrigued to see how it impacts the next time we get a correction or crash, because if my theory is right and large market makers are holding higher amounts of tokens because of downside coverage, you may get more aggressive liquidation cascades.

Either way DyDx continues to be a game changer of a product.

I still don't like the token, and I've had some connectivity issues, but it is a game changer in this space that has opened up some fascinating new models and behaviors in the space.

As always not financial advice, just something for you to chew on with your Wednesday morning coffee!

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It also uses a weird corporate EVM deployed by "Eluvio" which claims to be a blockchain alternative to a CDN.

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I love DyDx as a product, it shows the huge value that onchain perps are going to have. But, I think its overvalued compare to the upside potential of others in the space.

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