$DYDX Token Unlock: Is the Pump and Dump Already Underway?

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TLDR;

• DYDX is a decentralized derivatives exchange that has delayed a token unlock from January 2023 to December 1st, 2023.

• The unlock is for a significant portion of the total supply (30%), and investors are concerned that this will put downward pressure on the price of the token.

• The DYDX team has lined up several catalytic events in the lead-up to the unlock, including the release of the source code for its standalone blockchain and the return of staking and profit sharing.

• The market has reacted well to these announcements, with trading volumes increasing substantially and the price of DYDX rising.

• However, the timing of these events raises concerns that these could be part of a pump-and-dump scheme and that the price of DYDX could see substantial downward pressure following the unlock.

Introduction:

$DYDX was founded in 2017 by Antonio Juliano, Kevin Chen, and Piero Pero. The team was motivated by the lack of decentralized derivative exchanges and the high fees charged by centralized exchanges. As such, they wanted to build a decentralized, sustainable ecosystem. After a couple of years of development, $DYDX launched its mainnet on Ethereum in 2021.

The mainnet version increased the capabilities of $DYDX to trade perpetual swaps, cross-margin trade, and place limit orders across a wide range of cryptocurrencies. Finally, in 2023, $DYDX launched its V4 release on the $DYDX Chain. This brought several improvements such as a new tiered staking system, a new early unstaking penalty system, and a new staking dashboard.

DYDX’s delayed unlock

DYDX, the decentralized exchange (DEX), announced back in January they had signed an amendment to postpone an unlock of around 152m tokens, representing a huge 30% of the total supply. On the announcement, the market took the news positively - sending DYDX 110% higher in the following trading sessions. Given the low circulating float with just 18% of the supply in circulation - the cliff unlock would have increased the circulating supply by 84.4% overnight.

The decision to extend the unlock was made in response to feedback from the community. Many DYDX holders expressed concern that the large unlock would put downward pressure on the price of the token.

We are now ticking ever closer to the delayed unlock date. On December 1st, this supply (worth circa $360 million) is set to be unlocked. Investors are in line to receive the largest allocation of 25% of the circulating supply, worth $199.7M.

The issues first expressed in January, still remain. Such a substantial unlocking is likely to place downward pressure on the token. The team had hoped to “give the market more time to digest the tokens and reduce the impact on price”. In reality, they have simply kicked the can down the road.

To try and reduce the impact of this massive flooding of tokens on the market, The $DYDX team had lined up multiple catalytic events to facilitate demand. As the December 1st unlock approaches, these events raise questions over potential pump-and-dump tactics. In the last bull run, teams announced news before large unlocking events to deliberately inflate token prices. They then short-sold perpetual contracts and locked in profit before selling the tokens back to the market.

Recent Catalysts

The alpha mainnet for $DYDX version 4, along with the launch of its standalone Cosmos-based blockchain, was released last week. The release of the $DYDX V4’s complete source code represents a major step towards full decentralization for the platform as it transitions to a new community-governed layer 1 blockchain. Originally built on Ethereum L2 scaling solution StarkEx, the latest iteration introduces an independent blockchain tailored to accommodate the project's requirements on Cosmos SDK.

Open-source code is code that is freely available to anyone to view, modify, and distribute. This allows anyone to inspect the code for security vulnerabilities and make suggestions for improvements. As such, it shows $DYDX’s commitment to transparency and decentralization.

The mainnet is primarily focused on stress-testing the network and onboarding validators to ensure its security. It is already in the process of onboarding 60 validators. These validators for $DYDX will enroll by submitting a genesis file as noted by Cosmos-based development firm Cosmostation, which intends to operate as a $DYDX validator. Once approved by a community governance vote, a Beta launch is planned, which will enable trading on the network.

The release of the source code is positive for $DYDX in several ways:

• It could lead to increased adoption of the DYDX platform, as users become more confident in its security and transparency.

• It could attract new developers to the DYDX ecosystem, which could lead to new features and innovations.

• It could make it more difficult for other decentralized derivatives exchanges to compete with DYDX, as they would need to open-source their own code in order to match DYDX's level of transparency and decentralization.

$DYDX is one of the largest and most popular decentralized derivatives exchanges, with a cumulative volume of over $1 trillion since 2020. As such, the launch of its standalone blockchain is also a major development for the DeFi ecosystem as a whole. It represents a significant step towards the decentralization of derivatives trading.

$DYDX Staking and Profit Sharing:

In addition to the release of the complete source code last week, there was another major update – the return of staking and profit sharing for stakers.

In previous versions of $DYDX, all protocol revenue was accrued to the team. However, for V4 revenue will be directed to the $DYDX stakers. A staker’s profitability will only increase with decreasing staking ratio and/or increasing protocol revenue. The staking rewards rate has also increased from 5% APY to 10% APY, and the team has reduced the minimum staking amount to 1,000 $DYDX tokens.

$DYDX holders can therefore earn rewards in two ways:

• Staking rewards: DYDX stakers earn a percentage of the trading fees generated on the DYDX exchange. The staking rewards are distributed to stakers on a daily basis.

• Profit sharing: DYDX stakers are also entitled to a share of the profits generated by the DYDX exchange. The profit sharing is distributed to stakers on a quarterly basis.

The $DYDX team had previously disabled staking in February 2023 in order to "protect the community and ensure the long-term success of the project." However, the team has since decided to re-enable staking, citing the following reasons:

• The DYDX protocol is now more stable and secure than it was in February 2023.

• The team is confident that the DYDX tokenomics model is sustainable and can support staking rewards.

• The team believes that staking will help to decentralize the DYDX ecosystem and make it more resilient to attack.

The reasons cited above could be legitimate points. However, it does seem coincidental that staking and profit sharing has been reenabled, just one month prior to the token unlock.

Market Impact

The market reacted well to the release of the $DYDX Chain code last week with flows increasing substantially. In the week of the release, there was over $9billion traded on V3. In the month of October as a whole, trading volumes rose to 26.4B up from 17.4B in September.

We have also seen notable price action on $DYDX. On the staking announcement, $DYDX rallied 10% higher, before fading shortly after. On a more contextual level, and more relevant to this article, the market remains around 26% higher against Ethereum since the team announced the unlock delay back in January. This indicates the market has not yet priced this information in, giving us cause for concern about the sustainability of the current rally.

Conclusion

As the December 1^st unlock approaches, these catalytic events raise questions about potential pump-and-dump tactics. The token has seen a sharp rise of 12.3% in the last month which would seem to support this hypothesis. There is also the potential for further releases before the unlock, such as changes in staking rewards, or other tokenomics updates. These could also be well received by the market. The current volatility driven by the catalytic events discussed above, has the potential to act as team/investor exit liquidity prior to the token unlock. With that in mind, we are wary of this December 1^st release as this inflated price may not be sustainable. Following the unlock, we could see substantial downward pressure on $DYDX. Either, way we expect this token to be highly traded in the coming months. It should also be noted that the unlock could well be delayed again.

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