The Rise of the Sovereign/Multi dApp-Chain Thesis

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Coinmonks

8 min readJun 27, 2022

“At DYDX we embrace radical changes in technology that have the potential to dramatically improve the protocol” — Antonio Juliano, Founder of dYdX

dYdX are Ethereum OGs. The news of them leaving StarkWare ( An Eth L2) raised many questions and concerns regarding the future of Ethereum and its layer 2’s. A flagship DeFi product, such as dYdX, choosing to leave Ethereum, in favor of a sovereign blockchain is a key moment in crypto history that may have ramifications for years to come. The implications of this decision may begin the trend of Ethereum losing its status as the gold standard of smart contract platforms, which may lead to a decrease in dominance, usage, and increase in sovereign blockchains which will lead to the rise of the multi-dApp chain world.

The History of dYdX

Founded in 2017 by Antonio Juliano, dYdX was one ofthe first decentralized perpetuals, margin, and spot trading application built on Ethereum. At the time, margin trading was picking up in popularity, especially on centralized exchanges, like Bitfinex. By 2021, dYdx became a flagship DeFi product, through their unique orderbook system, ultimately becoming the dominant decentralized perps exchange. In 2021, in series C, they raised $65,000,000, which valued them at $215,000,000. However, the road to a $215,000,000 valuation was not easy.

Ethereum Mainnet→StarkWare→dYdX Chain

dYdX was originally built on the Ethereum mainnet. Up until DeFi summer, everything was all good. The rise in DeFi popularity on Ethereum absolutely skyrocketed gas fees. When gas was around a couple cents per transaction, dYdX was subsidizing its users. However, when single trades were costing $50-$100, dYdX was burning money at a frightening rate. Ultimately, this led to a radical decision. dYdX raised the minimum trade amount to $10,000, killing volume and protocol adoption.

THIS WAS A MAJOR ISSUE. Antonio has ALWAYS been product oriented. Product. Product. Product. Antonio’s vision for dyDx has always been clear from the start: a decentralized product, with an amazing UX, that is secure and extremely scalable.

In April of 2021, dYdX officially launched on StarkWare, an Ethereum layer 2 scaling solution. Built on StarkWare’s scaling engine StarkEx, dYdx was now able to offer zero gas trading, reduced trading fees, and a reduced trading size. In theory this satisfies all of Antonio’s criteria for dYdX: decentralization, security, scalability and UX. In the eyes of the public, everything was smooth sailing. Out of nowhere, dYdX announced they were leaving StarkWare for a sovereign blockchain, dYdX chain. This MAJOR decision ushered in many valid questions and concerns regarding the future of Ethereum and its layer 2's.

Why did dYdX leave StarkWare?

StarkWare should have solved the trilemma Antonio was facing, right? Well, not so much. The largest issue with StarkWare was centralization. What makes dYdX so unique is their off-chain orderbook. Rather than using the mainnet to finalize trades, dYdx executes trades off-chain which allows for higher throughput and better matching. There are two reasons why Starkware’s centralization was an issue for dYdX: closed source code and centralized roll-up sequencing.

The first centralization issue was closed source code. StarkWare uses a different programming language, called Cairo. Cairo is the native smart contract language for Starknet and StarkWare, allowing for zero knowledge roll-ups. One of the issues between dYdX and StarkWare is that essentially dYdX was using stark technology (StarkEx) “as a service”. They would pay fees to the StarkWare team off-chain, and the StarkWare developers wrote all of the code.

Secondly, the centralization of sequencers. One glaring issue with all Ethereum L2’s is centralized sequencers, which are only temporary. I am not a developer so I will do my best to explain. To understand roll-up technology we are going to use the mental model of a test.

Assume the Ethereum mainnet is the multiple choice exam you are going to turn in. L2’s such as Arbitrum, Optimism, and StarkWare are the scratch paper you do all of the “dirty work” on. You do all of the work on your scratch paper, find the answer, then circle the correct answer on the exam you turn in. L2’s roll up a bunch of transactions (Trading, approving smart contracts, staking, etc.) into one bundle and send it to the mainnet for the bundle of transactions to be finalized.

The centralization problem stems from the sequencers, which are the ones who send the roll-up of transactions from the L2 to the mainnet. A malicious actor can falsify transactions.

The Implications of dYdX Leaving Ethereum

This move has crypto twitter absolutely buzzing with many speculating on Ethereum’s future. This is a huge loss for Ethereum maxis and a huge win for Cosmos. Cosmos “poaching” a flagship product from Ethereum, may just be the beginning of Ethereum losing its title as the “Gold Standard” for blockchains and the rise of the sovereign chain/multi dApp-chain thesis.

Is Ethereum Still the Gold Standard for Blockchains?

No. Before dYdX left Ethereum, my thesis was that Ethereum is not the gold standard anymore. Is there a blockchain and ecosystem currently better than Ethereum? No.

There is a difference between being the best and being the gold standard. From its launch in 2017, through the bull run of 2021, without a doubt, Ethereum was the gold standard of blockchains. They were the first smart contract platform. All innovation was on Ethereum. The most talented developers built on Ethereum. The decentralized world WAS Ethereum. I argue that is not the case anymore.

The congestion of the Ethereum network, along with the emergence of alt layer 1’s, absolutely stifled Ethereum’s adoption. At its peak congestion (gas around $50-$100) Ethereum was just not usable for the average crypto user; ESPECIALLY THE NEW ONE.

Every day new users were choosing to use alternative L1s such as Solana, Avalanche, and Luna (Rip) because the user experience was more enjoyable (Sound familiar?). Instead of paying $50 a transaction, these other blockchains allowed users to experiment in their thriving ecosystems with transactions costing pennies. Innovation DOESN’T only happen on Ethereum. The best developesr DON’T only build on Ethereum. The smart contract platform market is more competitive than ever.

What about Ethereum Layer 2's?

One of the largest questions on CT was, “Who does this reflect more on, Starkware or all L2's?” I believe this is a reflection on Ethereum. Now, more than ever, there is pressure on Ethereum to deliver in the merge from Pow to Pos. In a blog post regarding sharding, Vitalik says,

“Sharding is the future of Ethereum scalability, and it will be key to helping the ecosystem support many thousands of transactions per second and allowing large portions of the world to regularly use the platform at an affordable cost.”

By the time sharding becomes available, Ethereum will already have switched to the beacon chain. In regards to Ethereum dominance, I have always said, “Just because you are the first, doesn’t mean you will remain the best”. Innovation always wins.

We are at the point of crypto adoption where THE PRODUCT is of most importance. Unfortunately, news users will be more inclined to simplicity, faster throughput, and cheap transactions at the tradeoff of decentralization. The merge to Pos will not fix the scalability issues immediately. it might alleviate some of them, but there are well-funded blockchains, with talented developers, that will have a more enjoyable user experience.

So what does this mean for layer 2s? Well, I am skeptical about their utility for my following thesis.

The Sovereign Chain Thesis and the Multi dApp-Chain World

Members of the crypto community, including myself, believe dYdX leaving Ethereum for a sovereign blockchain on Cosmos is the beginning of a trend switch, the sovereign chain/multi dApp-chain thesis.

The sovereign chain/multi dApp-chain thesis says that applications built on a protocol level will choose to leave the existing blockchain they are on, in favor of a sovereign blockchain, which will lead to the multi dApp-chain world. They will choose to start their own chain to maximize decentralization, security, and scalability.

This Antonio tweet says it all. I believe we will see more and more developers put less emphasis on the specific blockchain, in favor of product quality. The race is for new users. How do you attract users? By putting out the best product. Have you ever heard Jeff Bezos speak about Amazon? There is one recurring theme. THE CUSTOMER. In order to best satisfy the customer, one’s product or service has to provide VALUE.

For dApps to provide the best experience for customers, decentralization (Not every developer will value decentralization as highly), scalability, and security are musts. Sovereign blockchains allow for a customizable, decentralized, scalable, and secure protocols that will provide the best experience for customers, leading to the multi dApp-chain world.

My View on the Multi dApp-Chain World

First and foremost, I want to state that the intention of this blog post is not to blindly promote Cosmos. Personally, I have yet to dive deep into their blockchain, so my understanding is minimal. However, after this dYdX event, as well as my belief in the multi-dApp chain world thesis, I will most definitely be studying Cosmos. To execute a multi dApp-chain world is WAY EASIER SAID THAN DONE. For this thesis to be validated, the most important problem that needs to be solved is blockchain interoperability/communication.

To say the least, bridges are sketchy. Too many times we have seen bridges get drained due to exploits. Another take on blockchain communication is over ledger systems. Personally, I don’t like the “centralization” of overledger systems. For example, the Cosmos ecosystem solely depends on the Cosmos hub. Hypothetically, if the centralized point of failure fails, how decentralized is the system?

My ideal vision for blockchain interoperability is a blockchain-agnostic communication system that every blockchain can and will use. Do I have any idea on how that would be accomplished? Not a single clue. Way easier said than done.

Food for Thought

During this writing process, I have pondered some questions regarding decentralization:

Can a application built on a protocol ever truly be decentralized?

Can we ever achieve TRUE decentralization?

How does one maximize user experience while maintaining decentralization?

Short-term, the new user does value decentralization as most users. In our lifetime, will we see an event that “awakens” the masses to governmental infringement on individual liberties leading to a global trend switch of self-sovereignty?

God damn I am exited for the future. Please give me a follow if you enjoyed this!

Ben

Twitter: @ben_kaplan23

Tiktok: @crypto_kaplan

Beacons: beacons.ai/cryptokaplan

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