FODL vs. DYDX — 5 Important Points

12 min readMar 28, 2022

Before we start talking about the differences and advantages between these two projects, I would like to salute both for contributing great value to the future of decentralized finance. Both projects are really good, and the point of this article is not to bash or glorify any of them in any way. It is purely for informational and educational purposes as well as to raise some additional awareness about decentralized finance in a broader sense. This is definitely not financial advice, and you should always make your own research to verify the information you read in this or any other article for that matter.

Now, that we got that out of the way, let’s take a look at some brief descriptions of both projects to get a sense of what we will be talking about.

BRIEF DESCRIPTION OF BOTH PROJECTS:

FODL:

Fodl is a fully decentralized non-custodial leverage protocol. It allows you to trade with leverage without paying any funding rates. The Fodl platform combines several defi mechanisms which are flash loans and collateral lending platforms, combined with proprietary position protection bots and cross-asset price indexing.

The project follows a decentralized ethos of transparency, low fees, user autonomy, and distributing its revenue back to the token holders. All positions and calculations are handled on-chain using live market data which allows users to maintain the keys to their positions. Users don’t have to send funds to a central pool of any kind.

Fodl also has a DAO (decentralized autonomous organization) whose primary function is the distribution of revenue and fine-tuning the parameters of the project including fee amounts, rewards schedules for staking, and liquidity mining. Through time the DAO community is expected to have full control over the platform and access to 100% of protocol revenue.

The protocol was first built on the Ethereum smart contracts but is now quickly expanding and adding the ability to choose other networks to run on such as BNB Smart Chain and Polygon, with more on the way (Avalanche, Arbiturm, and Fantom).

If you want to take a deeper dive into Fodl you can go here or join their official discord.

DYDX:

dYdX is a hybrid decentralized crypto exchange. This means that some components of dYdX are decentralized and some components are run on servers operated by dYdX Trading Inc. and other partners (venture capitalists).

It is important to mention that dYdX is working towards a fully decentralized system in the long run, but we will be looking at the state of the system is in right now!

Unlike most other “decentralized” exchanges, on dYdX you can lend, borrow and trade with leverage. It’s an open-source trading protocol that is built on the Ethereum smart contracts and STARK (zero-knowledge/Z.K.) rollups powered by Starkware.

The main components of dYdX that run centrally are the orderbook and matching engine. dYdX’s orderbook trading model has allowed dYdX to grow into one of the most liquid exchanges in all of crypto. Running a central matching engine has allowed dYdX to scale to tens of millions of orders placed per day with sub-second latency, and has enabled dYdX to grow to well over a billion dollars a day in trading volume.

Additionally, all of dYdX governance and staking are built on smart contracts.

If you want to dive deeper into dYdX you can go here or join their official discord.

So, as we see both projects are on a mission to give people across the world access to decentralized leverage trading, however, there are some key differences you might want to consider before deciding which one to use. The five major advantages Fodl has over dYdX are:

FODL protocol is fully decentralized
FODL is trustless
FODL is immutable
You pay 0% funding rates with FODL
The fee revenue is being distributed between FODL token holders

So let’s have a look at each one of these and try to understand why they are so important.

FIVE ADVANTAGES:

1.) FULLY DECENTRALIZED

What does it mean that Fodl is fully decentralized? It means that all the mechanisms required for the protocol to execute trades (positions, calculations, fees, leverage, etc.) as intended are handled on-chain using live market data while the users still get to maintain the keys to their positions. Users are never required to send funds to a central pool as opposed to dYdX where they have to send their money to the dYdX’s “vault”.

In a system like dYdX’s which is not fully decentralized, as long as the dYdX Trading Inc. and their partners can be trusted, the system will function as intended. But if the exchange is subjected to any system failures, attacks, or hacks your money can be compromised as it would be with any other centralized exchange. Hence the phrase “Not your keys, not your coins!” Because of the lack of full transparency, data such as fees for example can be altered or manipulated without any public authority.

Here is an example of what can happen when you don’t have the control over your money:

It makes you wonder if you really want to give up all this control when you know there are alternatives out there to avoid all of this.

Of course, we are only human, and it’s quite natural for us to be a little naive and direct trust more towards people and organizations rather than systems for now. However, more and more people are starting to look for other alternatives (code), since organizations are made up of people who can be easily corruptible as we have seen many times before, while a computer code system stays objective and rational (if set up correctly of course) at all times.

2.) TRUSTLESS

What does it mean for a protocol to be “trustless”? The computer science definition states that it eliminates the need for participants to know or trust each other in order for the system to work. No central entity has the authority or control over the system.

Although I just implied that there is no need for “any” trust in such a system, this is not exactly true. There is still some trust that needs to be established. The users of such a protocol still need to trust the system (code)! For this reason, a 100% trustless system is theoretically impossible for now. The term “trustless” is a little misleading as a blockchain does not eliminate trust, but minimizes the amount of trust needed and distributes it across a network of people. Something to bear in mind anyway.

A permissionless or trustless protocol like Fodl for example, lets anyone participate and does not require permission from a central authority in this case “the Fodl core team” to use the services on the blockchain. All the mechanisms on Fodl are so to speak on-chain and function with the help of smart contracts (code).

Permissionless systems are synonymous with the ideas of transparency, decentralization, and accessibility. Fodl is an open source project and allows anyone with this kind of coding knowledge to see how the protocol works. Fodl is big on transparency and if you want to know more about how they are going about this you should check out this article right here.

dYdX on the other hand, because it’s not really fully decentralized and relies on off-chain mechanisms (order book, matching engine, central pool) for it to work, it requires you to trust “them” with your funds. When you invest in DyDx margin products, you lose control of your funds, because you have to deposit them into their “vault” (central pool). This means you essentially have to trust the exchange that it operates legitimately and that they will return you the money after your trades are done.

3.) IMMUTABLE

What does it mean for something to be immutable in terms of computer science?

It basically means it can’t be changed after its initial creation. Immutability represents one of the key features of blockchain technology. It can’t be changed by any individual, team, corporation, or even government for that matter. No entity has the ability to manipulate, replace or falsify data that is stored on a blockchain network, but this only applies if the network is fully decentralized. This is where dYdX falls short because of its semi-centralized nature for now. Fodl is immutable!

The concept of immutability can make the data auditing process much quicker and cheaper than in the traditional way (notaries, courts, etc.), because of the indisputable history of a transactional ledger. Maintaining a full historical record is not only a blessing to auditing, but also provides new opportunities in query, analytics, and overall business processes.

On top of that, it also helps with data integrity and overall trust associated with the system. The integrity of the chain can be validated at any time by simply re-calculating the block hashes. If there is a discrepancy between the block data and its corresponding hash, the transactions will not be validated. This means that any attempts of tampering with the data will be detected very quickly.

Although immutability is one of the core benefits of a blockchain, the data stored on it isn’t completely resilient to vulnerabilities. If someone with malicious intents is able to amass the majority of the network hash rate, it could alter the otherwise immutable data in an attack called the 51% attack. For more information on this topic, you can go here.

4.) NO FUNDING RATES

What’s a funding rate you ask? A funding rate is a mechanism to keep the price of the derivatives closer to the spot price of a given asset. It is a mechanism that incentivizes traders to close the gap between the two prices, by either getting paid or by having to pay for opening a position (one side pays the other and vice-versa) The rate is paid in time intervals and can fluctuate based on open interest

If the open interest is very high (meaning there are a lot of open leveraged long or short positions in the derivatives market) the price of let’s say $btc futures contracts can potentially deviate from the actual spot price of $btc.

If the open interest is low (meaning there aren’t many such positions open) the chances for a price deviation is lower.

So, let’s say a lot of traders are making a bet that the price of $btc will go higher from this given point and they open up long positions on the $btc futures market. Because the buying pressure from these traders can be higher than spot market buyers, they actually make the price of $btc futures deviate higher from the spot price.

Because the price is higher due to high open interest the funding rate will be positive. This means there is a potential need for someone to step in and bring the price back down closer to the spot price of $btc. The funding rate should now incentivize traders to take a short position to bring the price down. They will be getting paid by the ones who took or are still taking long positions.

If the funding rate is negative the process is just the other way around. (short-sellers need to pay the funding rate to the long buyers)

This is basically the mechanism that dYdX is using for their trading platform and is done “off-chain”. This mechanism is also used by all major centralized exchanges that provide the ability to trade in the derivatives markets (Binance, FTX, ByBit, etc.).

So how did Fodl approach this concept since everything is done on-chain? They approached it a little differently. Rather than having to rely on volatile on/off-chain funding rates driven by a smaller market of margin traders, they figured they can use lending platforms that provide deep liquidity, low volatility interest rates, and governance token rewards, allowing for a user’s position to almost always fully pay for itself. As they say: “Our motto is: be your own funding rate!”

5.) REVENUE DISTRIBUTION

The fee revenue distribution systems are very different between the two projects.

All the fees on dYdX are attributed off-chain. Meaning DyDx does not provide full transparency on how it accounts for fees or calculates the leverage since none of this can be seen on the blockchain. The user essentially needs to agree to the fees DyDx will charge against their positions post-factum. There is also no way of telling what the fees are going to be, and they occur for every lifecycle event: open, close, adjust. The fee revenue is not distributed back to the community.

Meanwhile, on Fodl the fees are attributed on-chain. They’re distributed among the token holders. All revenue that the platform generates is controlled by the DAO community. Ultimately it is their decision how they want to use the revenue, may it be $Fodl buybacks on the Sushi LP to refill rewards contracts or fuel future development grants; or maybe direct token profit share (Either the native tokens that are in the pool or conversion to stable coin) just to give you some examples. These decisions are and will be determined by voting on official DAO proposals.

Fodl fees are designed to be simple to understand, transparently calculated, and low.

You can find the full distribution here.

ADDITIONAL FEATURES YOU NEED TO KNOW

There are two more interesting features that should be mentioned when we speak about Fodl.

1.) As you may know the Fodl protocol was made by the one and only 0xb1 team which is widely known for its involvement and big contributions to the NFT space. It would only be natural for them to include this piece of technology in the project as well. When you make trades on Fodl, each position is actually an NFT. This brings to mind a wide range of possible use-cases, one of which is to supply your position as an NFT to an external platform like Drops DAO as collateral for borrowing money against it.

For example:

Let’s say that you have a very low-risk position like a stablecoin yield farming strategy or maybe a very low leverage position with a good entry that you don’t want to unwind. You like the APR so you don’t want to close the position.
So, let’s say you need more money because you want to buy some NFTs or maybe pay off something in real life. You can then supply your Fodl position NFT to Drops and borrow money against it.
The same thing applies to leverage long or short positions. Maybe you have a long position open on ETH at $2200 at 1.5x leverage, but you don’t want to close it yet you still need additional cash to do something. Again, you can supply it to Drops and borrow extra money against it. Additionally, while you maintain an open position, you can earn APY in other tokens (DOP) as well.

All this will be possible in the very near future (Q2 of 2022) when the mainnet of Drops DAO is launched.

2.) The other thing worth mentioning is that you can get a high APR in various tokens when you open positions on the Fodl. As of writing this article (3/22/22) you can get 112.97% APR on a long position WETH/USDC with 2x leverage for example.

That’s it for now. Thank you for reading and I hope this helped you in any way friend! Cheers!

“Disclaimer: This article is not trading or investment advice. The above article is for informational and educational purposes only. Please do your own research before purchasing or investing in any cryptocurrency or digital asset.”