As Bitcoin approaches its all-time high, an increasing number of cryptocurrency companies are proving they can use a tiny set of resources and turn them into high-yield businesses very quickly.
Dydx, a four-year-old San Francisco-based startup that allows traders outside the US to buy and sell cryptocurrency-based financial products, recently processed more transactions than Coinbase, America’s most expensive crypto company.
Dydx recorded $ 18.6 billion in transactions on September 27 and 28, according to CoinGecko, compared to $ 5.9 billion for Coinbase. According to 28-year-old founder and CEO Antonio Giuliano, it helped Dydx generate $ 75 million in revenue by 2021. It is expected to reach $ 125 million by the end of the year, with a net profit of $ 81 million.
Giuliano grew up in Pittsburgh and went to Princeton to study computer science. Like cryptocurrency billionaire Sam Bankman-Freed, he didn’t show much interest in cryptocurrency until he entered the industry. He just knew he wanted to join a tech startup and then become an entrepreneur. In 2014, venture capitalist Fred Wilson attended one of Giuliano’s entrepreneurship courses at Princeton and talked about Coinbase, which gave Giuliano an idea of where to work after college.
He graduated in 2015 and joined Coinbase as a Software Engineer, becoming its 100th employee. He stayed there for a year, briefly worked at Uber, and then launched a search engine for cryptocurrency applications that failed because his timing was too early, Giuliano says.
He decided he wanted to build something based on Ethereum, a popular cryptocurrency software that acts like a decentralized computer with applications running on it. After researching financial markets and watching Coinbase grow, he came up with the idea for Dydx. “Most financial markets develop in a way that first creates an asset and then sells it on spot exchanges,” he says, referring to exchanges that allow you to directly own the asset, as Coinbase does for bitcoin.
“Then the assets are traded on margin exchanges. And then, in the end, people create derivatives on top of the asset that people want to trade, ”he says.
At the end of 2017, at the height of the initial boom in cryptocurrency coin supply, he received $ 2 million in seed funding. Dydx launched in 2018 and allows users to buy Ethereum “on margin,” meaning they can borrow money through the Dydx platform to buy cryptocurrency, a strategy that traders use to gain extra leverage and maximize their profits (potential losses also increase).
By 2019, Dydx was processing around $ 1 million in transactions per day. The next year, he focused on “perpetual swaps,” a derivative popularized by Hong Kong-based cryptocurrency exchange Bitmex. Perpetual contracts track the price of bitcoin, but they do not require you to own real bitcoin. Unlike futures, derivatives that have been in widespread use for over a century, perpetual contracts have no expiration date. Launching them in 2020, Dydx was soon trading between $ 10 million and $ 30 million a day.
Two big changes have led to a sharp increase in Dydx sales this year, Giuliano said. In April, Dydx introduced a blockchain technology called StarkWare, which significantly speeds up cryptocurrency transactions made through Ethereum. Prior to this change, people trading on Ethereum-based decentralized exchanges often had to wait 60 seconds for trades to complete and had to pay an Ethereum transaction fee of between $ 50 and $ 100. With StarkWare, the fees are much lower and Dydx itself is the payer. “Now you place a trade and it instantly refreshes, just like a normal website,” says Giuliano. “This is very different from what most people are used to in decentralized finance.”
The second big change was that Dydx partnered with a Swiss-based fund to launch the Dydx cryptocurrency token, and then aggressively applied a marketing tactic called “liquidity mining.” This is an unusual term for the monetary reward of people for trading on the stock exchange. Dydx can offer in-house produced currency as a reward, creating an inexpensive way to fund incentives. “Tokens can really add fuel to the fire for the growth of a product that already meets market demands,” says Giuliano.
The effect of these changes was overwhelming. Dydx’s daily sales jumped from about $ 30 million in July to $ 450 million in August, and then to $ 2 billion in the last month. The spike in late September was due to the fact that trading rewards are distributed at the end of the month, and people feel more urgency to trade when the deadline approaches. Dydx has a total of 6,000 active clients, each trading hundreds of thousands of dollars a day.
One of the drawbacks of an incentive such as “liquidity extraction” is that it can attract “flush trading” where one person creates two accounts and trades with himself in order to receive a reward. So, once in August, Dydx noted that $ 1.7 billion worth of cryptocurrencies were sold on its platform. Dydx investigated and concluded that it was a “flush trade”.
“This prompted us to take a proactive stance against the flush trade,” says Giuliano. “We have proactive monitoring programs that use both common sense and technical analytics to try and identify the washout trade.” As noted by the CEO of Dydx, from 1% to 5% of sales in August accounted for “flush” trade. According to him, in September it fell to 0.1% due to new monitoring measures.
The majority of Dydx users are located in Asia and Europe – due to tighter regulatory restrictions in the US, Dydx is blocking all US residents from using its platform – and in September the People’s Bank of China announced that all transactions between cryptocurrencies are illegal. China has a long history of fighting cryptocurrency and residents are mostly finding ways to get around government bans. But if China finds a way to block or weaken trading in cryptocurrency derivatives in the country, it will undoubtedly have a negative impact on Giuliano’s business. “Dydx is not based in China and does not sell to Chinese users, so we cannot be a good source for commenting on Chinese legislation,” says Giuliano.
Unlike Coinbase and other brokerage companies, Dydx does not allow people to store money on their exchange and does not have any regulatory licenses. It does not perform know-your-customer checks required by regulated financial institutions, although it uses third-party services to track users’ e-wallets for illegal funds. This simple approach to regulation can help reduce compliance costs and deliver high margins. Giuliano believes that this will not cause him problems with US regulators. “Dydx has a long history of contact with the CFTC and other government regulators,” he says. “I think we first met them about three and a half years ago and sent them a few emails with comments.” He adds: “It really boils down to the fact that we just don’t support US customers.”
Dydx last raised $ 215 million in venture funding in June, according to PitchBook. Then they processed about $ 25 million a day, or about 1% of what they do today. If the exchange raises money again, this valuation will skyrocket, but Giuliano has no plans to raise additional venture funding as the company is very profitable. He says he will continue to maintain a low headcount, probably no more than 50 next year.
Even with a small number of employees over the next three to five years “Our goal at the highest level is to become one of the largest cryptocurrency exchanges,” he says. To achieve this goal, they will have to outrun not only Coinbase, but FTX, which processes around $ 15 billion a day, and Binance, which processes a whopping $ 90 billion.