"People Are Seeing The Writing on The Wall; DEXs Will Rule Crypto:" dYdX's Antonio Juliano

In this week’s episode we speak with Antonio Juliano, founder and CEO of dYdX, one of the biggest decentralized exchanges on Ethereum, focusing on derivatives. dYdX recently made news by being one of the first major DeFi projects to move to a Layer 2 scaling solution.

He talks about how dYdX will change for the user on Layer 2 —from transactions that cost cents instead of hundreds, being able to use one asset as collateral for many different tokens, to unlocking higher leverage. Juliano also explained why dYdX decided to go with StarkWare’s zk-rollup solution, instead of another Layer 2 solution or even on another blockchain, and it comes down to decentralization and security.

One of the main goals for his team this year will be to further decentralize dYdX, Juliano said, from the order book to the control of their smart contracts. So yes, for those reading between the lines, that means decentralized governance, and Juliano isn’t ruling out a dYdX token.

Juliano believes derivatives are going to be the biggest products in crypto and so his long-term goal is for dYdX to become one of the biggest crypto exchanges, period. He knows DEXes are just 5% of total crypto volume, but that’s up from 0% two years ago. He says, a lot of people are seeing the writing on the wall.

The podcast was led by Camila Russo, and edited by Alp Gasimov. Transcript was edited by Owen Fernau.

🎙Listen to the interview in this week’s podcast episode here:


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Antonio Juliano: I got into crypto back in 2015 when I had my first job out of college, which was at Coinbase as a software engineer. And I kind of got to Coinbase pretty differently than the way most people got there. The way most people got to Coinbase, especially back in 2015, is that they were really into Bitcoin, and especially back then in 2015, Bitcoin was really all there was in terms of the interesting stuff going on in crypto. But I didn't really know that much about it. 

And through the interview process met a lot of really awesome people, was really fortunate while I was there to be able to work with just a lot of the top people in blockchain at the time were at Coinbase, or if they weren't they were probably coming to Coinbase and giving talks. Like Vitalik came really early on in the life cycle of Ethereum to talk to us, and Olaf Carlson-Wee, was there giving presentations on smart contracts and gas usage on Ethereum, and all this kind of stuff. So that just got me really excited about what was possible to build based on that new technology. 

And I wasn't exactly sure what I wanted to build at that point on Ethereum, but I was pretty convinced that there would be something to build on top of smart contracts that would be really big. So I really see smart contracts as this new computing paradigm where for the first time you can write these programs, they execute totally autonomously, totally deterministically, obviously not controlled by anybody. And that's just really fundamentally different than what you can do in any other area of computing. And every time you see some new step in terms of something new you can do in computing, they're basically always is interesting stuff to be built on top of it. 

“…for the first time you can write these programs, they execute totally autonomously, totally deterministically, obviously not controlled by anybody. And that's just really fundamentally different than what you can do in any other area of computing.”

So anyways, that was back in kind of 2016, eventually left Coinbase in 2016, and after a few months, I started my own thing. And the first thing I started actually wasn't dYdX, it was something else, it was a search engine for decentralized apps and this was back in 2017. So I built this whole thing out. I was working on it for a couple of months and literally nobody used it. I think I had like 10 users literally ever. And the main learning that I took away from that was in addition to building something that's useful, the timing of when you build it is really important. Like probably someday, there will be a search engine for decentralized apps. But it certainly wasn't back in 2017 when there were less than 100 decentralized apps total, and what is the point of a search engine if there's nothing to search for? 

“…the main learning that I took away from that was in addition to building something that's useful, the timing of when you build it is really important.”

So after I spent a few months on that, I took a step back and was thinking about well, okay, if this isn't working out, what's something else on top of Ethereum that I could build that’s interesting. And that was right around the time when the very first decentralized exchanges were starting to come out. So things like Kyber and 0x were just starting to come out, took a look at this, spent a lot of time wrapping my mind around it, and got pretty excited about it.

And I thought that’s kind of the next logical thing to build after just base level spot, which just means like a fancy word for like buying and selling decentralized exchanges, would be more advanced financial products, like margin trading and derivatives. Because I really think of finance as a stack, especially decentralized finance as a stack where first you have decentralized money like Bitcoin and Ethereum and stuff, then you have decentralized spot exchanges like at the time, it was Kyber and 0x, and then the next logical thing to build on top of that is derivatives. But you can't build anything higher in the stack without things lower in the stack, and that's kind of what I was getting at back with the timing point. So been working on dYdX since then, we’re founded in 2017, so I've been around for a while now. And yeah, I guess kind of the rest is history.

CR: You didn't really have a financial background when you started this project so it's interesting that you came at this very just technically like purely financial product from a technical perspective. Was this because finance is kind of the low-hanging fruit on Ethereum, like what makes sense to build on the network?

AJ: Yeah. I think this thought certainly extends beyond dYdX to kind of all DeFi. But I think the area, that trust minimized computing can be the most effective in is finance because trust is so important in finance. And in the traditional financial industry, it's just really run through mostly centralized intermediaries, so it’s very ripe for disruption if for the first time you can start building these financial building blocks that aren't controlled by anybody. And really see the internet, back in the day is the decentralization of information, but the blockchain is really the decentralization of value. And all value is it's kind of like a fancy word for money. 

“…trust minimized computing can be the most effective in is finance because trust is so important in finance. And in the traditional financial industry, it's just really run through mostly centralized intermediaries, so it’s very ripe for disruption…”

So I think that's kind of the fundamental reason why it makes sense to focus on financial products as certainly the first use case for decentralized applications. 

CR: Totally. So can you explain a bit more about how dYdX actually works? We've seen this model of liquidity pools with automated market makers take off with Uniswap and then there's this more traditional model for exchanges which is order-book based but it's harder to make that model decentralized. So yeah, can you get into the backstage of dYdX? First, is it still non-noncustodial and what kind of framework do you use to match trades? 

Hybrid Exchange

AJ: Yeah, good question and that's a good backdrop as well. So we at dYdX are what's known as a hybrid exchange, so that means that we have some centralized components which are our order book, and our matching engine services, and then some decentralized components, which are, of course, the smart contracts which run on the blockchain and make everything noncustodial.

So given that we run on an order book, we don't run on automated market makers, and kind of the reason for that is just order books are a lot more efficient in terms of being able to make the exchange have much more liquidity for the same amount of maker capital. Automated market makers are great, but they're very capital intensive. So you have to have, if you're Uniswap, or Sushiswap, or whatever, billions of dollars locked on the exchange to approach a similar level of liquidity as other exchanges that operate on order books have. So that's the way it works right now. 

We run on an order book, we don't run on automated market makers, and the reason for that is order books are a lot more efficient in terms of being able to make the exchange have more liquidity for the same amount of maker capital.”

And then I think the other piece that's really critical to dYdX and the main kind of differentiator for us over most other decentralized exchanges is that we're focused on more advanced financial products. So the current product that we're really focused on is a synthetic, which is known as a perpetual contract. Probably a lot of people in crypto are already familiar with this. It's basically financially the same product that was really popularized by Bitmex and it is now super popular across the space on exchanges like Binance and FTX. 

But it's currently quite literally the most popular product in all of crypto by volume. Just in the past year, the volume of perpetuals has surpassed literally all the volumes for all the products including spot trading on crypto combined and it's just looking like it'll continue to grow from here. So that's kind of what got us really excited about offering these types of products, this kind of the potential addressable market. The reason they're so popular is because they can be traded with leverage, which basically just means you can multiply your gains and your losses when you're trading and trade as if you had more capital. So it's a much more capital-efficient way to trade.

“Just in the past year, the volume of perpetuals has surpassed literally all the volumes for all the products including spot trading on crypto combined and it's just looking like it'll continue to grow from here.”

So that’s the main reason that they're popular. On dYdX, of course, they're totally noncustodial, completely transparent. And those are the main reasons I think, some  users are choosing to trade on dYdX over other platforms that offer perpetuals.

CR: Right. I think perpetuals was a very killer product in in crypto, because it very much simplified going long on different assets, I mean, this futures contract that doesn't really ever need to get paid, so you don't need to deal with that trading logistics and you can just hold it and go leverage long on something. 

So this is hugely popular on centralized exchanges and BitMex is the biggest exchange by volume because it's the place that people go to trade these perpetual. But while you’re still among one of the biggest DEXs by volume, you're still lagging spot exchanges, like Uniswap or Sushiswap, why do you think that is in DeFi that spot trading is more popular than derivatives trading?

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