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How A 19-Person Cryptocurrency Startup Surpassed Coinbase In Daily Trading Volume

How A 19-Person Cryptocurrency Startup Surpassed Coinbase In Daily Trading Volume
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As Bitcoin approaches all-time highs, an increasing number of cryptocurrency companies are proving that they can take a small set of resources and turn them into highly profitable businesses very quickly.

Dydx, a four-year-old San Francisco startup that allows traders outside the US to buy and sell cryptocurrency-based financial products, recently handled more transaction volumes than Coinbase, America’s most valuable crypto company. On September 27 and 28, Dydx recorded $18.6 billion in transactions, compared to $5.9 billion for Coinbase, according to CoinGecko. This has helped Dydx generate $75 million in revenue so far in 2021. It’s expected to reach $125 million before the end of the year, with a net profit of $81 million, says founder and CEO Antonio Giuliano, 28. This would equate to a high net profit margin of 65%.

Giuliano grew up in Pittsburgh and went to Princeton to study computer science. Like crypto billionaire Sam Bankman-Fried, he had little interest in cryptocurrencies before entering the industry. He just learned that he wanted to join a tech startup and later became an entrepreneur. In 2014, venture capitalist Fred Wilson visited one of Giuliano’s entrepreneurship classes at Princeton and spoke about Coinbase, giving Giuliano an idea of ​​where to work after college. He graduated in 2015 and joined Coinbase as a software engineer, becoming employee 100. Giuliano said he stayed for a year, had a short stint at Uber, and then started a search engine for cryptocurrency applications, which failed because his timing was too early.

He decided he wanted to build something on top of Ethereum, the popular cryptocurrency software that acts as a decentralized computer with apps running on top. After studying the financial markets and watching the growth of Coinbase, he came up with the idea for Dydx. “The way most financial markets develop is, first of all, the asset is created, and then it is traded on spot exchanges,” he says, referring to exchanges that allow you to directly own an asset — like Coinbase does with bitcoin.

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The assets are then traded on margin exchanges. And then, eventually, people make derivative products on top of an asset that people want to trade. So it seemed like the next logical thing to build,” he says.

In late 2017, at the height of the initial boom in the cryptocurrency offering, he secured $2 million in seed funding from Andreessen Horowitz, Polychain Capital and Coinbase, among other backers. Dydx was launched in 2018 and allows users to buy Ether “on margin,” which means they can borrow money through the Dydx platform to buy cryptocurrencies, a strategy that traders use to gain additional leverage and maximize their profits (potential losses are also magnified).

By 2019, Dydx was processing about $1 million per day in transactions. The following year, it focused on “perpetual swaps,” a derivative popularized by Hong Kong crypto exchange Bitmex. Perpetuals tracks the price of bitcoin, but they do not require you to own the actual bitcoin. Unlike futures contracts, the derivatives that have been in widespread use for over a century, have no forever expiration date. After launching in 2020, Dydx quickly grew to trade between $10 million and $30 million per day.

Two big changes have driven up Dydx’s volume this year, according to Giuliano. In April, Dydx implemented 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 had to wait 60 seconds for trades to expire, and had to pay $50 to $100 Ethereum “gas” transaction fees. With StarkWare, the gas fee is much lower, and Dydx pays for it. “Now you make a deal, and it instantly updates like any 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 Switzerland-based firm to launch the Dydx crypto token, and then aggressively pursued a marketing tactic called “liquidity mining.” This is a great term for offering financial rewards to people for trading on the stock exchange. Dydx could offer self-mined coins as a reward, creating a low-cost way to fund incentives. “Codes can really fuel the fire for growth with a product that really matches the market,” says Giuliano.

The effects of these changes were astounding. Dydx’s daily volume jumped from about $30 million in July to $450 million in August, and then to $2 billion over the past month. (The spike at the end of September was triggered by the month-end trading awards, and people feel more urgent to trade as the deadline approaches.) Dydx has only 6000 active clients each trading hundreds of thousands of dollars per day in crypto on average.

One downside of offering “liquidity mining” incentives to traders: It can attract “washing trading,” when one person creates two accounts and trades with themselves to collect the rewards. One day in August, Dydx noticed that $1.7 billion of cryptocurrency aggregator was traded on its platform. This was about ten times the amount of the compound that was traded on all other cryptocurrency exchanges combined. Dydx investigated and concluded that it was laundering trading and not paying trading bonuses to violating users.

“It prompted us to take a really active stance against the washing business,” says Giuliano. “We have active monitoring programs that use both common sense and technical analysis to try to identify the laundering trade.” It is believed that between 1% and 5% of Dydx’s volume in August was lackluster trading. In September, he said it was down to 0.1% due to the new monitoring measures.

Most of Dydx’s users are located in Asia and Europe – due to stricter US regulatory restrictions, Dydx prevents all US residents from using its platform – and in September, China’s central bank declared all crypto-to-crypto transactions to be illegal. China has a long history of cracking down on cryptocurrencies, and residents have largely found ways to get around the government ban. But if China finds a way to ban or discourage the trading of crypto-derivatives in the country, it will undoubtedly have a negative impact on Giuliano’s business. “Dydx is not based in China and does not market to Chinese users, so we are not a good source for feedback on regulations in China,” says Giuliano.

Unlike Coinbase and other brokerages, Dydx does not allow people to store funds on the exchange, nor does it have any regulatory licenses. It does not perform KYC checks required by regulated financial institutions, although it does use a third-party service to help monitor users’ digital wallets for illicit funds. This basic approach to regulation keeps compliance costs low and profit margins high. Giuliano thinks it won’t get him into trouble with US regulators. “Dydx has been in contact with the CFTC and other government regulators for a long time now,” he says. “I think we first met them about three and a half years ago, and we’ve sent them multiple comment letters.” “It really comes down to the fact that we don’t support US customers,” he adds.

Dydx last raised its venture capital funding in June at a valuation of $215 million, according to PitchBook. Then it was processing about $25 million a day, or about 1% of what it deals with today. If you raise money again, that valuation will rise sharply, but Giuliano does not plan to raise more project funding because the company is very profitable. He says he will continue to keep the number of people down, and likely not exceed 50 people over the next year. “A small team with the highest quality can outperform and take larger teams overseas, especially in such a new market.”

Even with a small number of employees, over the next three to five years, “our highest-level goal is to become one of the largest exchanges in cryptocurrency,” he says. To achieve this goal, he will have to outperform not only Coinbase, but also FTX, which processes about $15 billion per day, and Binance, which brings in $90 billion.


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