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dYdX Chain Genesis

The Initial State of the dYdX Chain, A Critical Moment for the dYdX Community

Background

On September 11, 2023, dYdX Trading Inc. released an initial version of the dYdX Chain open-source software under a Business Source License (BSL). Creating the first block in a blockchain, “Genesis,” is a core component of protocols based on the Cosmos SDK. The Genesis block represents the nascent state of a network through its defining parameters, which shape the protocol’s functioning, robustness, and flexibility.

To those familiar with the concept of Genesis and the dYdX Chain software, the potential Genesis of the dYdX Chain (“dYdX Chain Genesis'') would represent a new chapter for the dYdX ecosystem marked by increased decentralization, a better user experience, and unparalleled strides in democratizing access to financial opportunity. There are several processes and decisions that would need to be made before dYdX Chain Genesis. Such procedures are incredibly strategic as they will determine the initial state and parameters of the dYdX Chain, which will impact the dYdX Chain's capacity for growth and sustained success.

Beyond the lines of code and technical configurations, this post aims to spotlight the role of a prospective key stakeholder in dYdX Chain Genesis: the dYdX community. This post underscores the belief that, for a protocol to thrive, the dYdX community must be aware of its role in the potential dYdX Chain Genesis process and the enablement of the protocol.

The dYdX Operations subDAO is releasing this blog post for informational purposes and to highlight some of the critical components of the potential Genesis of the dYdX Chain. This post aims to educate stakeholders in the dYdX ecosystem to make informed decisions when participating in the potential Genesis of the dYdX Chain.

Given the dYdX community's critical role in the operation, governance, and security of the dYdX Chain (if and when deployed), we encourage the dYdX community to understand and discuss the dYdX Chain Genesis processes outlined below.

Role of Genesis

The potential Genesis of the dYdX Chain would serve as a foundational moment for the entire dYdX ecosystem. During this crucial stage, the initial parameter configuration and settings of the dYdX Chain will be proposed by the dYdX Operations subDAO, initiating the creation of the JSON file, which defines the initial state of the dYdX Chain (the “Genesis File”), defined by social consensus between the potential mainnet validators of the dYdX Chain (the “Genesis Parties”). This blog post will segment the potential dYdX Chain Genesis process into three phases: Pre-Genesis, Genesis, and Post-Genesis.

Pre-Genesis:

The Pre-Genesis phase pertains to the activities necessary to complete the Genesis File. The dYdX Chain Genesis File would need to contain all information for the initial state of the dYdX Chain, including but not limited to the initial token allocation, Genesis accounts, consensus parameters, Genesis time, and default parameters. More information on the genesis file of a Cosmos SDK-based blockchain is available here.

Recently, the dYdX community has voted on the subject matter that should be included in the Genesis File:

Contents of the Genesis File Established through dYdX Governance

On August 28, 2023, a Snapshot vote was created and proposed several items that relate to the prospective dYdX Chain Genesis File:

  1. The dYdX community to adopt the dYdX v4 open-source software (if and when deployed on mainnet) as the next version of the dYdX protocol,
  2. the dYdX community to adopt DYDX as the layer 1 token of the dYdX Chain (if and when deployed on mainnet),
  3. the dYdX community to adopt the Ethereum smart contract (the “wethDYDX Smart Contract”) commissioned by the dYdX Foundation that, if deployed, would enable a permissionless and autonomous one-way bridge for the ethDYDX token to be migrated from Ethereum to the dYdX Chain,
  4. a recommendation that dYdX Chain validators should reference the wethDYDX Smart Contract when distributing DYDX on the dYdX Chain, and
  5. wethDYDX to have the same governance and utility functions as Ethereum-based DYDX (“ethDYDX”) on dYdX v3 (On-Chain: Long Timelock).

The vote concluded on September 1, 2023, and the dYdX community voted in favor of the above proposal with almost unanimous support. Proposal items 1-4 did not require any smart contract changes and, as such, were ratified by the dYdX community through the Snapshot vote. On September 13, 2023, an on-chain proposal was created to update the GovernanceStrategy Smart Contract to give wethDYDX the same governance utility and functionality as ethDYDX in dYdX v3. On September 23, 2023, the vote concluded with 105,599,760.08 ethDYDX voting in favor of the proposal. Both governance votes resulted in the dYdX community making key decisions and recommendations about the layer 1 staking token and the initial allocation of tokens on the prospective dYdX Chain.

Other Contents in the Genesis File

On August 3rd, 2023, dYdX Trading Inc. published a comprehensive blog post detailing potential parameters the Genesis Parties could include in the Genesis File. It is important to note that after Genesis, the parameters will be subject to change by DYDX stakers through dYdX Chain governance.

dYdX Chain Validators

An additional aspect of the Pre-Genesis phase would involve defining the initial set of dYdX Chain validators because, at least, a validator would need to propose the first block after the Genesis of the dYdX Chain. For Genesis of the dYdX Chain to be possible, an initial set of validators need to be identified and they would need to transfer ethDYDX tokens to the wethDYDX Smart Contract by a specified cut-off time before Genesis. Data from these bridging transactions on Ethereum will be included in the Gensis JSON file to ensure that all Genesis validators have been credited with the correct amount of self delegated layer 1 tokens at Genesis. Throughout the Pre-Genesis phase, prospective validators must be diligent. Those intending to join the mainnet Genesis must set up their home directory, establish their credentials, generate their genTx, and submit it to the mainnet repository.

Genesis:

Genesis involves validators agreeing on the contents of the Genesis File, publishing the Genesis File, and thereby creating the first block of the blockchain by social consensus before the POS consensus algorithm begins block production.

The dYdX Chain open-source software contains an initial set of blockchain parameters that the Genesis Parties may choose to include in the Genesis File. The dYdX community should review the dYdX Chain open-source software and the blog post that dYdX Trading Inc. published on potential rewards and parameters on the dYdX Chain. This post details potential parameters the Genesis Parties could include in the Genesis File. It is important to note that after Genesis, the parameters will be subject to change by DYDX stakers through dYdX Chain governance.

Post-Genesis:

The Post-Genesis phase encompasses all activities that would occur after Genesis. The dYdX Operations subDAO proposes characterizing the potential Post-Genesis period into two distinct stages: Alpha and Beta.

The ‘Alpha’ stage ensures that the dYdX Chain is stable and reliable, prioritizing an economic balance where the value of staked DYDX tokens exceeds the value of the network’s on-chain liquidity, among other valid security measures. In contrast, the ‘Beta’ stage would bring traders, liquidity providers, and other essential system components into the fold. All activity on the dYdX Chain (if and when deployed on mainnet) should be gradually increased before enabling a fully scaled trading experience for all users of the dYdX Chain open-source software.

Alpha Stage: Network Gains Stability

During the Alpha stage, the dYdX Operations subDAO, a deployer/s of the dYdX protocol Front-End, and the Indexer, will limit trading functionality to prioritize stability and security. For the dYdX Chain to achieve stability and security, dYdX-Chain-based DYDX token holders may consider prioritizing staking their DYDX to validators of the dYdX Chain during this phase.

It’s worth noting that the network might encounter disruptions in the initial period after Genesis. For transparency and performance tracking of the dYdX Chain, public dashboards like those provided by Mintscan, Keplr, and others will be accessible, and ecosystem participants should monitor key metrics like node count, block times, block production, block height, transactions, bonded tokens, and stake distribution, among others.

The Alpha stage allows for low-friction forks or roll-backs if confronted with significant issues, such as errors, functional problems, security vulnerabilities, or hostile attempts by malicious actors. As mentioned, the dYdX Operations subDAO plans to limit incentives and trading during this stage. This means that the implications of state reversions would be considerably reduced since a hostile takeover would be economically unviable.

Beta Stage: Trading Enabled

The transition from the Alpha stage to the Beta stage hinges on the stability and security of the dYdX Chain network and the readiness of the indexer infrastructure, among other factors. To navigate this stage effectively, the dYdX Operations subDAO team, amongst others, will be monitoring specific benchmarks to help further analyze the dYdX Chain’s readiness for the Beta stage, such as:

  1. Sufficient DYDX tokens staked to a diverse validator set for securing the network, and
  2. No further updates or fixes are expected, amongst other factors.

In the Beta stage, the dYdX Operations subDAO, which will operate a protocol front-end and deploy the indexer, will opt for public accessibility, provided each step above has been contemplated. The emphasis should remain firmly on ensuring network security and stability.

As the Beta stage draws close, the dYdX community may contemplate introducing additional reward and incentive programs to stimulate more liquidity and activity on the dYdX Chain. Conversations around these topics are currently underway in the dYdX Forum and would require a governance vote on the dYdX Chain (if and when deployed on mainnet).

Conclusion

The establishment and progression of a mainnet deployment of the dYdX Chain open-source software rest on three pivotal phases: Pre-Genesis, Genesis, and Post-Genesis. While the Genesis block forms the crux of a protocol's technical foundation, its success is intimately tied to the Pre-Genesis preparations and the Post-Genesis involvement of the various stakeholders. It’s imperative for stakeholders not only to understand but actively shape each phase, ensuring a robust, flexible, and community-driven ecosystem.