The Centralization of dYdX
dYdX is a decentralized exchange for tokenized assets. You can swap different tokens like Ethereum and Bitcoin. Recently, they made a large infrastructure change that makes their decentralized exchange look much more like a traditional one—this is the centralization of dYdX.
First, dYdX will move the significant portions of its app off-chain – orders and cancellations will never touch the blockchain. I wrote about this possibility in Crypto Without Blockchains. Orders will still be gossiped across the network, but without any cryptographic or ordering guarantees, it won't serve many purposes.
Second, dYdX will move to its own blockchain. This follows from the first change – validators cannot have application-specific validation on a generic chain like Ethereum. While still a blockchain, the infrastructure will be highly centralized:
It's too inefficient to query the blockchain directly, so dedicated indexers will serve data over HTTP or WebSockets to frontend applications like web or mobile apps. There are no guarantees that this data matches the historical chain data.
The new chain will be proof-of-stake. Since the chain is dedicated to serving dYdX, the diversity of validators will be low. As a result, there will be more incentive to have vertical solutions.
Why would dYdX make these changes?
Transaction speed – exchanges built on blockchains cannot compete with centralized exchanges like Coinbase or FTX.
Transaction fees – in the decentralized model, fees are proportional to network security. dYdX can lower fees by becoming more centralized.
Developer/user experience – building applications on top of a blockchain is difficult – it's hard to store and retrieve data and difficult to optimize. Controlling more infrastructure can translate to a better developer and end-user experience.
Regulation – I suspect dYdX is proactively trending towards centralization in anticipation of upcoming regulation. It would be near impossible to require financial regulation (KYC and AML) on top of an anonymized user base.
I think that dYdX is moving in the right direction. Web3 enables new experiences, but ultimately the infrastructure will have to look a lot more like what we had before.