Our bullish view on DYDX is based on the following points:

1) More people buy DYDX tokens after v4 as potential validators accumulate spot tokens to obtain transaction fees accrued by post-v4 tokens;

2) After decentralization is achieved in v4, product innovation will increase significantly.

In addition, we believe the following factors will drive expense growth over the long term:

i) The ability of validators to capture MEV;

ii) through wider adoption of new features such as prediction markets and account abstraction;

iii) Panic in centralized exchanges will drive DEX growth

What is v4?

In short, v4 is the process of dYdX migrating to its own chain built by the Cosmos SDK. v4 was first announced in January 2022, followed by the release of details about the dYdX chain in June 2022.

Previously, fees were not accrued to token holders but were distributed to equity holders, effectively making the token a useless governance token. v4 and the dYdX chain will make fees accrue to token holders, meaning we can think of v4 as the introduction of a fee switch for token holders.

Investment Thesis 1: After v4, the annualized rate of return for DYDX holders is about 20%

There are multiple signs that DYDX tokens will accumulate 100% of the transaction fees after v4

Based on current DYDX fees ($50m — annualized over the past 30 days), we estimate validators will earn a minimum of 15% staking yield from day one (assuming all DYDX in circulation is staked), but more likely closer to 20% (assuming a similar percentage of staked tokens as other high fee growth tokens like SNX, GMX, and CVX)

Investment Thesis 2: Decentralization will lead to innovation

We believe that the decentralization of DYDX has the potential to open up new verticals that were previously difficult to enter due to regulatory barriers, such as prediction markets, options, and synthetic products. This was also mentioned in the recent DYDX presentation at the Nebular Summit.

Investment Thesis 3: Bullish Unlock

v4 and investor token unlocks were originally planned for early 2023 but were later postponed. We clearly see that the timing of v4 has been synchronized with the unlocks to ensure that the new supply is balanced with the demand created by the new and improved token economic model.

Misconception: There will be a large unlock in December and tokens may be sold off

The biggest concern about the token right now is the upcoming December unlock. The December unlock will increase the token supply by 80%, and another 80% a year later. However, we believe the concerns here are overblown, and in reality, the team has every interest in ensuring the token is well-supported when it unlocks, supporting our bullish view

30% of the 150M DYDX tokens unlocked on December 1, 2023 belong to “employees and advisors.” We’ve seen precedent for this as previous unlocks have been delayed to better sync with the timing of the delayed v4; likely to ensure a good intersection between token supply and demand once value has accrued

Catalyst: MEV for Validators in v4

A recently explored idea is that DYDX validators are able to earn MEV income on exchanges. We read Chorus One’s in-depth report on DYDX validators extracting MEV and are convinced that “validators can increase their income by working with trading companies to extract MEV,” further enhancing the appeal of spot purchases to start validator nodes.

in conclusion

We view DYDX as both a trading (short) and investment (long) opportunity in both the short and long term. In the short term, we expect v4 to spark an “unlock upswing” as token fees increase and validators accumulate spot demand. In the long term, we also see it as a good core holding in a crypto portfolio as it has good fundamental market performance during crypto upcycles. In addition to new products post-v4 and perpetual DEXs potentially taking share from CEXs, it also has real value-added benefits from speculative trading volume returning to crypto

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