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digital
daily

digital daily: First Order Derivative

First Order Derivative. Remember Calculus? Newton's miracle. dYdX is the rate of change. That's exactly where we need to focus -- the rate at which the technology stack for blockchain applications is changing. On June 22nd, decentralized exchange dYdX announced that v4.0 of their platform will move from Starkware, an Ethereum layer-2 network, to Cosmos, a competing blockchain. In typical internet fashion, loud voices immediately pronounced betrayal, ascendance, and other tribal extremes. The reality is much less dramatic. An official announcement from dYdX (here) explains their reason clearly: control. Cosmos is a long-standing block-chain ecosystem (here). It allows an application to form its own blockchain and customize how the "validators" (i.e., block-producing computers) operate. For dYdX, that means having validators perform both on-chain and off-chain computing and accept the dYdX token as payment. dYdX wants its validators to use fast off-chain computing resources for the messy order matching process and save the immutable on-chain transactions to record resulting trades. The company also wants users to pay only for their completed trades, not every bid or ask submitted. Today, Cosmos provides dYdX with this flexibility, and Ethereum's layer-2s do not. Is this the death of Ethereum and the rise of Cosmos? No. Both ecosystems are accelerating. You can track Cosmos "zones" here and the evolution of Ethereum's layer-2s here. The two blockchains even connect through Cosmos' "Gravity Bridge." What dYdX shows us is an evolving business model wrestling with technology tradeoffs -- a routine problem. The blockchain "tech stack" that best suits dYdX will not be as attractive to other applications. Ethereum, Cosmos, Polkadot, Avalanche, Solana, and many other base-layer networks (and layer-2 solutions) present tradeoffs. Applications will struggle to connect real-world use cases with the power and limitations of each blockchain. Those that do it best will thrive. dYdX's decision to move to Cosmos is just a single example of technological forces shaping one company's decisions. If we step back and look, we can see those forces all around us. The rate of change is rising.

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