Margin Trading on dYdX Explained for Beginners
Published May 22, 2022.
Margin trading is a system of trading assets using borrowed funds provided by a third party. In crypto, margin trading involves borrowing funds from an exchange to facilitate a trade. Margin trading accounts provide users with more collateralized capital than standard trading accounts.
This approach to trading gives users the position to leverage their holdings while also assisting them in magnifying profits from digital asset trades. Margin trading is popular in low-volatility markets, such as the foreign exchange market, as well as stock, commodities, and cryptocurrency markets.
Margin trading forms one of the key features of DeFi, allowing users to borrow crypto to increase their trading position. With this trading system, users can decide to long or short crypto in anticipation of a rise or fall in the asset's price.
Trading on dXdY
dYdX is a decentralized exchange (DEX) powered by Ethereum and designed for crypto margin trading. Dydx provides margin trading for a range of popular crypto assets, including BTC, ETH, SOL, DOT, AAVE, LINK, UNI, SUSHI, MATIC, etc. The DEX leverages smart contracts in the blockchain to allow decentralized trading of crypto assets without requiring third parties.
dYdX started as a basic crypto margin trading platform using smart contracts to complete trades with limited trading options. However, the platform has now rolled out additional features for its users like margin and perpetuals now available for many cryptocurrencies.
Margin trading on platforms like dYdX presents new merits compared to traditional centralized exchanges or DEXs. These margin trading platforms provide users with advanced product derivatives for traders willing to take on additional risks.
There are two forms of margin trading used by dYdX: cross-margin trading and isolated margin trading.
1. Isolated Margin Trading
Under isolated margin trading, users utilize only a specific amount of funds for leverage. In the event of liquidation, this trading method allows traders to cap their losses by the size of the isolated position taken. Isolated margin trading is useful for taking speculative short-term positions and provides a means to easily view the capital deployed and the profit and loss of trade.
2. Cross Margin Trading
Cross margin trading, commonly referred to as "Spread Margin," is a margin mechanism that uses the entire available balance of the user's cryptocurrency tokens for taking leverage positions. Cross margin trading appears riskier on paper, but it provides certain perks over isolated margin trading. For instance, cross-margin trading is capital efficient, permits lenders to use any asset as collateral, and provides a better way to manage liquidations and decrease risks simply by depositing additional assets as collateral.
The Supported Margin Trading Pairs of dYdX
The margin trading pairs available on dYdX allow users to trade between Ethereum, DAI, and USDC in addition to bitcoin trading through the use of perpetual smart contracts.
There are a plethora of supported leveraged pairs available on the platform, including BTC/USDT, BTC/USDC, ETH/BTC, ETH/USDC, ETH/DAI, DAI/USDC, and many more.
Last year, dYdX added an additional six trading pairs,, including AGLD/USDT, DYDX/USDT, FTM/USDT, PLA/USDT, SHIB/USDC, and DOGE/USDC.
How to Trade on Margin on DYDX
You will need a crypto wallet to trade margin on dYdX. To trade on dYdX, users must first deposit funds into their relevant account by following the steps below:
- Create a user account on dYdX and after this is done, you can connect your wallet. dYdX currently supports most major cryptocurrency wallets on the market.
- After depositing USDC into the protocol, users can trade any asset that is listed from a single pool of deposited collateral. Below are some of the trading pairs of assets that are available:
- ETH-USD: up to 25x leverage.
- BTC-USD: up to 25x leverage.
- LINK-USD: up to 10x leverage.
- AAVE-USD: up to 10x leverage.
- UNI-USD: up to 10x leverage.
DYDX Margin and Borrowing Collateralization
dYdX margin is the amount of money that a trader puts up as collateral. In this case, borrowed funds by users are typically secured by other assets and must be repaid, together with interest, within a specified period. Margin creates leverage, which helps a trader buy more and make a bigger deal than they would have been able to otherwise.
To borrow an asset on dYdX, the users need to:
- Connect their wallet to the platform
- Go to the borrow page
- Click on the asset they wish to borrow under “Borrow Assets”
- Access the input fields in the borrow modal
On dYdX, you can borrow assets up to a collateralization ratio of 1.25, or 125 percent of the amount borrowed. Once this limit is reached, dYdX won't let traders borrow any more assets unless the trader puts up more collateral or pay back some of what was already borrowed.
