Crypto derivatives exchange builder dYdX raised $65 million from crypto investment firm Paradigm and a handful of market makers after seeing its improved swaps protocol catch fire among users.

The Series C round of funding was joined by CMS Holdings, CMT Digital, Electric Capital, HashKey Capital and StarkWare Industries, a software company that supports the upgrade of dYdX’s low-fee trading platform. 

San Francisco-based dYdX said it will use the new capital to “significantly improve liquidity” during volatile trading periods. Additionally, the funds will go toward protocol decentralization, an expansion of perpetual swaps contracts, a mobile app and back-office hires.

The beefed-up war chest makes the idea of decentralized exchanges meaningfully challenging the Coinbases of the world a smidge more concrete. Notably, Paradigm founder Fred Ehrsam was an early Coinbase executive.

The exchange aims to be a decentralized hub for Ethereum-based crypto derivatives. Its biggest volume comes from the cross-margined perpetual swaps market, which has seen $2.2 billion in trading since a February technology upgrade that dramatically lowered user costs by skirting pricey Ethereum transaction fees.

Perpetual swaps are comparable to bitcoin and ether futures contracts without an expiry date. Cross-margined means traders can use the same asset pool as collateral across multiple markets, instead of needing to deposit collateral in each market separately. That means more risk to the trader – but also higher potential reward. DyDx founder Antonio Juliano said it's more “capital efficient.”

“We're doing about $40 to $50 million in volume every day on layer two” perpetual swaps, Juliano said, referring to the protocol upgrade.

Nearly 30% of dYdX’s perpetual trading volume still flows through the exchange’s on-chain margin product; Juliano credited that activity to a handful of large investors. He said his team is dedicated to layer 2. 

“We feel that's a better product and has a lot more growth potential,” he said.

In the long run, Juliano said he’s positioning dYdX to be one of the largest crypto exchanges in the world by catering to derivatives, which he said is crypto’s biggest market. 

“And the biggest thing that's happened I think in the crypto markets in the past year, is that the derivatives volume, really driven by perpetual contracts, has become bigger in terms of trading volume than everything else in crypto put together,” he said.

Additionally, his team is betting that decentralized exchanges (DEXs) will ultimately prevail over their centralized counterparts because of their potential to offer avoid censorship and offer transparency and security to traders.

“The thing we're really thinking is that the next really big thing is going to be derivatives on DEXs,” Juliano said.

That bet appears to be paying dividends for dYdX – at least in the short term. Juliano, who said his exchange was in the red as recently as October or November, is now “hugely profitable.”