Analysis and Proposals on dYdX Chain and DYDX Tokenomics: Reduce the active set from 60 to 30 validators

Introduction

Since the genesis of dYdX Chain on October 26, 2023, dYdX Chain has generated $232B in trading volume and distributed $39M in USDC to dYdX Chain validators and stakers.

On August 12, 2024, dYdX Trading announced the dYdX Unlimited software featuring significant improvements to the dYdX Chain open-source software, such as permissionless market listings, MegaVault, the potential for revenue sharing, and an Affiliate Program, among other things.

Despite product achievements, the DYDX token has been facing challenges due to high inflation and a significant amount of token unlocks. We believe that dYdX Unlimited presents a unique opportunity to optimize dYdX Chain and DYDX tokenomics for the protocol’s long-term viability and success. Our proposals aim to (1) improve liquidity on dYdX Chain markets, (2) increase the attractiveness of the DYDX token, and (3) encourage holding and staking DYDX, all with a view to increasing the security of the dYdX Chain and driving sustainable growth in the dYdX ecosystem.

To achieve this goal, we recommend implementing revenue sharing, enhancing DYDX token utility, and reducing DYDX emissions, all while supporting the immediate growth requirements of the dYdX Chain. Implementing these changes will significantly enhance dYdX’s competitiveness and reduce DYDX inflation. This will turn the DYDX token into a more robust asset, therefore benefiting the overall security and resiliency of the network.

We published our Analysis and Proposals on dYdX Chain and DYDX Tokenomics on the dYdX Forum on 22nd October 2024 which has garnered constructive participation and discussions.

Our extensive analysis of the proposal can be found in our research report.

Based on the community’s feedback, we are splitting up the proposals based on subject matter. The four separate proposals (and threads) are as follows:

  1. Reduce the Trading Rewards “C” constant from 0.90 to 0.5.
  2. Protocol Revenue Distribution:
    a. 50% of all protocol revenue routed to the MegaVault.
    b. 10% of all protocol revenue routed to the Treasury subDAO.
    c. Recommendation that above an $80M level of annual protocol revenue, the Treasury subDAO could consider a Buy & Stake program.
  3. Reduce the active set from 60 to 30 validators.
  4. Cease support for the wethDYDX Smart Contract (i.e., the Bridge) on the dYdX Chain side.

Summary of Recommendations

  1. Reduce the active set from 60 to 30 validators.

Reduce the active set from 60 to 30 validators

The current active validator set on the dYdX Chain consists of 60 validators. At the current fee level, over 17 active validators are unprofitable after accounting for a fixed infrastructure cost of $1,000 per month at their respective commission rates. The proposed MegaVault and dYdX Treasury subDAO revenue shares would further reduce staking yields and, therefore, the funding validators receive from their respective commission, exacerbating unprofitability.

Of the total revenue, 50% is allocated to MegaVault and 10% to the Treasury subDAO. At current commission rates, in a set of 60 validators, 34 would incur losses, while in a 45-validator set, 19 would remain unprofitable. Meanwhile, increasing validator commission to boost profitability would lower staking APR. This could potentially encourage unbonding while discouraging staking. The equilibrium bonded ratio to achieve the current staking APR would decline and thus, impact dYdX Chain security.

We proposed reducing the active validator set from 60 to 30, ensuring that all validators in the active set have a chance to remain profitable after accounting for MegaVault and Treasury subDAO revenue shares at current commission rates. We have conducted a thorough analysis of the proposals. For more details, please refer to our research report.

Community feedback indicated strong interest in exploring potential latency and performance improvements from reducing the validator set.

This was followed by valuable community input, highlighted below.

Hi! The reduction of trading rewards down to 0.5 will make service fees unfavourable compared to other exchanges with more stable API and better liquidity.

Thanks.

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