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 significant amount of token unlocks. We believe that dYdX Unlimited presents a unique opportunity to optimize dYdX Chain and DYDX tokenomics for the protocolâs 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 dYdXâs 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.
Summary of Recommendations
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. Above an $80M level of annual protocol revenue, the Treasury subDAO could consider a buy & stake program.
Validator Profitability
a. Reduce the active set from 60 to 30 validators.
Trading Rewards
a. Reduce the Trading Rewards âCâ constant from 0.90 to 0.5.
The Bridge
a. Cease support for the wethDYDX Smart Contract (i.e., the Bridge) on the dYdX Chain side.
We have conducted extensive analysis on this proposal. For more details, please refer to our research report
A lot of strong points in here. I do take exception with the valset reduction.
Those organizations can make their own decisions on profitability, and their financial decisions to validate or not on dYdX are up to them. Many, us included, are benefited by being in the dYdX valset, regardless if the numbers are there or not â we donât need your organization making that recommendation for us.
The VP disparities mentioned in the document are absolutely an issue, but decreasing the set will just make the situation worse. Weâre #52 in the set, but have the 10th most number of delegators - those are the types of trends that will ultimately help distribute VP and âfixâ the Nakamoto. More individual stakers driving more decentralization from large token holders with concentrated stake.
Only one last point, the document doesnât seem to factor in the reduction of stake based on reduced fees to stakers. In the model, if the fees dropped from $50M to $16.2M, I would similarly expect the total staked tokens at 280M to drop significantly.
If that were 1:1 (90M total staked) or even 1:2 (181M dYdX staked), how does that affect the model or the security of the chain?
From the âresearch reportâ:
ââŚit leaves the ecosystem without a sustainable mechanism to fund essential operational expenses and growth initiatives. Relying solely on token dilution to cover these costs exerts continuousâ, âThe reliance on token dilution to cover ecosystem costs puts downward pressure on the token priceâ, âreducing the reliance on DYDX token emissions to cover ecosystem expenses will help stabilize the tokenâs valueâ
There is NO inflation on dYdX, the staking rewards come from USDC commission of trading volume on dYdX v4. Moreover, @karpatkey will manage the treasury which will generate additional around 4M USDC from staking rewards
Unlike most PoS networks, dYdX Chain doesnât reward stakers via inflation, but with real USDC revenue from the dYdX v4 trading volume commissions.
To encourage staking DYDX the key is increasing the trading volume at dYdX v4 so that stakers receive a larger reward for staking DYDX. Moreover, the unstaking period of DYDX is very long compared to most networks, decreasing the unstaking period could also encourage more staking.
This is confusing, currently 100% of dYdX v4 revenues go to DYDX stakers and validators, are you suggesting changing 100% to 0%? Or are we missing something here?
The profitability depends, once more, on the trading VOLUME of dYdX v4. More volume means more revenue for DYDX stakers and validators. Most dYdX validators have not been profitable since the dYdX v4 genesis, because Tokyo is very expensive especially for bandwidth while the trading volume hasnât been too high. In other words, most dYdX v4 validators have not been profitable yet but they still contribute a lot to the network in multiples ways, killing 30 validators will results in 30 entities stopping their contributions to dYdX v4, contributions we have been doing for around a year since genesis despite most of us not being profitable.
Furthermore, 60 is already a very small validator set compared to most other PoS networks, which is already more centralization, by cutting the number of validators by half you are exacerbating the centralization problem even further. Moreover, if validators are really not profitable and leaving the network you will see the minimum amount of DYDX to join the active set decreasing rapidly, however, the opposite has happened, the minimum amount of DYDX to join the active set (60th) has been increasing continuously meaning a high demand and competition to join the active set. This is empirical evidence proving the opposite of what you suggest: despite maybe revenues not being yet great for dYdX validators, these validators see a lot of potential and future so not only they have remained but still there is strong competition to join the active set with the minimum amount to join continuously increasing. Also, Regen network and Archway are really small Cosmos chains, you cannot compared them in your report with dYdX and suggest that dYdX copy what such small projects did. dYdX is a bluechip project and the leading Perps DEX, you canât compare dYdX with Regen network or Archway.
Again, most dYdX validators have not been profitable since the launch, removing 30 of us what will it achieve? Just losing all our contributions and support, and decentralization. Donât be scared that 30 validators will leave because of profitability issues, after 1 year we are still here.
Also, in your document, saying that reducing the validator set by half to 30 wonât impact decentralization much is incorrect. Injective, Sei and other networks maintain a low amount of validators to keep fast block times, 60 validators is already amongst the lowest. And the whole point to move from dYdX v3 to v4 was to decentralize all components of dYdX and the key of this decentralization with v4 is the number of validators, 'dYdX v4 open-source chain softwareâs fully decentralized and performant in-memory orderbook â and âIn dYdX v4, each validator will run an in-memory orderbook that is never committed to consensus (i.e., off-chain)â, dYdX v4 decentralization is not just about the stake distribution but its decentralized order book and unless I miss something you are suggesting to cut by half the decentralization of this in-memory orderbook kept by each validator (the main point to move from v3 to v4, decentralizing also the orderbook and matching engine) (Announcing dYdX Chain)
Additionally, the dYdX Foundation, Stride and now @karpatkey are increasing the decentralization of stake and the Karpatkey program with 40M DYDX will likely have a very positive impact to increase decentralization and validator revenues. Also, with dYdX Unlimited and the new incentives program, the larger trading volume will also bring more revenue to validators and dYDX stakers
Could you elaborate more about the reasons for this?
I think it was already announced that dYdX v3 would be closed soon?
Also, this proposal is VERY dangerous. If it goes on-chain, unless stakers are voting very actively and getting informed, naturally the top validators will vote instantly in favour to eliminate 30 of their competitors, and the proposal will likely pass given the already centralized staked in the top validators
wait what? Am i dumb or you dont know how DyDx staking works?
There is no inflation, what inflation are you talking about? Investorâs tokens are unlocking in any project, itâs totally ok. But inflation is 0%. All the protocol fees are distributed to stakers. How could you increase revenue for stakers if already 100% of revenue distributing to them? You cant distribute more than 100% which are already distributing It cant be better than it is already.
There are Only 2 ways to increase revenue : increase % of trading fees (not best way) or increase trading volume by improving protocol. UI, UX, amount of markets, liquidity, bridges from every chains ,marketing and so on.
Trading rewards can be reduced but i dont think its gonna change things cardinally, they will end once anyway. I would better redirect a part of tokens from reward pool to developerâs incentive pool, to pay developers for improving DyDx and attracting new users.
Reducing active set of validators is cringe in my opinion.
RE inflation,
this is quite strange since there is no inflation.
You must be referring to trading rewards instead?
in which case agreed but should probably be removed entirely.
And instead focus on the refarral system, thats the real game changer.
RE reducing val set,
There is no economic benefit to this.
Imposing business decisions on external companies hurts those validators the their stakers who staked to them, and encourage delegations to the top of the set instead, centralising voting power, which in turns increases technical & regulatory risk to the chain. proposing to increase in the future wont work, delegators already learned an expensive lesson, and will not delegate there
RE Protocol Revenue Distribution
Yep, agree these sound fine actually
(short term decrease in yield as an investment to grow the pie)
But perhaps scaling yield slowly into the MegaVault to start off with to analyse data first might perhaps be wiser.
Thank you for the detailed report on the current state of dYdX! Good points to start discussions!
About the Validator Set
Reducing the number of validators to 30 could alleviate the load on consensus mechanisms, thereby enhancing the UX for traders. Hyperliquid achieves its superior UX by operating with just 4 validators. Currently, there is virtually no demand from traders for greater decentralization, so this suggestion is intriguing in terms of improving product quality.
However, itâs also important to recognize that this perspective largely aligns with the interests of the top 30 validators, so the community should consider this proposal with a balanced and careful approach.
About Tokenomics
Liquidity is the most crucial aspect for traders, making it reasonable to allocate half of the revenue towards enhancing liquidity. Simply distributing 100% of revenue to stakers, as is currently done, does not unfortunately result in increased liquidity.
Furthermore, adopting a model similar to BNB, where the Treasury SubDAO executes buybacks and burns for revenue that exceeds a certain threshold, could provide a more transparent and effective way to enhance the value of the dYdX token.
Reducing the tradersâ rebate fees would be beneficial, as it would decrease the amount of dYdX being released into the market.
About the Bridge
Pausing the bridge at a certain point would be a good strategic move. However, as noted by @cryptoplaza , it is wise to retain some flexibility for manual adjustments.
First of all, they suggested the elimination of 30 validators not because of any improvement or benefit for dYdX v4 but because of profitability of validators. This is such a terrible idea. Most dYdX v4 validators have not been profitable since genesis, yet have brought immense value and contributions to dYdX v4 willing to subsidize the costs because they believe in the potential of the project, why stop this? Why stop all these âfreeâ contributions to dYdX v4 from 30 top validator entities? Makes no sense and only damages dYdX v4.
Secondly about @eguegu mention of consensus. dYdX already recommended Tokyo as the infra location for best latency and hence best trader experience so if you really want to improve trader experience you should eliminate all the validators not based on Tokyo, not the âsmaller 30 validatorsâ. Also your comment âthere is virtually no demand from traders for greater decentralizationâ, of course users donât care about the underlying tech, it was dYdX team that decided to decentralized all components of dYdX including the orderbook and matching engine (first DEX to achieve this) and thatâs why they migrated from v3 to v4
I believe the proposal addresses key issues like liquidity and inflation well. Routing 50% of revenue to MegaVault can boost liquidity and competitiveness, while 10% to the Treasury subDAO secures operational funding without increasing token emissions. Adjusting staking rewards should help stabilize DYDXâs price.
However, Iâm concerned that committing too much to MegaVault might be inefficient early on. Reducing validators from 60 to 30 could harm decentralization. A smoother transition, gradual changes to trading rewards, and temporary incentives for validators would improve the overall outcome.
Hi Interstellar Lounge here. We have an investment into dydx and also run a validator ourselves where we stake our own assets.
We detected significant portions of this report generated by GPT AI.
We believe this report exemplifies the complete lack of understanding from Nethermind on how tokenomics work.
When you divert significant amounts of staking rewards to entities away from the average dydx hodler and investor, the asset becomes less attractive to hold, purely due to the decrease in the future expected dividends from holding the financial asset; this then will highly likely decrease the number of stakers and decrease the economic security of the ecosystem.
It is truly laughable that you believe it takes $1,000/month to run a profitable validator. I believe no one in Nethermind has actually explored the most efficient ways to run a validator on any network. To then use this as an excuse to reduce the validator set to 30, of which the top 30 currently have a disgusting high concentration of stake, is deplorable.
We will veto this report in a heart beat and if this passes you can expect us to dramatically reduce our dydx investment positions and divert them to alternatives like Unichain.
the concern is about the Megavault which is currently unprofitable, as of now it has made a loss of 4.43%, and it has definitely not been battletested yet, we havenât had any significant sell off or black swan to see how it would perform, but itâs safe to say that the loss will be way higher considering that weâve been in a ranging market the last months. If we start directing more money there, thatâs something we should keep in mind.
second suggestion is to change the % of distribution to 40% Megavault and 10% to Treasury, just for the sake of being able to claim that half of the profits are distributed to DYDX holders, instead of 40%. Big difference in my opinion in terms of marketing and enticing people to continue or start buying/staking DYDX.
âDYDX holders donât even get half of the profits generated by the protocolâ
sounds a lot worse than
âDYDX holders get half of the profits generated by the protocolâ
this simple shift could make a big difference in how appealing the staking program is
In my opinion, none of these proposals, except for reducing C, will positively impact the token price; in fact, they might do the opposite.
Itâs clear that if we reduce staking rewards, we decrease the tokenâs attractiveness.
Moving 40% of revenue to the MegaVault seems very strange. So far, the Vaults havenât proven anything and are running at a loss of around 10% APY (a very rough estimate, as thereâs no detailed report on the Vaults).
On one hand, the idea of paying for liquidity in USDC is appealing, but on the other hand, how does the token fit into this?
I think if we want to incentivize liquidity, we need a hybrid model. For example, a user could become an LP in the MegaVault if they lock a certain amount of dydx tokens for a period of time. The longer the lock, the higher the percentage they might earn on their capital and/or have higher available limits as an LP.
In this format, directing a portion of the protocolâs revenue makes sense.
All moot & useless if the #1 priority isnât figuring out how to make traders love the platform.
(W/o bribing them)
â
And pushing out a fantastic Android app this year, facilitating tax reporting, figuring out what bigger institutions want, making the front end a joy, end user A/B testing, breaking into new marketsâŚ
Thatâs all so much more urgent than twiddling tokenomics juju.
Stop giving tokens away. Spend them on the above.
First of all, thanks for sharing this. I would strongly recommend splitting proposals like this into separate governance proposals when moving on-chain.
For example, one proposal for Protocol Revenue Distribution, one for validator profitability, one for Trading Rewards, and one for the Bridge.
The challenge with large, combined changes (something weâve seen in the past) is that people might agree with certain aspects but disagree with others. This is why itâs crucial to separate them into individual proposals.
Regarding the specific points:
Protocol Revenue Distribution:
Currently, dYdX staking yields around 12%, which is quite attractive for stakers.
The MegaVault seems like it could draw significant USDC liquidity into dYdX and improve market efficiency. Weâve seen how well a similar product worked on Hyperliquid, so it makes sense to allocate a portion of rewards to the MegaVault.
My concern is that if we allocate around 60% of staking rewards to the MegaVault and the Treasury subDAO, the staking yield would drop from
around 12% to 4.8% (assuming other factors remain the same). Why would these new conditions make buying and staking DYDX more appealing than the current setup?
I like this idea if we implemented, the MegaVault will struggle to compete with other similar products in the market that donât require holding additional tokens (at least for now).
I assume the proposal is mostly a bet on the idea that it will attract more trading volume, which would offset the reduction in trading fees allocated to stakers and operators.
Mintscan shows an APR of around 12%: Mintscan, and it was around the same levels last week. Not sure what leads to such a high difference between the two sources.
I deeply appreciate the insights and suggestions from Nethermind.
While the direction to reduce the supply of DYDX tokens is excellent, I believe that more fundamentally, there needs to be a solution that continuously allocates the revenue stakers earn within the chain.
I fully agree with RealVovochkaâs opinion. Instead of focusing on determining the amount of revenue, I think the discussion should center around how to create a virtuous cycle for that revenue.
So if I understood correctly, people who invested in the dydx token have not only lost 80%+ of their initial investment, but the staking rewards are already negligible, and now youâre proposing to take even more? This absolutely cannot pass, and if it does, it should only be with the option, as RealVovochka mentioned, for dydx holders to have both regular staking and MegaVault staking⌠Please, have some sense, because youâre going to kill the project!!!
It cant be better than it is already.
