Analysis and Proposals on dYdX Chain and DYDX Tokenomics

[nethermind]

We would like to address the additional questions posed by the community. We appreciate all the constructive conversations that are ongoing.

Based on community feedback we are planning to split up the proposals based on subject matter. We will be following up with four separate proposals (and threads) 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.

@ARIA

What I am referring to here is that the grand design of the proposal is unclear.

If the focus is on a sustainable economy, there is no need for revenue sharing to Megavault.
If the focus is on increasing market share, then reducing validator sets and trading rewards is not a priority in the least.

Also, as you replied, it is essentially up to the community to deal with what has happened as a result of the proposals, but if that is the case, the direction should be even clearer.

The dYdX community sought further clarity on the goals and direction of the proposed changes. As mentioned in our proposal, it aims to improve liquidity on dYdX Chain markets, increase the attractiveness of the DYDX token, and encourage holding and staking DYDX, all to increase the security of the dYdX Chain and drive sustainable growth in the dYdX ecosystem. The recommended proposals are linked to these said goals:

1. Improve liquidity on dYdX Chain markets:
   a. Route 50% of all protocol revenue to the MegaVault
2. Increase the attractiveness of the DYDX token
   a. Increase utility through a Buy & Stake program
   b. Reducing inflation of circulating supply through trading rewards reduction and 10% allocation of protocol revenue towards Treasury subDAO
3. Maintaining a lean, agile, and financially healthy chain
   a. Ceasing support for the wethDYDX Smart Contract (i.e., the Bridge) on the dYdX Chain side.
   b. Reducing the active set from 60 to 30 validators.

The proposals in this research report seek to support the DYDX token’s financial value to preserve capital while ensuring long-term value accrual, all with a view to improving the dYdX Chain network’s long-term health and security.

@AndresNodes.Guru

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 DYDX’s price.

However, I’m concerned that committing too much to MegaVault might be inefficient early on.

MegaVault is a core component of dYdX Unlimited and aims to improve liquidity on dYdX Chain’s long-tail markets. It is important to support and bootstrap the product which depends on the TVL it attracts.

MegaVault TVL is paramount for the success of dYdX Unlimited and dYdX Chain in general as it will increase liquidity, especially on long-tail assets.

Looking at a 24-hour period on the 25th of October we can quickly observe how dYdX volume/liquidity ratio per token reduces its performance as we move down from highly liquid assets to less liquid assets on the platform.

dYdX fares very well compared to Binance in majors and very liquid altcoins like PEPE or SEI. Liquidity is significantly worse on long-tail markets like POPCAT or STX for instance.

	dYdX ratio	Binance ratio
PEPE	4.72	3.56
SEI	2.89	6.95
APE	7.62	12.04
POPCAT	0.22	4.02
STX	0.12	4.51

Source: Chaos Labs and https://coinmarketcap.com/

Over the same period the liquidity available for POPCAT was no more than $3k with a 100bps slippage on small orders and no liquidity for large orders.

Source: Chaos Labs

The same token was doing $300M and $14M volume respectively for Binance and Hyperliquid, with Hyperliquid offering 2bps slippage for orders larger than $100k.

We propose to allocate 50% of the protocol’s revenue towards MegaVault to quickly attract TVL to Megavault. We acknowledge that the 50% revenue share will have an impact on the staking APR, but we view this as a key investment for the long-term success of dYdX. Also, the revenue share should be reassessed a few months after launch once statistics around its performance are available. It is important to note that the dYdX community may increase or decrease the 50% Megavault revenue share at any time via a governance proposal.

@RealVovochka

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.

We appreciate all the interesting suggestions around providing liquidity to the MegaVault. The current design of the MegaVault as mentioned in the Deep Dive: MegaVault blog post, only accepts USDC. This makes it infeasible to implement suggestions around locking DYDX token, in the short term due to software design limitations, placing the idea beyond the scope of the current proposal.

We encourage the community to have further discussions around MegaVault’s design which can be evaluated by the community and the dYdX team as potential upgrades to the software for the future.

@Cosmic_Validator

One more time: the suggestion of the proposal is to eliminate arbitrarily the bottom 30 validators because of Profitability concerns, the discussion about latency was started by Robo not by the authors of the research report. As I already said above, since genesis Skip Protocol and the dYdX Trading team RECOMMENDED validators to be based in Tokyo and sign locally for the best latency and trading experience.

We appreciate all the feedback and acknowledge that our initial research focused on validator profitability, which was an issue raised by validators while discussing the Treasury subDAO proposal. It’s clear there’s also interest in discussing the potential latency improvements from reducing the active validator set from 60 to 30 on the dYdX Chain. Beyond profitability, we believe this reduction could drive meaningful improvements to the speed and reliability of dYdX Chain for the following reasons:

Network Efficiency: A larger validator set requires messages (like new orders) to travel farther across the network, often in multiple steps to reach all validators. This can slow down the network and introduce unpredictability. By reducing the validator count, messages can take more direct routes, minimising delays and enhancing both speed and reliability.

Faster Order Processing: For a competitive trading platform, rapid order processing is essential. Fewer validators mean fewer steps for orders to reach the proposer, which results in faster and more consistent processing times, improving the overall user experience to more closely match centralised exchanges (CEXs).

Faster Consensus: Fewer validators means fewer number of prevotes/precommits required for consensus to reach finality.

Node Location: Several validators have suggested that prioritising validators operating within Japan would be the most effective way to reduce latency. While we agree that this could improve latency, validator node location should not be seen as an alternative to the current proposal. Rather, validator node location and reducing the active set should be seen as two levers that the dYdX community could leverage to improve speed and reliability of dYdX Chain. We strongly encourage all dYdX Chain validators to align with the MEV committee’s guidelines and urge ecosystem participants to consider node location when choosing validators to stake to.

We believe a smaller validator set would enable a faster, high-quality trading experience, and maintain sufficient decentralization for the security of the dYdX Chain, while improving the financial health of the chain. Given that our proposal does not include the technical analysis around latency and focuses on the economics of the chain, we invite any technical teams without a direct stake in this proposal to share their perspectives and insights.