Don’t trust these numbers. Go to detailed statistics and see why their APR is like that.
I use three sources keplr / stride / and those accruals are on my wallet in usdc.
Mintscan takes the total reward for 365 days in usdc and divides the income by the current token price. Does not take into account the token price drop by 70+%
agree with you, Just go directly to their website, section dydx, and it’s clear as day, black on white, and I agree that these low rewards have been a long-term issue!!! Who would buy the dydx token now? Why?
If we took 5-10% for buybacks and burning tokens, it would be much more attractive than all the aforementioned pseudo-proposals…And it would be predetermined how much % of the total supply we want to burn, so it wouldn’t be a long-term process, but a temporary one until we reach the milestone.
A lot of the criticisms to this proposal tend to focus only on maximizing short term value for stakers / validators and miss the big picture. Breaking these down here:
Staking Rewards Reduction
As a Stride contributor, I understand the concerns here. There are currently ~25m DYDX tokens staked with Stride, making Stride (and its dYdX treasury stake) one of the more impacted parties by this rewards reduction.
However, DYDX stakers should be looking toward long-term sustainable solutions to protocol growth rather than their own individual rewards. As indicated from the report, the current model simply is not working.
A DYDX staker who delegated 1 DYDX on November 10, 2023, has since earned a staking yield of 12.5%. However, due to DYDX’s price decrease, the value lost on the staked capital has eroded the staker’s net worth by 52%.
Yes, DYDX stakers have enjoyed one of the better USDC yields out there, but if the token value decreases over time at a rate exceeding that yield, the yield is not contributing to long-term value growth for stakers, leading them to exit their DYDX positions. At the same time, the protocol doesn’t benefit in any way from that yield. 100% of the trading fees are effectively being extracted from the protocol, forcing everyone to rely on DYDX token sales for growth initiatives. We need a tokenomics mechanism targeted at growing dYdX’s core trading audience and reducing our reliance on trading incentives.
The megavault portion of this tokenomics proposal accomplishes this quite well, in my opinion. The megavault is designed to facilitate deeper trading liquidity, especially in longer-tail markets that tend be lower volume but also draw in new traders more frequently than BTC/ETH/SOL. The vault has the potential to be one of dYdX’s largest trader onboarding mechanisms in its history.
The goal of the vault is to increase overall trading activity, which grows the protocol and increases trading fees. The increased trading fees also increase megavault TVL, which compounds this effect, creating a positive growth flywheel that may also see a positive impact on the price of the DYDX token. Given this mechanism targets both growth and yield, it has the potential to be strictly better than the current model (frankly I have pretty high conviction that it will be). Additionally, as has been mentioned, this could lead to a reduction in trading incentives in the future, which will result in less DYDX entering open market circulation.
The vault is unprofitable right now, but this is arguably a good thing. It means that traders tend to trade favorably against the vault’s liquidity. If traders win, they tend to keep trading. In the absolute worst case where the vault isn’t profitable in the future, directing revenue here makes it a valuable loss-leader for dYdX.
Validator Set Reduction
I’m very strongly in favor of reducing the validator set, but not for the reasons proposed here. There’s been a lot of commentary here about validator profitability, even by the proposers.
To me, this is less of an issue of profitability (as noted in the report, on most chains validators seem happy to run unprofitably) and more of a performance issue. dYdX is a trading platform that relies heavily on optimizing trade execution speed and low-latency. The biggest bottleneck on this right now is the time that it takes for validators to come to consensus.
If traders lose value because of latency, they won’t trade here. Reducing the set to 30 will reduce instances of this occurring. It truly is that simple.
Further, and as I’ve repeated on numerous occasions, large validator set sizes do not have a meaningful impact on overall decentralization.
Note: In the event that this does pass, Stride will also have to adjust its delegation program for dYdX and move delegations around. We’re already thinking through what this could look like and expect to have a plan out in the coming weeks (subject to this passing).
Treasury Diversification
This is already a very long comment, so I won’t spend time on the benefits of diversifying treasuries generally (hopefully most of us agree that doing so is valuable), but I strongly recommend this article for people interested in the value of treasury diversification:
The proposal to direct 10% of revenue to the treasury subdao is a great first step toward a robust and diversified treasury for dYdX. A USDC-denominated treasury will reduce reliance on DYDX spends, as well as become a good metric for protocol valuation in and of itself (it’s hard to imagine a protocol with a billion-dollar treasury being worth anything less than a billion dollars, for example).
Conclusion
In sum, I’m very much in favor of this proposal as written. I think it creates a strong growth flywheel for dYdX where one does not currently exist, and brings revenues for stakers to a more reasonable valuation while increasing the likelihood of those revenues increasing.
Robo, honestly, who is that kind of speech aimed at? Market makers profit from the inefficiencies of the vaults. The vaults have been available for several months—what volume growth have they led to? What’s going to change with the MegaVault, aside from withdrawals, compared to the current situation? The utilization rate for these vaults isn’t huge. Even if you put $100M into the MegaVault, who will it trade with? The same usual suspects, who will now be on both sides of the trade with an increased volume. They’ll put funds into the Megavault as LPs, earn a percentage on their liquidity thanks to these absurd incentives, and with the other hand, profit from the inefficiencies of the MegaVault.
Meanwhile, people like you will be telling token holders to hang tight, that we’re focused on the future, and once we get the next flywheel going, all token holders will be wealthy. If we’re taking profits from stakers and channeling them into growth initiatives, maybe we should first conduct a full audit of all past “growth” and, in fact, all protocol costs.
I think this point has been mostly addressed by @carlbergman 's comment to you here in another thread.
TLDR:
The point is that these aren’t profits. Stakers are losing money because the current model of leaking 100% of trading fees to stakers is not working. Reinvesting some of these fees into targeted growth is a far better mechanism than simply doing nothing and allowing for that value leakage to continue.
Some comments from my personal DeFi perspective and company validator perspective:
I hope this is some help to the proposers and community, looking forward to a final proposal.
Best,
Ertemann
Lavender.Five Nodes
Firstly, we would like to thank the community for taking the time to read our report and give their comments. The constructive feedback is greatly appreciated.
We have identified the following concerns and we would like to address them in this post:
dYdX is aiming to become the largest exchange in crypto. To achieve this, the dYdX community needs to have a long-term outlook and focus. dYdX needs to remain competitive against competitors, especially centralized exchanges. The DEX landscape is highly competitive, and rivals are constantly innovating with new products. This means dYdX needs to invest heavily in launching new initiatives like MegaVault. To drive long-term growth and increase adoption and protocol activity (which would translate into multiple other benefits, including staking yields), dYdX should focus on boosting liquidity for dYdX Chain markets, especially those new markets that the community will decide to create once permissionless markets are live with the deployment of dYdX Unlimited. As such, we recommended that 50% of protocol revenue beis directed to the MegaVault, at least initially, to ensure that MegaVault depositors are sufficiently incentivised to provide capital that can enable the vault to achieve its ultimate goal of bringing unparalleled liquidity to all dYdX markets.
dYdX MegaVault is not live yet and existing vaults are not representative of the MegaVault strategy performance. Based on the blog from dYdX Trading, an operator will be in charge of the MegaVault strategy, managing allocations to market-specific sub-vaults, adjusting parameters, monitoring and managing risk while it transitions to a more automated product. dYdX will potentially have hundreds of markets once Permissionless Market Listing is enabled with the Unlimited upgrade.
Our report refers to the inflation of the liquid circulating supply. Our reference to inflation includes DYDX token unlocks, DYDX that is transferred out of the community treasury for DAO operational expenses and growth campaigns, and DYDX distributed as trading rewards. It is important to clarify that inflation does not refer to staking rewards on the dYdX Chain in our report (given that staking rewards are denominated in USDC and derived entirely from protocol fees). The increase in circulating supply from the various initiatives listed above under inflation creates significant selling pressure for the DYDX token.
Relying too much on token emissions can dilute token holders. While stakers have earned 12.5% staking APR since November 2023, their net worth has eroded by 52% due to the token’s performance. The initiatives proposed in our report aim to increase DYDX token’s attractiveness and competitiveness by reducing circulating supply inflation, and increasing its utility, all while supporting the growth requirements of the dYdX Chain.
We acknowledge that while the APR for staking DYDX tokens may decrease soon, we believe it will remain competitive in the long term. We do not anticipate any risks to protocol security. Currently, the total value locked (TVL) on the dYdX Chain stands at $184M in USDC, with 237M DYDX tokens staked to validators. Assuming a token price of $1, the dollar value of staked DYDX still exceeds the TVL in USDC. Although changes in DYDX token price or an increase in TVL could occur, it would be extremely difficult—if not impossible—to acquire and stake enough DYDX to pose a threat to the network. Additionally, we expect the Treasury subDAO to stake approximately 40M DYDX in the near future, helping to offset any potential unstaking due to reduced APRs.
If we take into account growth incentives, the protocol is distributing more than its net revenue to stakers, which is not sustainable in the long term. This has been highlighted by Stakehouse Financial in their Treasury SubDAO proposal. Under our proposal, the protocol revenue would be rebalanced and stakers would capture a significant portion of the revenue, adjusted for growth expenses.
We appreciate that validators could decide to operate at a loss with the hope that volume and revenue increase on dYdX Chain, but we think it is in the best interest of the dYdX ecosystem to reduce the active set.
The proposed reduction of the active validator set from 60 to 30 takes into account the impact on validator profitability, assuming the approval of a 50% revenue share towards MegaVault and 10% towards the Treasury subDAO. At the time of the analysis, 17 validators were unprofitable with 100% of protocol revenue directed to stakers and validators, assuming a fixed infrastructure cost of $1,000/month (which, again, we acknowledge may not be representative in all cases but, in our opinion, serves as a good proxy). With the proposed revenue share, over 34 (of 60) validators could face unprofitability, accounting for 57% of the active validators. This concern has been raised by comments suggesting that some validators have been operating at a loss since the genesis of dYdX Chain. Validator financial health is important to the chain’s security and overall success.
We do not think there are significant impacts on validator network decentralisation from reducing the active set by 50%. The top 30 validators have been delegated 86% of the total stake, with the top 4 accounting for 36%. The report notes that the Nakamoto Coefficient would remain at 4, and the HHI would increase slightly to 552 if the active set reduction is implemented. We strongly advocate for decentralization, and recommend the community adopt a delegation policy framework that encourages a more even distribution of stake, particularly supporting validators with lower delegations. Additionally, we propose reassessing the active validator set in the future, potentially increasing it once dYdX Chain achieves sufficient unincentivized volume. This should occur alongside the stabilization of DYDX price and the bootstrapping of new initiatives, which could allow for a reduction in the revenue share allocated towards them.
This proposal emphasizes the importance of maintaining a lean, agile, financially healthy validator set to ensure dYdX Chain’s security, leaving the final decision to the community.
Additionally, reducing the active validator set could improve network performance. We have not done any technical analysis, but we assume that decreasing the active set will result in less network traffic.
Since dYdX Chain’s launch on October 26, 2023, ~226M ethDYDX, representing 22.6% of the total supply, remains unbridged. While we recognize the risks of ceasing support for the wethDYDX Bridge Smart Contract on the dYdX Chain side, after evaluating the costs and benefits, we concluded that a 6-month window following the proposal’s approval would be sufficient for ethDYDX holders to migrate to the dYdX Chain if they so choose to, providing the required time for ethDYDX token holders to migrate to the dYdX Chain.
In relation to this proposal in particular, we also strongly advocate for recurring, ample disclosures by all community members, including on the dYdX social media channels, to ensure that the public -and ethDYDX holders in particular- are sufficiently informed about this proposal and have sufficient time and information to make informed decisions.
If implemented, we believe that this proposal could significantly benefit liquidity, governance, and staking participation, promoting dYdX Chain’s growth and long-term success.
To date, approximately 17M (~$30M) DYDX have been distributed as trading rewards on dYdX Chain and there is an opportunity to significantly reduce DYDX emissions from Trading Rewards.
"LensesTrading rewards were initially increased to 0.9 to stimulate activity on the dYdX Chain after its launch in Q3 2023.
Our analysis indicates that this reduction is equivalent to raising dYdX fees by 0.5 basis points. Please refer to the report for more details. Considering this alongside the impact of launch incentives, trading on dYdX is expected to remain cost-competitive compared to other exchanges (CEX and DEX). Additionally, the increase in trading fees will be more than offset by improved liquidity and reduced slippage.
It’s excellent news that we have such a high level of conversation within the forum around the protocol. I believe this is necessary in order to make the best decisions and to better understand the likelihood of the various scenarios we might face. One exercise that I think is essential is grounding these statements in data that we can later use to evaluate the outcomes against expectations.
Staking Rewards Reduction
It’s an excellent reflection that the project must prioritize growth at this stage, which I believe is something we all share. This growth needs to be financed, and this financing can fundamentally come from two main avenues. The first is through token sales that are part of the project, which can be understood as a kind of capital increase. The second is reinvesting the revenues that the project begins to generate from its activities.
The most important factor at these stages is the first, as long as the market recognizes the value creation within the project, leading to an increase in token price. This is why it’s so crucial to develop strategies that demonstrate growth to the market or that allow the token to capture more value.
In this sense, the rewards that have been offered to token holders surely helped to limit the drop, which can only be explained by the negative inertia in recent months,in terms of metrics. For this reason, I believe it’s important to conduct an analysis of the impact that the project’s spending has had on growth so far before increasing it, as failing to do so would overlook an essential evaluation. Increasing spending on ineffective measures would not achieve the impact we are hoping for.
In this sense, we support this measure, but we believe that without an analysis of the impact of the measures taken so far, it is less effective. A significant part of the pressure on the DYDX token comes from the token sales made by market makers who have directly received the incentives from these initiatives without creating long-term value.
Megavault 50% Revenue Share
The general dynamic in any derivatives exchange is that traders typically lose money due to leveraged trading. It requires a lot of experience and excellent risk management to be sustainable in the long term. For this reason, it is common for these statistics to be a consistent pattern across all exchanges. In Hyperliquid, as expected, this also happens. In fact, their Vault develops a strategy that closely correlates with this PNL
This implies that the VAULT’s profit is explained by the losses of many small investors. It is certainly an opportunity for the protocol, which should act as a counterparty to this activity, even attempting to return some of the profits to these investors until they start to become profitable. However, the statistics of our VAULT are different. We are actually providing a counterparty to professional market makers, to whom we direct part of the project’s revenues, and they will only remain active as long as they are profitable. This will certainly increase the project’s volumes, but it does not create long-term value, and it shifts all the profitability to these agents.
I am convinced that the VAULT strategies will improve to achieve profitability that the project could even share with investors who also provide liquidity. However, it seems imprudent to start directing capital to these VAULTs at this moment without these statistics. The most likely outcome will be directing capital for project growth to these market makers, which won’t compensate for the fees generated. While it may make the project’s statistics look better, it would be a highly inefficient way to generate volume, as it will be closely tied to this subsidy.
Strategies that I believe would be much easier to scale and that we know have high demand are cash & carry strategies. These strategies, in projects like Ethena, have managed to attract 3 billion in capital, and apart from being profitable, they provide liquidity to short positions, which are precisely what a derivatives exchange needs.
Validator Set Reduction
As we mentioned in the analysis, we found the reasoning behind the profitability to be very weak, and the only reason we could identify was improving the user experience. If the project deems it necessary to enhance the user experience, then this is certainly a very appropriate measure. However, the downside is the increased centralization, which we agree may not be significant, as well as the impact on governance, since it will also reduce participation in forums like this by half, along with contributions from these token holders. Another additional impact is the loss of these stakeholders, as it is very likely that they will sell the tokens they had purchased to engage in the activity
Treasury Diversification
I fully agree with this measure and also with the creation of a team to manage the treasury. I believe this is a sign of the project’s maturation.Our vote was in favor of this matter, and it seems like an important goal to generate revenue that can sustain the operational costs of the project
Conclusion
It is truly important to get the project back into a growth momentum. This certainly implies allocating more resources towards growth. However, it’s crucial to conduct an analysis of the measures that have not been efficient in achieving these objectives over the past year, so that part of the resources previously used and any new resources can be redirected to more efficient measures
Hello. I am submitting my views on this proposal as I feel it contains important changes.
First of all, I would like to thank you for your valuable insights. All of the proposed changes seem to capture the issues well and provide prescriptions that have a certain rationale.
By the way, if the proposal is passed, what narratives do you imagine will be spread in CT?
Unfortunately, many people are not interested in the thoughtful conversations being made here.
Staking APYs will be reduced, LP yields will be bootstrapped but trading rewards will be reduced.
Don’t you think this is somewhat confusing?
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.
However, I opposed to splitting the proposal easily to deal with this disagreement.
I think that would only make the signals even more ambiguous.
(And that is the history of the dYdX DAO)
In my opinion, the Megavault and Permissionless markets could become flywheels to attract users and improve the ecosystem.
I also feel that this can be achieved through an emphasis on APY across the ecosystem.
Therefore, I think that only Proposal 1 should be retained, while Proposals 2, 3 and 4 should be decided again after observing the post-launch changes.
（In proposal 2, is it not possible to address the profitability of validators by changing commission rates?）
In addition, Proposal 1 should be accompanied by an expenditure from the community pool or a lock on $DYDX.
I agree with @RealVovochka or @Ertemann’s suggestion.
The reason for this is not only the simple narrative of increased revenue-generating opportunities, but also the fact that the concept of everyone being able to create markets and participate in liquidity, controlled by decentralised entities, is a major strength that dYdX has externally.
That is also the meaning of what we are discussing here.
When the joint proposal from Reverie and Stride was presented, we were sold on the idea that the economic security of the protocol was at risk due to having a only 3x staked in $ value compared to TVL. Now our ratio is close to 1:1. If we’re fine with this proportion, I don’t see the point in holding 20M dydx tokens in Stride and paying 7.5% of the profit for it. Especially considering that LSM was developed with the help of North Koreans and could carry significant potential risks. If staked through Treasury subDAO instead we save at least $180k which can go to stimulating MegaVault
Just to clarify this point, the LSM is not deployed on dYdX Chain nor on Stride. It’s only deployed on the Cosmos Hub and doesn’t impact DYDX liquid staking in any way.
Each of these chains’ staking modules are isolated systems. Any risks related to the LSM would only be applicable to staked ATOM that became tokenized via the MsgTokenizeShares function on the Cosmos Hub (a very small subset of staked ATOM).
Saying that the LSM on the Cosmos Hub puts dYdX at risk is comparable to saying the radiant capital hack last week puts dYdX at risk. The two are entirely unrelated.
Thanks on clarification about LSM. What about staked value and tvl ratio? Is it a problem for economic security of the chain right know?
It’s certainly on the lower end compared with when the treasury staking proposal passed. As you know, that proposal was put in place precisely because a situation like this (reduction of economic security relative to TVL) was always a possibility.
But there are plenty of solutions to mitigate this, so it’s a rather poor reason to oppose a reduction of the validator set that would have a positive impact on chain latency and improve the quality of life for traders.
The treasury subdao’s upcoming staking program will help a lot here, and more capital could always be deployed there if economic security worsens. Additionally I’d imagine that much of the staked DYDX in the bottom 30 validators will migrate if the valset is reduced, so the 14% ES losses being projected are likely on the high side by an order of 2x or more.
Sorry but this is incorrect and I think shows you didn’t read all previous messages above? dYdX recommends validators based in Tokyo and local signing precisely to improve latency for traders. You want to improve the latency? Then what you must do is eliminate the validators not based in Tokyo and not signing locally right? Definitely not the lowest 30 validators since many of these validators actually improve latency being based in Tokyo and signing locally. For example ourselves, we are in the bottom 30, yet since the beginning based in Tokyo with unlimited bandwidth, signing locally with top bare metal server, one of the lowest Avg orderbook discrepancy/MEV and consistently in the top 10 by uptime and by governance participation. Contributing to decentralizing dYdX and education about the transition from v3 to v4 with dozens of videos for over two years. In the bottom 30 there are also many other validators like us improving latency based in Tokyo, etc. One more time, you want to eliminate validators with the goal to improve latency and traders experience? Then blindly eliminating the bottom 30 makes no sense and will likely make latency worse. To improve latency, one more time, the solution is NOT to eliminate the bottom 30 validators, but rather, those not based on Tokyo, not signing locally and hence making latency and trader experience worse
Moreover, each dYdX validator has the in-memory orderbook that’s why dYdX v4 decentralized all components and why the MEV committee is so important. Eliminating 30 validators like that is insane, basically doubling the centralization of v4 in terms of the decentralization of the orderbook component which was the whole point to migrate from v3 to v4. You are confusing stake decentralization as in most PoS networks with ORDERBOOK decentralization which is something particular for dYdX v4 and again, the whole point to move from v3 to v4 was to decentralize all components including the orderbook also and matching engine.
You didn’t read most of the previous replies given how you replied and just repeated what you presented initially in the report without taking into account all the numerous counterarguments presented by most, I hope you read this time before replying. Let’s make this crystal clear:
Nethermind says the problem is: validators are/will be unprofitable, solution: eliminate the 30 bottom validators, benefits for dYdX: ??? actually only damages dYdX, these are the big flaws in Nethermind argument:
Validators have been unprofitable for 1 year, yet they stayed and added a lot of value to dYdX v4 and will continue adding value. Why eliminate 30 of them? The benefit for dYdX v4 is 0, only hugely damages dYdX by losing 30 entities adding a lot of value and contributions
You again only talk about decentralization of stake. But you forget the in-memory orderbook held by each validator. Eliminating half of the validator set you DOUBLE the centralization of the orderbook, do you understand this? dYdX v3 moved to v4 to decentralize all components, the components left to decentralize were the orderbook and matching engine, and now you suggest reducing by half the decentralization of dYdX v4 which is its main value versus v3?
As Robo mentioned, reducing validators would benefit dYdX v4 only if this reduction would lead to better latency. But this is NOT achieved by removing the bottom 30 validators, this would be achieved by identifying the validators not based in Tokyo and not signing locally to improve latency. If many validators in the bottom 30 are based in Tokyo signing locally these are then the consequences of your proposal:
-dYdX v4 loses 30 long-term contributing entities (this is a lot, a 50% reduction of contributing entities) adding a lot of value in many ways
-You increase by 50% the centralization of the orderbook, which is terrible since orderbook decentralization is the main value of v4 vs v3
-You make latency and trader experience much worse potentially if many validators in the bottom 30 are based in Tokyo signing locally
Also, as others mentioned, hiding this terrible proposal (terrible for the reasons presented above) to cut the bottom 30 validators amongst other proposals is just really bad. It’s like you want to mix all these proposals together to make them all pass. No, there are many different topics and proposals that need to be discussed separately
Also @nethermind who paid you for this report and why present this report now like this? I ask because this is the first time you wrote on the dYdX forum, you opened the account on the forum on 17th October 2024 a few days ago, you didn’t even introduce yourself to the dYdX community and just throw this mixtures of proposals with exigences to do as you say? Moreover, in your website and linkedin you claim you have ‘expertise on Ethereum’, are you aware that dYdX v3 on Ethereum migrated a year ago to their own Cosmos based dYdX Chain called dYdX v4?
Most of the discussion in this thread is centered around the MegaVault fee distribution and the validator set reduction. For some context, the DEP has worked on initiatives that have had direct insight into both of these topics.
First, it’s important to keep in mind that a competitive trading venue is dependent on two components:
Bootstrapping liquidity with the MegaVault
Our previous efforts working with market makers proved that incentives are required to attract liquidity to long-tails. Market makers are not interested in providing liquidity unless compensated, the risk/reward ratio is too high otherwise. Vaults have been successful in providing the same service while maintaining a near-zero cost (~-4% today, but if fluctuates). In other words it’s working, but it doesn’t scale as a grants initiative – our capital constraints are high and our primary goal is funding contributors to dYdX.
Simply put, dYdX needs access to more liquidity to compete with other venues, attract more volume, and scale permissionless markets. The MegaVault offers a solution to this problem, but will need a substantial amount of USDC deposits to work. Though we should expect slight differences in execution with MegaVault, we see from our existing vault deployments that returns hover near (or below) 0%. Attracting deposits will require additional incentives.
By redistributing trading fees, the MegaVault can offer an attractive yield capable of offsetting potential strategy losses. Put differently, the protocol is compensating depositors for their willingness to risk capital in return for liquidity, just as we did with market makers. As liquidity improves, we can expect more competitive markets, which in turn should attract more volume and increase trading fees. Ideally, this growth increases fees generated, returning more to stakers over time.
Ultimately, we should think of liquidity as a protocol expense. We can either pay for it via community funding to market makers, or we can bake it into the protocol via trading fees. The latter is permissionless, adjustable, and much more sustainable.
Improving execution with networking performance
Through our work with the MEV Committee, we have repeatedly identified issues of inefficient order gossiping resulting in orderbook discrepancies. Orders submitted by traders don’t reach the relevant block proposer in time, resulting in worse pricing, slower execution, or both. This isn’t due to any malicious activity, but a result of networking problems.
It’s worth noting that practically every validator has, at some point in time, displayed issues with discrepancy. Even under optimal configurations, validators display discrepancies. This leads us to believe the network simply isn’t efficient enough to process trading demand at the expected performance level.
By halving the validator count, we effectively halve the network topology for an order to reach the next block proposer. We reduce peering requirements, allowing for more direct routes among validators and trading nodes. Theoretically, the reduction should allow orders to gossip more efficiently through a leaner network, improving discrepancies.
As far as I know, the number of validators at launch was chosen arbitrarily. There is no research or justification for why 60 is an optimal number of active validators. Instead, we’re learning from experience now that 60 is probably a sub-optimal amount. Why should we stick with a number that isn’t working? Reducing this number is a reasonable experiment to improve execution, making dYdX a more competitive trading venue. Thankfully, this is something we can continue to adjust or revert over time based on future learnings.
Obviously, as mentioned in the thread, we risk losing a number of high quality validator teams contributing to the protocol. It’s not an easy decision to make, but dYdX has to perform better on execution if it wants to compete with other venues.
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. So now let’s analyse the following:
-In the bottom 30 validators, many are running their infra from Tokyo with local signing, eliminating these validators would make latency worse
-In the top 30 validators, many are not running their infra from Tokyo with local signing, keeping these validators would make latency worse
-In fact around 20 validators are not running their infra in Tokyo (https://observatory.zone/dydx/countries?sort=validatorsCount&order=desc), some have their validators in far locations in Asia from Japan, and others even in EU. This clearly damages latency so when you talk about halving validators to improve latency you definitely must specify that you refer to those not based in Tokyo signing locally. Because using the latency argument to arbitrarily eliminate the bottom 30 validators it is just a flawed and incorrect argument with potentially large negative consequences for dYdX v4.
Moreover, dYdX grants is actually profitable, many validators have been adding a lot of value for ‘free’ while Reverie has been well paid for the MEV research. Instead of suggesting to halve validators based on incorrect arguments, shouldn’t Reverie try to add more value for the revenue they get from dYdX by providing better information about MEV including not just malicious validators but those with the lowest MEV?
Again you are providing only half or the information or incorrect information. dYdX v4 risks losing not just ‘a number of’ but 50% of their contributing validator entities, this alone is a massive loss for dYdX v4. Moreover, you again decide to skip the argument about in-memory orderbook, reducing validators by 50% also reduces the number of in-memory orderbooks and hence increasing the centralization by 50%. Of course for best latency and performance just one validator would be the best right? But the reason to move from v3 to v4 was to decentralized also the orderbook so maybe 60 validators was chosen as a good balance beetween decentralization and latency? And again, if most those 20 validators not running their infra from Tokyo or signing locally happen to be in the top 30, then you will make latency and trader experience much worse by arbitrarily eliminating the bottom 30 validators. To improve trader experience/latency (at the costs of orderbook decentralization) you would need to eliminate the validators not running their infra from Tokyo and this is not equal to the bottom 30 validators, many in the top 30 are not running the validators from Tokyo. Moreover, if you look at MEV (https://observatory.zone/dydx/mev/validators?timeframe=month) you also see that those with the highest MEV are actually in the top 30 of validators. Given the in-memory orderbook that each validator runs, preventing MEV is critical for dYdX v4. By suggesting to arbitrarily eliminate the bottom 30 validators, you are potentially eliminating many validators with the lowest MEV and best latency from Tokyo, while keeping many validators in the top 30 with some of the highest MEV and worse latency running their validators far from Tokyo
From your MEV Committee September report @carlbergman:
'As seen in the pictures above, the empty blocks percentage among some validators is above average when comparing them to all other validators. We contacted most of these teams and found issues with performance-related node configurations. We referred these teams back to our optimal validator configuration guideline, and found a few new parameters to adjust surrounding max peer counts and open connection limits.
We also suspect validators using remote signing configurations could be adding unnecessary latency to their proposal process, adding to the likelihood of proposing empty blocks. As a reminder, we recommend that all validators run with local signing instead.’
In your September MEV report you highlight OKX Earn and Polychain, validators in the top 30.
Very important also, given that the stake is already too centralized on dYdX v4 if there is a cartel of large validators they can just create proposals to eliminate many other validators, and given the voting time for dYdX proposals is very short and most delegators don’t vote then a cartel of large validators could indeed take over dYdX v4 by eliminating smaller validators via centralized governance and then further concentrating stake and governance. Once only this large validator cartel is left, they could then perform MEV as they want and the dYdX community may be forced to do a hardfork. Even if dYdX Trading/Foundation intervene to prevent this the potential cartel could still put the proposal and vote in favour. The risk of centralization is not just the risk of a 1/3 or 2/3 attack but being able to control governance (given short voting times in dYdX v4 and little delegator participation so validators inherit the governance voting power) for their own benefit which includes gradually eliminating the competition via governance and further increasing their centralization of governance and stake
I think it’s worth mentioning that many validators that are in top30 not because their flawless execution or active participation in the governance or producing educational materials you name it. But because they got their delegations from Stride, dydx foundation or they are CEX’es entities, so by dismissing bottom 30 we lose more than 50% of contributors. We centralize governance even more
