Analysis and Proposals on dYdX Chain and DYDX Tokenomics

Proposals
43

Great take, agreed, should be a gradual increase.
As for incentived for validators, I am one of them, and we choose this as a business decision because we believe in the long term future of dydx, to happy to have it as a loss leader, and we spare no expensive, with 2 over specced servers Asia region. no need for incentives.

Do not impose business decision on other companies, we all have our own motives, and if we didnt want to be here we can just drop out anyway. especially since it can harm dydx chain also, rubbing further salt in this wound.

Also this is correct, reducing to 30 validator wont have the impact you expect on performance, instead we should advocated harder to move all validator to Japan area

Greater block time performance can already be achieved by tweaking consensus params

take injective as an example

image
image385×334 16.8 KB

And this is with 60 geographically distributed validators, given that dydx (or should) validator are in Asia, dydx could achieve even greater results again

Happy to help show the config changes necessary for this if its something dydx wanted

Also this is requirement otherwise it will be a veto from us

also agree with this, the situation is pretty dire at the moment, makes far more sense to take yet another small hit for a chance to actually grow the pie significalty

3 Likes
44

Unlike most PoS networks such as Injective, Sei, Osmosis, etc., the dYdX Chain does not reward stakers through inflation but with actual USDC revenue generated from dYdX v4 trading volume fees.

45

Hello Nethermind team and dYdX community! We are TTT VN (TTT Labs), the only Validator community from Vietnam!

Allocating 100% of platform fees to stakers is a short-term solution (not sustainable in the long term), similar to stimulating demand with negative interest rates to revive an economy damaged by financial crises. Allocating around 50% of platform fees to the MegaVault is reasonable. However, the dYdX Chain is quite unusual, as it doesn’t use dYdX inflation to reward stakers like other typical PoS chains. If 50% of platform fees are allocated to the MegaVault, rewards for stakers will significantly decrease, and additional incentives for stakers will be necessary. For instance, the Solana network mints nearly 2 million SOL annually to reward all stakers. dYdX should also consider a solution to mint new dYdX tokens to reward stakers, offsetting part of the transaction fees allocated to the MegaVault.

1 Like
46

Hey everyone, I’m Vishal, one of the cofounders of Stride Labs, and a longtime holder of DYDX. I wanted to weigh in with my thoughts here. To start, thank you to Nethermind for spending the time to develop this proposal, and thank you to the many community members who contributed to the discussion.

To share my high-level thoughts, I’m strongly in-favor of this proposal. dYdX has been a market leader in decentralized perps since they were invented, and has repeatedly prioritized the long-term health of the protocol. The migration to the v4 chain is great example of this - dYdX made the push to become the most fully decentralized perps protocol, optimizing for long-term growth over short-term revenue. Now, the decentralized perp market has become increasingly competitive, particularly with the recent growth of Hyperliquid. I believe the changes described in this proposal will meaningfully improve the fundamentals of dYdX and ensure it remains competitive.

One thing I’ll note: I’m very aware that this proposal will short-term reduce rewards for DYDX stakers and validators. The Stride Protocol currently stakes ~10% of all DYDX tokens, and its short-term revenue will decrease if this proposal passes. I don’t view this as a negative. Ultimately, stakers, validators, and tokenholders should care about the long-term growth of dYdX. Getting 100% of a medium amount of revenue is worse than getting 40% of a much larger amount of revenue. Perps are potentially the most competitive sector in crypto, and it’s vital that dYdX invest in increasing volumes.

Addressing each part of the proposal:

Protocol Revenue Distribution

It’s becoming increasingly clear that long-tail assets can drive significant amounts of volume and fees to trading venues. To cite a very recent example: GOAT has incredibly high volume - more than 2x blue-chip tokens like UNI. Having reasonable liquidity for long-tail assets will also attract new users. Traders like to be able to trade the full gambit of tokens they’re interested in, and every time a trader needs to switch applications, dYdX potentially loses their long-term volume.

To this, the MegaVault can help ensure dYdX has ample liquidity for long-tail assets. Carl highlights the early effectiveness of this vault here. ~$1.5m of capital has facilititated $100m+ in volume. It seems incredibly useful to direct large amounts of revenue to this vault to drive trading volumes, and additionally have that TVL be owned by the protocol. In my opinion, dYdX needs to aim to be the most liquid venue for all assets, and I don’t see a path to doing that for long-tail assets other than having a heavily capitalized MegaVault.

I would be very open to re-evaulating sending revenue to this vault based on traction (e.g. it’s possible that the vault becomes extremely capitalized from outside capital), but based on the data so far, it seems like very high ROI.

I want to emphasize one point here: the benefit of the MegaVault isn’t only that it drives volumes, but also that it becomes a user-acquisition tool. Particularly in the most recent trading meta, users are increasingly drawn to the long-tail of memecoins.

Reduction of the Validator Set

I can’t directly speak to the profitability of validators, and whether or not validators want to run unprofitably on networks. However, I can speak to the importance of having a highly performant chain.

Traders, particularly quantiative traders, have a ~limitless appetite for transaction throughput. On venues where they are offered the chance, traders will spend millions to optimize throughput on the order of nanoseconds (e.g. NYSE). dYdX contributors and validators have done a truly spectacular job at optimizing the dYdX chain - block times are down to ~1.1s running a fully decentralized network. This is done through many technical optimizations on the chain-level, as well as social coordination among validators to optimize the geographic placement of their nodes.

However, the reality is that other decentralized perp markets, like Hyperliquid, operate in a pseudo-centralized manner with few nodes that are tightly colocated. This allows them to give extremely strong guarantees to traders around trade execution, which drives much more liquidity and volume to the venue.

I’ve heard from multiple liquidity providers that dYdX performance is still below other markets. Unfortunately, dYdX is still compared to fully centralized venues like Binance, Coinbase, etc, as well as psuedo-centralized venues like Hyperliquid. Having even 1-5% of transactions fail or not get processed in time is enough to convince HFT firms to stop supporting dYdX.

I view this as a critical issue for dYdX, and should be the protocol’s top goal. Market makers offboarding from dYdX would be catastrophic.

The long-term viability of dYdX is fully dependent on attracting the most competitive and efficient liquidity providers. I fully believe that reducing the validator set can only improve the performance of the chain.

As other contributors have mentioned, validators already mostly colocate their nodes, and we would achieve large gains by improving the technical setup of a few underperforming validators. I fully agree with this, and I believe any delegations done by the dYdX protocol or the Treasury SubDAO should only delegate to highly performant validators. I don’t disagree with this view at all, and also view the underperformance of large validators as a critical issue.

However, it’s certainly true that fewer validators will lead to faster blocks. Fewer validators means less gossipping on the p2p layer, and fewer nodes needed to reach 2/3 consensus. Even in a world where all validators are located in the same room, fewer nodes will still directly lead to faster blocks.

Carl highlights some empirical data about this here - it is a fact that the current dYdX network has performance issues. We need to increase the tx throughput of the network, or we risk losing meaningful liquidity.

I am aware that this reduction would be painful, but I do strongly believe it’s necessary for the long-term competitiveness of dYdX. I believe that one of dYdX’s core goals should be optimizing tx throughput for liquidity providers, otherwise all validators will be negatively affected in the long-term.

Trading Rewards

Given the increase of liquidity to the MegaVault, it seems reasonable to decrease the rewards given to traders. This will also mitigate some of the selling pressure on the dYdX token. Based on the analysis done by Nethermind, it seems like dYdX is over-compensating traders, and there is room to decrease trading rewards.

I would caveat this by saying that dYdX governance should be nimble with the adjusting trading rewards. Based on the trading environment and the empirical results of the change, this value should be changed again in the future.

The Bridge

At this point, DYDX holders have had ~1 year to bridge their tokens. It seems reasonable to give holders another 6 months to bridge or they risk losing their tokens. Ultimately, it is difficult for market makers to support liquidity on two separate tokens on separate networks, and I suspect liquidity for DYDX would be improved by fully consolidating to the v4 token.

3 Likes
47

Until we have solid quantitative evidence on how much latency and consensus will improve with the halving of the validator set, I am not convinced.

Is it worth removing 50% of decentralization consensus for what? 10-20ms gain? When today’s validators are mostly already co-located in Japan, I don’t see how halving the validator set will make any material impact on consensus times.

Where is the modeling and test cases?

2 Likes
48

There are smaller validators in the 31-60 positions in the last year who have worked tirelessly to maintain uptimes, especially with the skip integration etc, run rpc nodes / public goods - who have received 0 support delegation from Stride or the foundation and are about to be entirely fucked over by the halving of the validator set?

Is this how dydx intends to treat their infrastructure partners because of some theoretical consensus or latency reason with 0 empirical modeling and quantitative evidence on how much exactly of an improvement we are talking about?

3 Likes
49

If a ‘decentralized’ exchange is operated in a ‘pseudo-centralized’ manner then it is not decentralized? Following this reasoning, traders would prefer just centralized exchanges like Binance, which yes it is the case with the largest spot and derivatives volume. So then what is the point of DEXs, what is the point of dYdX or the migration to v4? Simple, and the same reason why bitcoin was created in the first place: we cannot trust centralized systems, including centralized exchanges. dYdX knew this and throughout the years tried to improve decentralization with the culmination and success of dYdX v4. And now, instead of valuing this and thinking how can we attract more traders and volume to the only truly decentralized perps DEX in existance currently, the suggestion is go back, become more centralized again and you will get more traders and liquidity? I think we need to do better than this.

Since the launch of dYdX v4, most volume quickly migrated from v3 to v4. And the volume levels have been constant with the incentive programs. Currently lower since incentives were stopped but will be restarted with dYdX Unlimited. This indicated that traders on v3 were happy to migrate to v4 and happy also with v4 looking at the historical volumes.

Why are most validators running from Tokyo and with local signing? Because most dYdX traders are based around that area right? To have the best possible latency for traders ideally ALL dYdX v4 validators should be running from Tokyo, with local signing, and top bare metal servers. Any validators running very far from Tokyo, or not signing locally are making LATENCY worse and hence a worse experience for traders. Reducing validators not running their infra from Tokyo or signing locally CAN indeed improve the latency and trader experience. Arbitrarily eliminating the bottom 30 validators because of ‘profitability concerns’ CANNOT and it will only damage dYdX pool of long-term contributors and increase its centralization of governance, stake distribution and in-memory orderbook.

Yes, in the MEV report the highlighted validators are usually in the top 30. Also, Stride and the DYDX Foundation I believe delegate to several underperformant validators who get jailed often, don’t participate in governance, don’t run the infra from Tokyo, don’t sign locally etc. While other top performant validators never jailed, top uptime, top infra, based in Tokyo signing locally, don’t receive delegation.

Ok, but then let’s get first to the world where all dYdX v4 validators are in Tokyo signing locally and from there we discuss who to eliminate for faster blocks based on performance and other metrics. The lowest hanging fruit to improve latency and validator experience is eliminating validators not running infra from Tokyo or signing locally, if the goal really is better latency and trader experience this is what has to be done. Just saying eliminate the bottom 30 validators because of profitability issues is ridiculous, makes no sense and will for sure damage dYdX v4. And please remember that all this discussion about latency and performance is between Robo, you, us and a few others, but Nethermind just mentioned profitability for the elimination of validators.

The math is simple here, we want to improve latency and trader experience? Then the solution is reducing the validators not based in Tokyo signing locally. I didn’t hear anything now about profitability issues (initial argument to reduce validators) but about latency and trader experience. With this new argument, reducing the bottom 30 validators makes no sense, since this was proposed due to the initial argument of profitability which is no longer discussed. For the new argument of latency, the subset of validators to reduce is not the bottom 30, but rather those running their infra far from Tokyo and/or not signing locally

3 Likes
50

My last experience with dydx, three days ago, was that my SL got hit 2.5% lower than I had set it, which is truly awful!!!

51

We are have plenty of scope to optimise block times further as is with 60 validators based close together like DYDX recommends

Check out Injective, they have 60 geographically distributed validators across the world amf are still able to achieve 0.6s block times

Happy to share the config changes necessary to achieve this.

We can even beat that, when all validators are based close together plus we can also do direct peering, etc:

image
image430×373 17.4 KB

Reducing the validator set will cause irreversible damage to the decentralisation score of DYDX and damage DYDX social reputation.

Hyperliquid are moving to a decentralised validator set model too, its already making progress, just check their github.
This was spurred on after being called our for being centralised publicly on twitter.

1 Like
52

Hi, Nethermind and dYdX team!

If we reduce the number of validators from 60 to 30, by how much would the network speed increase, percentage-wise? Has there been any detailed report on this matter? For the 30 validators, what criteria will be used for selection – will it be based on the current amount of dYdX locked? The top 30 mostly consist of centralized exchanges, VC, and teams that were selected by Stride Team to stake for 26 teams, with each team holding approximately 927,732 dYdX tokens. The specific wallet is: dydx1xkpgnprs33sr9a3e78evgk0hkfzlkxdpsqajl97tqkvam9krw42s29ckac. Over the past year, the contributions of the 60 validators to dYdX have been substantial in various roles. From our perspective, 60 validators are a small number, not large, compared to major app-chains today. We are currently ranked 42nd out of 60 based on the amount of dYdX locked, and 13th out of 60 based on the number of wallets. We would like to receive in-depth reports from the team on the results of reducing the number of validators from 60 to 30 and how this would help improve dYdX’s speed. We are young contributors.

53

Hi Team and dydx!
As you know, Injective has an impressive speed with a block time of approximately 618ms, and they maintain 60 validators distributed globally in a highly decentralized way, achieving super-fast performance. We could even surpass this by placing all validators closer together and implementing direct connections. We would love to work with you to improve the speed of dYdX without reducing the validator set to 30 while still ensuring decentralization.

You’re aware that the BNB Chain initially had only 21 validators, and now they are moving towards expansion; the BNB Chain currently has 45 validators. Being a major project, they will continue to increase their validator set. dYdX is a top project in the industry, so reducing validators as Archway recently did does not seem reasonable. Unlike other projects, dYdX does not mint new tokens to reward stakers; instead, we use transaction fees, directing 100% of the rewards to stakers, which is not sustainable.

I believe we should consider a combination of minting dYdX tokens to reward stakers to offset the portion of USDC transferred to MegaVault, along with a portion of transaction fees. If all transaction fees are directed solely to MegaVault, stakers would lack incentives and may abandon the platform.

54

Hello, I am an admirer of this project as it has always managed to be ahead of its time (at least in the past).
I also want to declare that I am a staker in the project and I assume that my intervention in this forum is solely and exclusively as a staker.
As a staker, my interests are aligned with the preservation and profitability of my capital invested in this project. I understand that my interests outlined above are completely interconnected in the sustainability and development of the project. My goal is not to realize all the capital now, but in the future. To achieve this, the value of the $DYDX token must be defended and the expansion of the project must be ensured with a long-term vision.
As we know, the competition established in the recent past was able to learn (and very well) the lessons from the ground initially explored by DYDX and implement a level of competitiveness much higher than what DYDX was used to. Today DYDX has extremely high competition and, we have to admit, has lost its competitive advantage.
When this happens, as in any other company, decisions need to be made and action taken.
The report and proposal made by @nethermind , although painful, is a pragmatic proposal that defends, above all, the sustainability of financing and business expansion of the DYDX project and promotes the reduction of dumping of $DYDX tokens (which I believe to be beneficial for everyone involved with this project) which is common in the most varied crypto projects due to poor engineering in the development of their tokenomics.
That said, we need to act and regain DYDX’s competitive advantage, fight where we fall short of the competition (improve the product):

  1. Latency: it is necessary to analyze how it is possible to reduce latency and prove with technical data the number of validators, location and quality, as well as what (if any) technical alternatives are necessary to achieve this objective; It is equally important, for the sake of transparency, to prove to the community what the effective arguments are for reducing the number of validators. While reducing latency of the DYDX chain and higher profitability (per validator) corresponding to a smaller group of validators are justifiable objectives (always keeping latency reduction as the main objective). On the other hand, a possible reduction in the group of validators with the sole objective of increasing the profitability of DYDX’s largest current valuers to the detriment of the rest is a purely and simply predatory positioning of large validators in relation to smaller ones. I insist that this issue must be clarified without any doubt within the community.
  2. Liquidity: forwarding fees to Megavault increases the liquidity available for trading and forwarding fees to Tresury DAO future staking increases the liquidity necessary for the sustainability of project management without the need for financing to be carried out through the sale of $DYDX token (imagine Apple financing its current cash needs by selling its shares). Since this is a normal system at the beginning of a project, it is not acceptable to maintain it in the future;
  3. Benchmarking: the competition developed its products with innovations resulting from lessons learned from DYDX’s trajectory. It’s time for DYDX to also learn from its competition and innovate;
  4. Structural costs: a cut in the profitability of stakers and validators is not enough without there also being an internal analysis on the adequacy of the size of internal costs to DYDX’s liquidity needs;
  5. Differentiation: although this discussion is focused on the sustainability and tokenomics of DYDX, we must not forget that it is necessary to appeal to creativity in the development and expansion of the product, whether through new services, new collateral, passive income strategies, a delta-neutral stablecoin , better UX, abstraction, new liquidity bridges, etc.
  6. Tackle the last big elephant in the room (incentivizing users with $DYDX tokens) in an innovative way. Something that I would like to see present in the report presented would be an alternative solution for incentivizing users other than the distribution of $DYDX tokens, which we found that, although common practice in defi, is not at all an effective way to retain users the distribution of tokens from a protocol, be it DYDX or any other. I propose that the possibility of denominating the incentives in USDC be analyzed, which would be directed to the Megavault and the user would be given a token representing their percentage in the vault that would increase in value (as for example what happens with Jupiter’s JLP. In addition to eliminate dumping of the $DYDX token, the user would be encouraged to conserve liquidity in the protocol.
    Conclusion: the plan proposed by Netherming is extremely pragmatic, although painful in the short term, and I consider that its correct implementation (after the necessary clarifications I mentioned) constitutes an unparalleled innovation for the sustainability and expansion of the DYDX protocol, which will allow placing the DYDX once again at the forefront of the DeFi market. At the same time, it lays the foundations for greater future profitability for the protocol, stakers and validators.

As this report is clearly the result of a consultation carried out by DYDX I would like to see a post on this forum about the current position of @dYdXFoundation and @antonio regarding this proposal.

Thank you for your attention.

1 Like
55

Hi dYdX Community!

I’m wondering why we don’t reduce the validator set gradually, for instance, by decreasing it from 60 to 50 and reducing the block time from 1 second to 0.6 seconds to see how much the network speed of the dYdX chain improves. If we suddenly reduce from 60 to 30 validators without lowering the block time, would it actually be faster? Do you have any in-depth reports on how much speed would realistically change? We would like to have an in-depth discussion about your statement that reducing the validator set would increase speed by a certain percentage. The options are to reduce the block time to 500 ms while keeping 60 validators, or to keep the block time at 1 second and reduce the validator set to 30. Which of these two options would help improve the latency of the dYdX chain and the dYdX DEX? We are looking for clear, detailed data reports from the dYdX Foundation and the Founder, @antonio, related to this matter.

1 Like
56

HI Autostake!
The options are to reduce the block time to 500 ms while keeping 60 validators, or to keep the block time at 1 second and reduce the validator set to 30. Which of these two options would help improve the latency of the dYdX chain and the dYdX DEX?

57

This illustrates a seemingly critical issue: How much direct feedback is being solicited from actual users?

Have surveys been done? Pop up questions in the UX? Incentivized feedback?

How recently?

“Hey user! It’s been awhile. What brings you back? What made you take a break from dydx?”. < this stuff.

There appears (?) to be more speculation above about what actual users come for, stay for, & leave for than there is actual data & relevant feedback? (Just judging by this thread.)

User acquisition & retention must be #1. What would make them stay & trade & recommend dydx to others? What aggravates them the most? What’s #1 on their dydx wish list? Does anybody have data / percentages of “who wants what” based on tx counts & volume?

W/o a bigger effort along these lines doesn’t this all feel like too much hunch-based planning?

58

Hello dYdX community!
I’m Thomas Hoang, the Founder of a validator community from Viet Nam. I have a few topics I’d like to discuss, hoping we can work together towards contributing more to the dYdX chain. There are four main issues raised by the Nethermind:

1.Protocol Revenue Distribution:
-50% of the protocol’s total revenue is allocated to the MegaVault.
-10% of the protocol’s total revenue is allocated to the Treasury subDAO.
-When the protocol’s annual revenue exceeds $80M, the Treasury subDAO may consider implementing a buy & stake program.

The initial decision to allocate 100% of the revenue (transaction fees from the dYdX DEX) to stakers is an unsustainable approach.
This solution was more of a short-term stimulant for dYdX, suitable for only a few months, yet it has been maintained for over a year. Therefore, redistributing platform transaction fees to the Treasury subDAO and MegaVault is reasonable.

Over the past year, platform fees have generated approximately $39 million USDC from a trading volume of around $232 billion.

Distributing 50% to the MegaVault would amount to about $19.5 million USDC.
Allocating 10% to the Treasury subDAO would result in around $3.9 million USDC.
To achieve an annual dYdX revenue of over $80 million, a trading volume of around $480 billion would be needed.
The rewards for stakers would then be around $15.6 million USDC for the total of 237.46 million dYdX currently staked. In the past year, staking 1 dYdX token yielded approximately $0.065 USDC, with the value of dYdX also decreasing. This raises the question: what incentive do holders have to support platform security? Security staking on the dYdX chain would see a significant decline.

According to the proposal, having dYdX stakers receive only 40% of platform transaction fees is unlikely to attract stakers and holders to the dYdX chain ecosystem. In comparison, several major PoS projects are doing the following:

Solana: Mints nearly 2 million SOL tokens annually (approximately $340 million) to reward stakers.
Injective: Mints around 7.2 million INJ tokens annually (valued at approximately $151 million) as staking rewards.
Similarly, Sei, Sui, Aptos, and Celestia also significantly increase token supply to reward stakers.
What does this imply? Other major chains rely on minting new tokens to reward stakers, while dYdX relies solely on an annual fee reward of $15.6 million USDC, which is quite small.

If we want to build a strong dYdX chain, a combined approach is needed: 40% of platform fees in USDC plus an additional amount of newly minted dYdX tokens as rewards for stakers. This would create the needed incentives and make the platform more competitive.

In summary, there are currently $15.6 million USDC allocated for stakers and 16.9 million dYdX tokens allocated for traders, which is relatively modest in terms of incentives. If the proposal to allocate 60% of platform trading fee revenue to the MegaVault and Treasury subDAO goes forward, it would be necessary to add dYdX token rewards to make the incentives balanced.

2.Validator Profitability:
2.1 Reducing Validators or Reducing Block Time

Is there any official report indicating how much latency on the dYdX chain would decrease if the validator set were reduced by 50%, from 60 validators to 30? Let’s consider the approaches taken by other chains such as Injective, Solana, and Sei, which have successfully reduced block times to achieve very low latency.

Injective has a block time of 618ms.
Sei Network has a block time of 420ms.
Solana has a block time of 400ms.
Thus, for the dYdX chain, we could consider two potential solutions:

Maintain 60 validators and reduce the block time to 500ms — how would this affect dYdX latency?
Reduce the validator set to 30 while keeping the current block time at 1000ms — how would this impact dYdX latency?
The more optimal approach should be chosen. However, as stated in the Nethermind team’s report, their suggestions lack specific data or in-depth analysis, which makes it difficult to be convinced by their claims.

2.2 Top Chains in the Industry Are Expanding Validator Sets

There’s a clear trend where smaller chains are reducing their validator sets, while larger chains are expanding theirs. If dYdX chain reduces its validator set, it might be positioning itself as a smaller chain, thus lowering its value as a “blue-chip” project and a pioneer in decentralized derivatives (Perps DEX).

For instance, BNB chain initially had 21 validators and has now expanded to 45 validators.

If the validator set is reduced, the dYdX chain may diminish its own value and lose its leading position.

2.3 The Claim That Validators Are Unprofitable and Should Be Reduced Is Unreasonable

The Karpatkey Foundation will be managing 40 million dYdX tokens and staking them across 60 validators, which will impact the profitability of smaller validators. Over the past year, most validators on the dYdX chain have operated at a loss; however, they have continued to contribute and compete fiercely to secure a place in the top active set.

2.4 Criteria for Selecting 30 Validators to Run on the dYdX Chain to Encourage Competition

What are the selection criteria for the 30 validators chosen to run on the dYdX chain to foster competitiveness? Currently, the top validators hold around 86% of the total stake, with Stride delegating to 26 teams, each receiving 927,732 dYdX tokens. When Stride selected these 26 validators, there was no specific, publicly reported criteria, leaving many teams competing to demonstrate who contributes the most to the dYdX chain.

Over the past year, many smaller validators from positions 31 to 60 have worked hard and made significant efforts. Are we sure that the top 1-30 validators have contributed the most to the dYdX chain, or are they simply familiar teams that have received delegation, such as from Stride?

2.5 Latency Reduction Solutions for the dYdX Chain and Discussion

Option 1: Place all 60 validators in Japan (Tokyo) and reduce the block time to 500ms, which would result in a significant improvement in speed.

Option 2: If the validator set is reduced from 60 to 30, but validators remain widely dispersed across regions such as Europe and Asia, resulting in unchanged latency, what would be the next steps?

Currently, only 40 validators are based in Japan, while 20 are located in Europe and other Asian countries, which significantly impacts the actual latency of the dYdX Chain. Instead of reducing the validator set, requiring validators to operate from Japan could greatly improve latency.
Validator Location Map for dYdX Chain

The dYdX team made the decision to decentralize by moving from V3 to V4, making the order book and matching engine decentralized.

Naturally, if reducing the validator set proves effective by bringing validators closer together and reducing block time to 500ms, we would support the solution to reduce the validator set.

3.Reducing Trading Incentives by 55%
Over the past year since the mainnet launch, around 16.9 million dYdX tokens have been awarded as incentives to traders on the dYdX chain. This roughly equates to 72,844 dYdX tokens rewarded per $1 billion in trading volume.

Is this incentive excessive? With a trading volume of $1 billion, the reward amounts to only 72,844 dYdX tokens (around $72,844 if each dYdX token is valued at $1). What detailed report supports this reduction? Could you provide the source?

4.Cease support for the wethDYDX Smart Contract
Since the launch of the dYdX chain on October 26, 2023, approximately 22.6% of the ethdYdX supply has not migrated to the dYdX chain. The team proposes to issue a six-month notice (starting from the date the proposal is approved) to encourage holders of the dYdX token on the Ethereum chain (ethdYdX) to migrate to the dYdX chain. After this period, support for the wethdYdX smart contract would be discontinued.

We are early contributors to the dYdX chain, and we are enthusiastic about continuing to support and contribute even more to the future of the dYdX chain.
You can join the discussion on the X (twitter):

59

Hello dYdX community!
We have several solutions to reduce the latency of the dYdX chain while still maintaining a streamlined set of 60 validators. Naturally, the advantage of this approach is that the dYdX chain benefits from the diverse contributions of 60 major Proof of Stake companies within the current validator set.
Latency Reduction Solutions for the dYdX Chain and Discussion:

1.Option 1:
Place all 60 validators in Japan (Tokyo) and reduce the block time to 500ms, which would result in a significant improvement in speed.

2.Option 2:
If the validator set is reduced from 60 to 30, but validators remain widely dispersed across regions such as Europe and Asia, resulting in unchanged latency, what would be the next steps?

Currently, only 40 validators are based in Japan, while 20 are located in Europe and other Asian countries, which significantly impacts the actual latency of the dYdX Chain. Instead of reducing the validator set, requiring validators to operate from Japan could greatly improve latency.

We have just tagged the validators on the dYdX chain on Twitter (X). You can check the details here

60

Hi @antonio I think the points below are quite relevant and would like to hear your thoughts:

-Previously, because of high Ethereum fees after the launch of compound, uniswap and defi, dYdX on Ethereum L1 was subsidizing the fees and you almost went bankrupt. You tried to raise money and most investors declined because at that time dYdX was still centralized and you couldn’t convince investors of why dYdX was better than CEXs. Luckily, 3AC funded dYdX and then you thought about the next steps

-You decided to move to a zk rollup, Starknet, which helped to fix the issue of high fees but the orderbook/matching engine was still centralized and now also the whole dYdX: while before on ethereum L1 as least you had the security and decentralization of Ethereum for the settlement, now in Starknet you only had a glorified multisig (because fraud proofs were not ready and even not still now) meaning you fixed the issues of high fees by making dYdX a lot more centralized

-Then, to fix the centralization issue you decided to build your own Cosmos chain and decentralize also the orderbook and matching engine by having validators run an in-memory orderbook, and trying to prevent the risk of MEV because of this design with the MEV committee, etc. Now you decentralized also the orderbook and matching engine while preventing MEV, and had the security of staked DYDX and decentralization of 60 validators, much better than the Starknet multisig (of which iqlusion/zaki and ethan/informal were part of)

-But fraud proofs are now coming soon for optimistic rollups, meaning they will really inherint the security and decentralization of ethereum vs having a glorified multisig. What if a competitor of dYdX launches an optimistic rollup and fraud proofs are ready as well as a decentralized sequencer? They will then have much higher security and decentralization than dYdX: the security and decentralization of the Ethereum L1 tens of billions $ of staked ETH and thousands of validators, much higher than the security and decentralization of DYDX with just 60 validators. So in this situation, does dYdX still has any advantage? I see the only advantage with the orderbook/matching engine decentralization with the 60 validators, unless Espresso systems or similar decentralized sequencers can also offer this to optimistic rollups with fraud proofs

-Therefore, this is potentially the only value left of dYdX which should be maintained and amplified at all costs. If it is reduced and dYdX goes back to more centralization dYdX may then lose all advantages versus upcoming optimistic rollups with fraud proofs. You see BNB chain is still quite centralized, but Coinbase and now Kraken launched/launching optimistic rollups on Ethereum that while still centralized they would become decentralized with upcoming fraud proofs, meaning CEXs could transform themselves into DEXs, and in this situation dYdX would still have the advantage of the orderbook/matching engine decentralization IF and only if decentralized sequencers cannot also offer this for these rollups

-60 validators is very centralized in terms of security and governance compared to the thousands of Ethereum validators, there is no way dYdX can compete with Ethereum in this area. The only area where dYdX competes, and in my opinion it is its biggest value, is the decentralized orderbook/matching engine, and instead of improving this what is being suggested is to reduce the biggest value of dYdX and make the orderbook a lot more centralized?

-Assuming the worst case scenario where fraud proofs are ready let’s say in 2025, there are two possibilities. 1) If it is not possible to decentralize the orderbook in optimistic rollups as in dYdX v4 even with decentralized sequencers, then dYdX still has this orderbook decentralization advantage which should try to keep at all costs to survive. 2) If decentralized sequencers can offer similar decentralized orderbook for optimistic rollups with fraud proofs then I don’t see the advantage of dYdX since Kraken or Coinbase would have the full security of Ethereum, orders of magnitude bigger than dYdX Chain, much more decentralzation with thousands or validators, a decentralized orderbook, and low fees, high throughput by being an L2 rollup not in the L1

-So, the report presented here in general seems very short sighted, only looking at dYdX and its closest competitors, only looking at some economics variables but it totally misses the bigger tech picture that could potentially put dYdX in a very though situation as previously when it was on Ethereum L1 and the fees starting raising so much. The report only focuses on incentives for DYDX holders, on trading volumes etc., but as mentioned above all this is irrelevant in the case where fraud proofs are ready soon for optimistic rollups on Ethereum since then dYdX could potentially lose all its competitive advantages. This is totally overlooked in the report presented while being the biggest risk for dYdX in the medium/long term. All what is discussed in the report is irrelevant and the volume will drop a lot as well as the DYDX price if traders in an optimistic rollup with fraud proofs perps DEX (could be Binance and similar) get the security and decentralization of Ethereum L1, lower fees, better latency etc. than dYdX and potentially (not clear yet) even a more decentralized orderbook and matching engine. And all this above applies also to Hyperliquid

-What is Hyperliquid? It uses Tendermint/CometBFT the same as dYdX. It claims they built it from scratch in rust rather than using the Cosmos SDK yet they claim ‘The staking and slashing mechanisms of the Hyperliquid L1 work similarly to other Cosmos chains when enabled.’. So, Hyperliquid has exactly the same risks as dYdX regarding optimistic rollups on Ethereum with fraud proofs: Hyperliquid also cannot compete with the security and decentralization of Ethereum. Moreover, Hyperliquid ‘Currently has a small validator set controlled by the team, with plans for future decentralization.’. So Hyperliquid has a much higher risk than dYdX regarding L2s with fraud proofs, because at least dYdX has the orderbook/matching engine decentralized via the 60 validators, which is not clear decentralized sequencers can achieve. But Hyperliquid has nothing, even if they have in-memory orderbook book in each validator like dYdX if there are only a few validators and all controlled by the team then it is a centralized orderbook. Then, currently Hyperliquid has less competitive advantages than dYdX against optimistic rollups both without/with fraud proofs. Moreover, Hyperliquid not only has a centralized orderbook but also it is just centralized in general, if there are only a few validators controlled by the team, there is no security or decentralization (Hyperliquid is basically like dYdX v3 on Starknet but disguised as a dYdX v4 decentralized perps competitor), given all is centralization on Hyperliquid, seems that instead of just launching a CEX, they launched a CEX but disguised as a decentralized Perps DEX

-In summary, the biggest value of dYdX now in the medium term is its decentralized in-memory orderbook with MEV prevention run by 60 validators. To remain competitive and survive, dYdX must maintain and amplify this value and this report is suggesting the opposite, going towards a more centralized orderbook and losing the biggest and probably only competitive advantage of dYdX in the medium term

3 Likes
61

Hi dYdX Community,

Thank you for being vocal and sharing your perspectives - it’s great to see such active engagement!

I’ve noticed a slight shift away from the initial topic created by @nethermind . While I completely understand that some points may be seen as controversial, I’d like to kindly remind everyone to stay aligned with the current topic and to provide constructive feedback without pointing fingers.

I know this can be challenging, but please keep in mind that actions will be taken against those who do not adhere to the dYdX Forum’s Code of Conduct and Guidelines.

62

Rules are essential, but when a proposal this pivotal is up for discussion, I’d expect to see truly critical analysis rather than overly agreeable, surface-level comments. There’s no personal targeting or offensive language here, so I don’t see a reason to activate a censorship mode.