[DRC] Activate Trading Rewards and the 6-Month Launch Incentive Program

Governance/DAO Discussions
1

Hi dYdX community –

Steven from Amber here. We’re a large team engineers, quantitative researchers, traders, and crypto enthusiasts. Operating globally 24/7, we are an active market participant heavily involved in pricing, trading, and hedging cryptocurrency assets across all the various venues.

We have been active on dYdX from the start, being among the initial market makers on the platform and contributing to over a quarter of total trading volume at times. We are also an investor in dYdX and are excited to see the launch and success of dYdX V4.

Simple Summary

We are proposing to end the Beta Stage by activating Trading Rewards and the 6-Month Launch Incentive Program, among other things:

(1) activate Trading Rewards by crediting the Rewards Treasury Vester, setting the trading rewards constant “C” to 0.33 to enable Trading Rewards, and for the constant “C” to subsequently increase to 0.66 and .90;

(2) approve the start of the 6-month Launch Incentive Program proposed by Chaos Labs;

(3) Credit dYdX Chain Community Treasury Vester with DYDX based on DIP 29; and

(4) to potentially seed the Insurance Fund with ~1M USDC.

Abstract

Since the Genesis of dYdX Chain, 430M ethDYDX tokens have been bridged, and over 14M DYDX tokens have been staked to dYdX Chain validators. On November 13, 2023, the Beta Stage outlined by the dYdX Operations subDAO commenced after the vote to set markets to active passed. The Beta Stage served as a testing phase to ensure smooth trading functionality on dYdX Chain. There were no trading rewards during the Beta Stage, although fees have been accruing to Validators and Stakers.

On November 22, 2023, the dYdX Operations subDAO published a deep dive on the Full Trading Stage. Full Trading could encompass Staking Rewards, Trading Rewards, and the start of the 6-month Launch Incentives Program proposed by Chaos Labs.

During the Beta stage, the dYdX Chain has been stable with minimal bugs and issues, therefore we propose ending the Beta Stage and transitioning to Full Trading with DYDX rewards distributed through Trading Rewards and the 6-Month Launch Incentive Program.

Specification

  1. Credit the dYdX Chain Rewards Treasury Vester with DYDX tokens to enable Trading Rewards based on the remaining allocation of Trading Rewards.
  2. Change the fee_multiplier_ppm parameter that represents the trading rewards constant “C” to 0.33.
  3. Increase the trading rewards constant “C” to (1) 0.66 at the relevant block height and (2) 0.90 at the relevant block height which corresponds to the Epoch 30 and Epoch 31 changes to Trading Rewards on dYdX v3.
  4. Approve the start of the 6-month Launch Incentive Program proposed by Chaos Labs.
  5. Credit dYdX Chain Community Treasury Vester with DYDX based on DIP 29.
  6. Seed the Insurance Fund with ~1M USDC.

Motivation and Rationale

Since the Genesis of dYdX Chain, more than 430M ethDYDX tokens have been bridged, and more than 14M DYDX tokens have been staked to dYdX Chain validators. On November 13, 2023, the Beta Stage outlined by the dYdX Operations subDAO commenced after the vote to set markets to active passed. The Beta Stage served as a testing phase to ensure smooth trading functionality on dYdX Chain. There were no trading rewards during the Beta Stage, although fees have been accruing to Validators and Stakers.

On November 18, 2023, dYdX v3 governance voted to (1) wind down dYdX v3 Trading and LP rewards, (2) migrate available ethDYDX in the Community Treasury and Rewards Treasury to the dYdX Chain, and (3) upgrade the Treasury Contract for each of the Community Treasury and the Rewards Treasury smart contracts leveraging the Community Treasury Bridge and the Rewards Treasury Bridge contracts, respectively. The Community Treasury Bridge and Rewards Treasury Bridge contracts effectively enable dYdX Chain governance to credit the corresponding amount of tokens from the Ethereum Community Treasury vester and Rewards Treasury vester to the Rewards Treasury Vester and Community Treasury Vester on dYdX Chain.

On November 22, 2023, the dYdX Operations subDAO published a deep dive on the Full Trading Stage. Full Trading could encompass Staking Rewards, Trading Rewards, and the start of the 6-month Launch Incentives Program proposed by Chaos Labs. During the Beta stage, the dYdX Chain has been stable with minimal bugs and issues, therefore we propose ending the Beta Stage and transitioning to Full Trading with DYDX rewards from Trading Rewards and the 6-Month Launch Incentive Program, among other things.

dYdX Chain Trading Rewards (and Rewards Treasury Vester)

To activate Trading Rewards on the dYdX Chain, the dYdX community through governance needs to credit the Rewards Treasury Vester with DYDX tokens and set the trading rewards constant “C” to a non-zero amount.

First, we propose crediting the Rewards Treasury Vester with DYDX to account for the remaining allocation for trading rewards.

Second, we propose setting the trading rewards constant “C”](https://github.com/dydxopsdao/networks/blob/fd7ee6e63e7e4b3ffab4fe600ac7cdb77c28d88d/dydx-mainnet-1/genesis.json#L3760) to 0.33 and to increase the trading rewards constant “C” to (1) 0.66 at the relevant block height and (2) 0.90 at the relevant block height which corresponds to the Epoch 30 and Epoch 31 changes to Trading Rewards on dYdX v3. We have included our rationale:

  1. dYdX v3 governance voted to wind down trading rewards by ⅓ each epoch starting in Epoch 30. Correspondingly, dYdX Chain trading rewards can ramp up at the same rate on dYdX Chain. The delayed message enables increasing the trading rewards constant “C” at approximately the same time that dYdX v3 rewards are reduced.
  2. We anticipate that activating trading rewards will result in more activity (trading and staking) on dYdX Chain. Initially, setting the constant to 0.33 could push ethDYDX holders to migrate their tokens to the dYdX Chain and dYdX Chain DYDX holders to stake to validators.

Start the 6-month Launch Incentive Proposal

We propose approving the start of the 6-month Launch Incentive Program proposed by Chaos Labs.

On October 1, 2023, the dYdX community supported a sentiment signaling proposal to use $20M in DYDX from the dYdX Chain Community Treasury for a 6-month Launch Incentives Program. This program is “designed to motivate the seamless migration of volume and users to the dYdX Chain.”

Note this proposal item will not result in any dYdX Chain on-chain changes. Each distribution of DYDX rewards under the Launch Incentives Program is subject to a dYdX governance proposal on the dYdX Chain. We are including this proposal item so that the dYdX community is aligned on the start of the 6-Month Launch Incentive Program if this proposal is successful.

The Launch Incentives Program could motivate the migration of volume and users to the dYdX Chain. Similar to Trading Rewards, we anticipate that the Launch Incentives Program will result in more activity (trading and staking) on dYdX Chain.

dYdX Chain Community Treasury Vester

On dYdX v3, the dYdX community through several governance proposals voted to reduce ethDYDX emissions and as a result, ethDYDX from emissions reductions accrued in the dYdX v3 Rewards Treasury.

We propose crediting the dYdX Chain Community Treasury Vester with DYDX based on the balance of the dYdX v3 Community Treasury Vester and the dYdX v3 Rewards Treasury Vester, less the DYDX that will be allocated to the dYdX Chain Rewards Treasury Vester for Trading Rewards.

dYdX Chain Insurance Fund

Given that we are proposing to activate trading rewards on dYdX Chain, it is crucial to incorporate a precautionary measure to mitigate potential systemic risks that could impact dYdX Chain users. Therefore we are proposing to seed the Insurance Fund with ~1M USDC.

If you are interested in sending USDC tokens to seed the Insurance Fund please respond to this thread with your intent, the number of DYDX from the community treasury you expect in return, and the calculation for arriving at the requested amount of DYDX.

Note that the Insurance Fund grows when a given trader’s position(s) is/are liquidated. We think it makes sense to have at least ~1M USDC in the insurance fund at the time that Trading Rewards are activated.

Next Steps

We will provide an update about when we plan to create the on-chain vote in the near future.

10 Likes
2

Cipher Labs is excited about the proposed activation of Trading Rewards and the 6-Month Launch Incentive Program on dYdX V4. We fully support this initiative as it marks an important advancement for the platform. We look forward to participating in and contributing to this new phase of growth and innovation.

3

Exciting news for the dYdX community!

I have been trading for several days in the Beta Stage. Everything looks good and smooth.

Let the new journey begin!

4

Dear Steven and the dYdX community,

We at Luganodes are thrilled to express our wholehearted support for the proposal to activate Trading Rewards and initiate the 6-Month Launch Incentive Program on the dYdX Chain. As a genesis validator and active participant in the dYdX ecosystem, we understand the significance of these measures in advancing the platform’s growth and promoting community engagement.

The comprehensive plan outlined, including the activation of Trading Rewards, launch incentives, community treasury allocations, and seeding the Insurance Fund, reflects a thoughtful and strategic approach to fostering a vibrant and secure dYdX Chain ecosystem.

1. Activating Trading Rewards:

We fully endorse the proposal to credit the Rewards Treasury Vester with DYDX tokens and incrementally adjust the trading rewards constant “C” to 0.33, 0.66, and 0.90. This approach aligns with the evolution of dYdX v3 and is poised to stimulate increased trading and staking activities on the dYdX Chain. We believe this move will effectively incentivize users to migrate and actively participate in the ecosystem.

2. Launching the 6-Month Incentive Program:

Luganodes supports the initiation of the 6-Month Launch Incentive Program proposed by Chaos Labs. The allocation of $20M in DYDX from the dYdX Chain Community Treasury for this program is a strategic move to motivate the seamless migration of volume and users to the dYdX Chain. This program, coupled with Trading Rewards, is expected to catalyze heightened engagement and contribute to the overall success of the dYdX Chain.

3. Community Treasury Allocations:

We appreciate the proposed crediting of the dYdX Chain Community Treasury Vester with DYDX based on DIP 29. This step ensures a fair and transparent distribution, aligning with the principles of decentralization and community-driven governance.

4. Seeding the Insurance Fund:

Luganodes acknowledges the importance of risk mitigation in the rapidly evolving DeFi landscape. Seeding the Insurance Fund with ~1M USDC demonstrates a proactive approach to safeguarding users and the integrity of the dYdX Chain.

In summary, we commend the dYdX Operations subDAO and Chaos Labs for their meticulous planning and strategic vision. Luganodes stands firmly behind these proposals, anticipating their positive impact on the dYdX community and the broader decentralized finance ecosystem.

We eagerly await the on-chain vote and look forward to contributing to the continued success of the dYdX Chain.

5

I am extremely excited for the full-scale launch of dydx v4, as it marks a significant milestone.

However, at this moment, my concerns lie with the security and decentralization of the network. Were
these not the objectives of the alpha and beta stages?

I am hopeful that leading validators will address this issue and alleviate any doubts.

6

Hey dYdX Community, we are planning to move forward with the proposal later today. We have attached a final version of dYdX Improvement Proposal (DIP 2 - Activate Trading Rewards and the 6 Month Incentive Program), if you would like to review it.

We have removed seeding the Insurance Fund from the current proposal because:
(1) determining the appropriate amount of DYDX to send to a third party might be contentious and we do not want to jeopardize the current proposal failing, and
(2) no third party has expressed interest in seeding the insurance fund at this time.

With the launch of Trading Rewards and presumably greater activity on the dYdX Chain, it is important to have an adequate Insurance Fund in place ASAP.

7

Thank you for sharing the proposal for the Dydx Chain. We appreciate the clarity in your Simple Summary outlining the activation of Trading Rewards, the 6-Month Launch Incentive Program, and other key steps. The proposed actions, including activating Trading Rewards and approving the Launch Incentive Program, seem well-considered.

It’s commendable that the proposal addresses specific measures such as crediting the Rewards Treasury Vester, setting the trading rewards constant, and crediting the dYdX Chain Community Treasury Vester based on DIP 29.

Overall, the proposal reflects a strategic approach to concluding the Beta Stage and initiating essential programs for the next phase. We look forward to seeing these initiatives come to fruition.

Best regards,
Validatrium

8

Glad to see this.

Proposal on chain here: Mintscan

9

Hey everyone,

Wintermute would like to put forward our interest in seeding the Insurance Fund with USDC tokens.

From our understanding, the process will happen in 2 phases:

  1. If the on-chain proposal is successful, the network will transfer X amount of DYDX to an address we specify.
  2. After receiving the DYDX, we will have to manually send the USDC to the Insurance Fund.

The second part is particularly important as it requires the DAO to trust the party on the other side of the trade, which we hope shouldn’t be an issue given Wintermute’s ongoing commitment to dYdX as an investor, liquidity provider, and active governance participant.

Nonetheless, we propose to use the mid-price of ETHDYDX on Binance minus a 10% discount. A snapshot of the price will be taken upon receiving the DYDX.

For example, if the mid-price of ETHDYDX at the time we receive the DYDX is $3.20 the price charged to the DAO is $2.88 ($3.20 * 0.9).

Such a discount is standard in OTC trades, but the size of the discount is due to the fact that we are taking on ‘peg risk’ by providing the DAO with pricing based on ETHDYDX liquidity. Currently, there is no real way to perfectly hedge native DYDX. All CEX & DEX liquidity is based on ETHDYDX which due to the one-way bridge is not identical to native DYDX on the dYdX Chain. Furthermore, it’s pretty much impossible to exit a $1M DYDX position via IBC liquidity - the largest Osmosis DYDX pool has $80k in liquidity and if the DAO were to try to sell DYDX this way to fund the insurance pool they’d lose a lot more than 10% due to slippage.

Proposed Execution Process:

Given that the voting period is 4 days there is some time for the price of DYDX to deviate from the time the proposal is created on-chain. Therefore, we propose the following process:

  1. The proposal (proposer) will use a 5-day TWAP to calculate the price of DYDX and determine the quantity of DYDX + 10% (to account for the discount) to send to our address (dydx1aakf4gq5wep9ukeemtuvrjvccz2lhnjteerrme).

  2. E.g., if the 5-day DYDX (ETHDYDX) TWAP price is $3.37 the amount of DYDX to be sent to our address is $1,000,000 / $3.37 = 296,736 * 1.10 = 326,410 DYDX (rounded to the nearest whole number).

  3. After 4 days of voting and if the proposal has passed, Wintermute will take the mid-price of ETHDYDX from Binance with a 10% discount after receiving the DYDX.

  4. We will then use this price with the 10% discount to calculate how much USDC to send to the Insurance Fund (this is effectively the price we are charging for the trade).

  5. E.g., if the mid-price of ETHDYDX on Binance is $3.37 we will send $3.033 ($3.37 * 0.9) * 326,410 = 990,001 USDC (rounded to the nearest whole number) to the Insurance Fund.

  6. We will then reply to the forum confirming the trade has been finalised with the relevant details of the trade.

Note: the price of DYDX for the initial TWAP will be sourced from CoinGecko using ETHDYDX which takes the past 5 days of price data + the most recent price. I’ve written a simple Python script here that the proposer can run to easily calculate the 5-day TWAP price.

This means the Insurance Fund will likely receive a little bit less or more than $1M USDC depending on the price movement of DYDX during the voting period. By separating the price at the start and end of the vote, we don’t need to factor in the potential price movement of DYDX over the 4 days of voting resulting in a better price for the DAO.

1 Like
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Seriously, @Callen_Wintermute 10% is pure robbery.
Yes dydx native token is illiquid so far. But the token generates Yield, wasn’t dumped after unlocks. And I am sure soon to be added to major exchanges.

Anyway, it’s an open market and I bet other market makers can offer a better quote. If not, I am happy to support the quote from Wintermute

11

This seems rather unnecessarily manual. Please review other more efficient, modern and streamlined means of creating an insurance layer, for example, the Aave Safety Module.

While it is possibly not feasible to add this functionality to dYdX quickly, the patch to hold over until something like this is executed should be, IMO, smaller and by nature temporary.

There are better ways out there and I urge the community to consider them.

12

Hey @eddieb. An insurance fund and safety module have different purposes. The insurance fund acts as a backstop for liquidations and is constantly in use. The safety module acts as a protocol-wide backstop; in the case of an unexpected loss of user funds (e.g. a hack), the DAO can vote to slash the safety module and make users whole.

More generally, it could be possible to implement an insurance fund (not a safety module) where users could deposit USDC and earn some yield for doing so (either paid by profitable liquidations or by some rewards from the DAO).

However, I think outsourcing risk-capital is appropriate when the protocol needs leverage. Let’s say it needs $300M in insurance, but it doesn’t have $300M to spend right now. Instead, it pays a ~10% APR ($30M) in exchange for the option to slash a $300M notional.

In this case, dYdX certainly has $1M to fund the insurance fund itself. By doing so, it internalizes the risk of losing that $1M if the insurance fund is depleted, but it also avoids:

  1. Having to pay an APR that reflects this risk to the depositors.
  2. Dealing with the uncertainty about the insurance fund’s TVL, as depositors must be allowed to withdraw their funds in some reasonable timeframe. Given how important the insurance fund is to ensuring liquidations happen smoothly, I’d say avoiding this uncertainty is pretty important.

In a nutshell, the protocol seeding the insurance fund itself (instead of outsourcing the deposits) seems to be a more predictable, and in the long-run potentially cheaper, solution. Curious if you have other suggestions for how the DAO can efficiently purchase the necessary USDC.

On Safety Modules Generally

~For those new to the dYdX community~

dYdX has considered variations of safety modules in the past and implemented a fork of Aave’s Safety Module on dYdX v3. Following some research from Xenophon Labs and lots of discussion, the community voted to wind down the safety module last year.

One reason the module was wound-down was because it was entirely denominated in DYDX token. Intuitively, this poses some “wrong-way risk” in that, if the protocol suffered a shortfall, DYDX token price and liquidity would also decline.

However, as dYdX Chain matures, the community might choose to re-surface the safety module discussion and consider a USDC-based safety module in a separate thread. We discussed this in detail in our paper. Thanks!

1 Like