[DRC] dYdX Treasury SubDAO DYDX Buyback Program

[karpatkey]

Summary

This proposal outlines the establishment of a DYDX buyback program (the “Buyback Program”) to be implemented by the dYdX Treasury SubDAO. As a first step, the dYdX Treasury SubDAO proposes allocating 25% of dYdX’s net protocol revenue to the Buyback Program.

In the future, the dYdX community could explore increasing the percentage of net protocol fees used for the Buyback Program, potentially directing 100% of net protocol fees to the Buyback Program. We include more information about this under the Future Considerations section below.

The Buyback Program aims to support the ecosystem by aligning token holders with dYdX platform growth and enhancing market perception, all with the ultimate goal of contributing to dYdX Chain network security.

Motivation

Background

Several community members have proposed using a portion of protocol revenue to buy back DYDX tokens from the open market and stake them to strengthen network security and stability. In Nethermind’s Research Report, they suggested a Buy & Stake Program.

In karpatkey’s proposal for dYdX Treasury SubDAO, karpatkey also offered the optional service of “operationalise(ing) the deployment of a portion of the USDC accumulated through the staking program towards buybacks of the DYDX token in the open market, followed by staking of such tokens”, subject to a separate follow-on governance proposal.

Building on top of the works mentioned above, the dYdX Treasury SubDAO now proposes to establish a DYDX Buyback Program.

Protocol buyback programs have proven effective in increasing token holder engagement across Web3. Other liquidity venues such as Binance, Hyperliquid, and Jupiter have implemented buyback strategies to align token holders with protocol growth and development as well as to contribute to network security and stability.

Current state of DYDX protocol revenue

• 2024 Net Protocol Revenue: $46.0M
• Current Net Protocol Revenue Distribution:
  • Megavault (50%)
  • Treasury SubDAO (10%)
  • DYDX staking rewards (40%)

Proposal Specifications

• Stage 1 - Reduce Megavault net revenue share from 50% to 37.5%.

• Stage 2 - After approximately 1 week, we will create a second proposal to further reduce Megavault net revenue share from 37.5% to 25%. A gradual decrease in Megavault’s share of dYdX’s net protocol revenue should ease the impact on the APR for Megavault stakers.

• Allocate 25% (initially 12.5% and a total of 25% of dYdX’s net protocol revenue) of net protocol revenue to a dYdX Chain address controlled by the Treasury SubDAO to be used for the Buyback Program, operationalised as follows:

  1. 25% of net protocol revenue (predominantly in USDC) is sent to a separate dYdX Chain account controlled by the Treasury SubDAO specifically for the Buyback Program (the “Buyback Account”).
  2. Treasury SubDAO regularly transfers USDC from the Buyback Account to a centralized exchange, like Binance, or a decentralized exchange, like Osmosis, to purchase DYDX.
  3. Treasury SubDAO executes the purchase of DYDX; the default mechanism would be Time-Weighted Average Price (“TWAP”).
  4. Any purchased DYDX tokens are transferred to an account controlled by the Treasury SubDAO and delegated to dYdX Chain validators. Please note that delegations will be made in accordance with the Treasury SubDAO’s existing staking program.

Infrastructure Required

• A Binance Account will be created by the Treasury SubDAO, as the majority of DYDX token liquidity is on Binance at the moment.
• The Treasury SubDAO may consider conducting DYDX purchases on other venues, including other centralized and/or decentralized exchanges, in the future at its own discretion.

Impact of the Buyback Program

Based on 2024 annual dYdX fees, re-directing 25% of net protocol revenue for the Buyback Program would have resulted in the purchase of ~1.55% of the max supply and 2.15% of the circulating supply of the DYDX token.

Further scenario analysis of the potential impact of various levels of net protocol revenue on the Buyback Program reflects the following:

• 25th percentile protocol revenue* ($2.35M monthly revenue, $28.24M annualised revenue): $7.06M of buyback
• 50th percentile protocol revenue* ($3.64M monthly revenue, $43.62M annualised revenue): $10.91M of buyback
• 75th percentile protocol revenue* ($4.48M monthly revenue, $53.78M annualised revenue): $13.44M of buyback
• Projected ‘25 monthly protocol revenue (based on year-to-date 2025 revenue): $9.05M of buyback

*from Dec’23 to Jan’25

Scenario Analysis of Annual Protocol Revenue on Buyback
(Based on DYDX price of $0.80)

The dYdX Treasury SubDAO’s Staking Program (the “Staking Program”) is generating an estimated 326,819 USDC per month (as of January 2025) and 3,921,828 USDC annually. A portion of the USDC generated from the Staking Program is being deposited into the dYdX MegaVault, and could be deployed into DeFi protocols in the future.

Around $9.05M in DYDX tokens (based on 2025 Projected Net Protocol Revenue, based on year-to-date 2025 revenue) purchased through the Buyback Program would be deployed into the dYdX Treasury SubDAO’s Staking Program to increase network security and generate additional USDC staking rewards. Assuming a 6% DYDX staking APR, this would contribute an estimated additional 543k USDC in annual stablecoin reserves for the Treasury SubDAO, increasing the projected total annual staking revenue to 4.46M USDC.

Future Considerations

By committing a portion of net protocol revenue to strategic buybacks, we aim to enhance tokenholder alignment with protocol growth and reinforce network security.

This is just the beginning. As the program matures and its impact becomes clear, the dYdX community may explore expanding its scope in several ways, including but not limited to:

• Scaling the Buyback Program: Gradually increasing the percentage of net protocol revenue allocated to buybacks to further align incentives and enhance market confidence.
• Distributing Net Protocol Fees in DYDX: Exploring the potential to direct 100% of net protocol revenue toward DYDX buybacks, then distributing acquired DYDX to stakers, Megavault depositors, and the Treasury SubDAO to maximize network participation.
• Enhancing Token Utility: Introducing new ways to leverage DYDX within the ecosystem, such as expanded staking incentives, fee discounts, or other mechanisms that drive deeper engagement and adoption.

These are complex realities with multiple, far-reaching potential implications for the dYdX ecosystem and its stakeholders, and all of the potential consequences of any proposal or initiative similar to the ones mentioned above for all kinds of dYdX stakeholders should be taken into consideration by the community.

We encourage the community to actively contribute ideas, provide feedback, and help shape the evolution of the Buyback Program.

Compensation

karpatkey would like to request a flat fee of $10,000 for the set-up and $36,000 per year for administering the Buyback Program. This would increase the Treasury SubDAO’s minimum compensation from $300k per year to $336k per year.

[thecryptostakr]

This is true alignment. I’m all in on this proposal.

[thecryptostakr]

Also reiterate the necessity of analyzing the current rewards program.

[RealVovochka]

Overall, I support the buyback program, but we need to consider the fact that the dYdX team has been buying tokens from the market since the end of September, and according to my information, they have spent about $15 million on this. As we can see, this has had no impact on the token price. Therefore, I believe a comprehensive approach is needed, which includes reducing expenses in the dYdX token and adding additional utility for the dYdX token. The token needs to serve a purpose to create organic demand.

[thecryptostakr]

You have to be able to see the big picture here. This refinement of DYDX tokenomics creates a mechanism that combines all interests in strengthening the protocol and the value of the token, as described in the following points:

1. The adoption of the buyback mechanism proposed by the Tresury subDAO simultaneously introduces an increase in buying pressure and a reduction in selling pressure for the DYDX token;
2. Introduces an increase in buying pressure by using a portion of the protocol fees to acquire the token, reducing the volume of tokens available for trading on the open market;
3. The fact that the acquired tokens are applied to the staking program managed by Tresury subDAO contributes to the channeling of USDC fees to the protocol’s treasury, allowing in the future to finance the protocol’s operations without the need to sell DYDX tokens on the market, thus reducing one of the main sources of pressure to sell the token;
4. The resulting strengthening of the Tresury subDAO portfolio will allow organically funding the protocol’s financial needs and constantly strengthening the treasury’s USDC position;
5. Investing a portion of USDC from the staking program in Megavault creates an organic liquidity source that allows Megavault to be fed with liquidity and raise its liquidity level to a much higher and more competitive standard, contributing to better future performance of the DYDX protocol;
6. The growing volume of acquisition of DYDX tokens through the buyback program and consequent application of the staking program also creates an organic mechanism for increasing the economic security of the DYDX chain, contributing to the increase in the staking rate and, in parallel, selecting in a more technical and eventually more effective way the delegation of tokens to the best validators.

That said, I have some doubts about a possible very drastic reduction in fees sent to Megavualt, under penalty of making the product less interesting (read: profitable) compared to the competition. At the same time, the staking rate has shown extremely low values ​​(as expected, after the introduction of the tokenomics proposed by Nethermind), which has resulted in a double penalty for stakers due to the increasing devaluation of the token. It might be better to find a more balanced distribution of fees between the buyback program, staking rewards, and fees directed to the Megavault.

Finally, there is still a loose end in this token value development engine, which resides in the mechanics of incentives paid to traders in DYDX. This mechanism contributes to token dumping and its real cost to the protocol deserves an analysis to be carried out, in my opinion, in collaboration with the Tresury subDAO.