[DRC] Seed Insurance Fund

Proposals
1

Intro to E4
We have been one of the earliest market makers on dydx - Commonwealth

We are a team of researchers, traders, and engineers coming from some of the most successful firms in traditional finance. We achieved a leading position by making volume on v3 and looking forward to provide liquidity on dYdX V4. We are very excited to participate in the exchange growth plans, and support dYdX both as a market maker and an active governance participant.

Key details:

  • Firm founding date: 2021
  • Markets/products: Cash, futures, swaps, and other derivatives on main centralized exchanges and major blockchain protocols
  • Website: https://www.e4capital.com/

Simple Summary

We are proposing to transfer 382025 DYDX from the Community Treasury to Wintermute (dydx1aakf4gq5wep9ukeemtuvrjvccz2lhnjteerrme), in exchange for ~1M USDC to seed the Insurance Fund (dydx1c7ptc87hkd54e3r7zjy92q29xkq7t79w64slrq).

Abstract

To maintain the solvency of dYdX Chain trading system, the Insurance Fund (dydx1c7ptc87hkd54e3r7zjy92q29xkq7t79w64slrq) is used as the first backstop when an account has a negative balance. Such an account will be liquidated and the Insurance Fund will take on any losses. The Insurance Fund will be used before any deleveraging occurs.

Since Full Trading was enabled on November 28, 2023, the size of the Insurance Fund is currently at 3,997.49 USDC. With daily trading volume reaching $260M, traders on dYdX Chain would likely benefit from a sizable Insurance Fund.

As discussed on the Forum, Wintermute has expressed interest in seeding the Insurance Fund with ~1M USDC using the mid-price of ETHDYDX on Binance minus a 10% discount.

Specification

  1. We propose to calculate the amount of DYDX to be sent to Wintermute’s address (dydx1aakf4gq5wep9ukeemtuvrjvccz2lhnjteerrme) using the following:
  2. the 5-day Time Weighted Average Price to calculate the market price of DYDX, utilizing this script (and adjusting the price for 10% discount); and;
  3. round the amount above to the nearest whole number.
  4. If the proposal passes, Wintermute will take the mid-price of ETHDYDX from Binance with a 10% discount after receiving the DYDX, then use this price with the 10% discount to calculate how much USDC to send to the Insurance Fund.
  5. Wintermute will then write on the Forum confirming the trade has been finalized with the relevant details of the trade.

Motivation and Rationale

Since Full Trading was enabled on November 28, 2023, the size of the Insurance Fund is currently at 3,997.49 USDC. With daily trading volume reaching $260M, we think that it is an important time to seed the Insurance Fund. Therefore we are proposing to seed the Insurance Fund (dydx1c7ptc87hkd54e3r7zjy92q29xkq7t79w64slrq) with ~1M USDC.

Test Cases and Implementation

A full implementation and test cases of the proposed change can be found [here].

Copyright

Copyright and related rights waived via CC0.

* - numbers to be confirmed

4 Likes
2

As a holder of dydx, I think this is a good proposal. I would like to see the insurance fund seeded with even more money but this is a decent first step. We’ve seen recently that just one attack was able to drain a sizable portion of v3’s insurance fund. Just seems to me that 1M isnt going to cut it.

That being said I would vote yes to this proposal -with the caveat that Wintermute be subject to a short lockup/vesting schedule as there is a discount to the market price (standard market practice to have lockup if buying tokens at a discount). Given that the discount is only 10%, perhaps something like 3~6 months should suffice? Believe they are good long-term actors in the space so shouldn’t be a problem. Would like to hear wintermute’s/e4’s comment on this.

1 Like
3

sounds promising and aligns with potential benefits for dYdX Chain traders. Looking forward to further discussions on this proposal

1 Like
4

Hey guys! I haven’t generally been active on dYdX governance but have been a personal holder for the last few months and involved in Cosmos at large via my role as Grants Lead for the Neutron Grants Program.

I agree with seeding the insurance fund, but this seems like a bad deal for dYdX and a great deal for Wintermute. ETHDYDX liquidity at +/-2% depth on Binance is $868,789 at the moment, so the 10% discount seems unnecessarily large and would only make sense with a 6-12 month lock-up, perhaps. Alternatively, this deal could make sense with a 1-2% discount — or, most ideally (for dYdX, not Wintermute), none.

2 Likes
5

Hey everyone, I just wanted to add more context to this proposal to explain the rationale behind the discount value for those who missed it here

" 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. "

Thanks!

cc @LanreIge @william

4 Likes
6

@Callen_Wintermute Thank you for your response. I have no issue with the TWAP pricing, the discount, and the mechanism regarding transferring USDC to the DAO given Wintermute’s reputation. Point taken regarding the thin IBC liquidity. To clarify, Wintermute will be receiving native DYDX on DYDX Chain, though the TWAP pricing will be using ETHDYDX price data from Coingecko. I see no problem with that.

However, speaking as someone taking the stance of the DAO (though I do not hold any formal position within dydx or the dao), I would still like there to be some commitment to not selling the DYDX token for a period of time. From my point of view, it doesn’t have to be put into a vesting contract or anything like that, but just a commitment that Wintermute will not be selling DYDX tokens into the open market for 3 months or something of that nature. I don’t think this should be a problem given Wintermute’s long-term orientation to supporting projects.

That being said, I do appreciate Wintermute taking the initiative to seed the insurance fund by purchasing tokens from the DAO when you could have easily purchased tokens from the open market and not have to go through the trouble.

1 Like
7

I am curious whether DOT/DOS can sponsor an insurance fund. I do not delve into the legal details, and my proposal might be challenging to implement. However, I see it as the most advantageous way for dYdX to finance the insurance fund:

  1. We create a proposal for transferring, for example, 350K dYdX tokens to an account under the control of OpsDAO.
  2. OpsDAO conducts a public tender for converting the tokens.
  3. Various market makers submit their bids.
  4. OpsDAO signs an OTC trade contract with the company that offered the best terms.
  5. OpsDAO transfers USDC to the insurance fund.

P.S. @Callen_Wintermute, what percentage of your ethdYdX tokens has Wintermute bridged to the dYdX chain already? I ask this question because Wintermute is clearly a long-term partner and investor, and as I understand it, you plan to profit from protocol operations. Consequently, Wintermute needs native dYdX to stake. If my assumptions are correct, Wintermute is simply trying to secure a 10% discount. If they are not correct or if Wintermute has already bridged a substantial amount, then I understand your desire for a 10% discount.

One more minor point I would like to mention: a long-term partner’s desire for a 10% discount on project tokens appears to the market as uncertainty in the project and its token at least in the short-term perspective.

~Vladimir

8

Can the DAO sell ETHDYDX, or can dYdX Foundation help facilitate the delivery of ETHDYDX instead some other way, given large buckets of community treasury (e.g. the rewards vesting balance) still sit on Ethereum?

This lowers the slippage allowance that Wintermute or any other OTC provider would need.

9

I saw this in the other thread, but thanks for the context. I still think this is a bad deal for dYdX, in my opinion, and the 10% discount with/ no lock-up is at odds with how these deals typically would go for other tokens (or tokens even less liquid than DYDX).

The point about not being able to exit a 1M position via IBC liquidity is not too relevant since another strategy could be just to submit a governance proposal to mint ethDYDX via governance proposal for the sole purpose of selling into existing secondary markets (and burning the equivalent amount of DYDX). I think a 10% discount would be more appropriate alongside a 1-year lock-up but the lack of engagement around this deal concerns DYDX governance.

10

Hi all.

After reading the proposal and the comments, we have voted no on this proposal.

We believe that in the spirit of blockchain, this transaction could be done in a more trustless way and with a better result for the token holders through an austion facilitated by the Operations DAO or by selling on market as required by the Operations DAO.

Null.

1 Like
11

Hey @kingnodes

Not too sure how an auction through the Operations subDAO is more trustless than the current set up? I just want to reiterate that this proposal had an open request for bids to seed the insurance fund and no one else but us put forward a bid.

Importantly, I think this decision is more about protecting the chain from any adverse events as it’s currently doing $200M-$300M a day with only a $50k insurance fund. As an LP ourselves we’d feel a lot more comfortable if the insurance fund is seeded sooner rather than later.

12

It appears to me that an open request for bids is when the Operations subDAO announces that it is seeking proposals. It publishes this information across its communication channels, provides a certain time period for the submission of bids, and then selects a winner, as exemplified by the selection of the Indexer provider.

1 Like
13

I agree with @LanreIge and @kingnodes . It would be simpler if the foundation or ops DAO sold the tokens themselves on the market. There is sufficient liquidity on cexes, and I do not think it’s necessary to offer a 10% discount. 10% is excessive.

To put my money where my mouth is, I’d be more than happy to make an offer myself to bid 1 million USDC worth of DYDX at an 8% discount. If the community is insistent on doing a deal like this, I think we should at least take my deal as my deal would offer a better price for the community. If this sounds interesting to the community, I’d be more than happy to get in touch with the relevant members of the community to make this deal go through.

However, I still think it makes more sense to sell on the open market, or the discount should be reduced signficantly.

14

I urge the community to vote No on this issue until we’ve had more time to discuss this. I agree with seeding the insurance fund, but I do not believe this specific proposal is a good deal for the community.

15

Hey everyone,

The on-chain vote was successful! We can confirm that we received 382,025 DYDX.

As highlighted in the proposal, the midprice of ETHDYDX on Binance when we received the DYDX was $2.9535. Applying the 10% discount, the final price of the trade was $2.65815 ($2.9535 * 0.9); thus, we have sent $1,015,480 USDC ($2.65815 * 382,025) to the insurance fund.

Insurance fund: Mintscan

1 Like