[DRC] Simplifying Incentives: Ending Protocol Level Trading Rewards and Setting C to 0

Proposals
1

About Nethermind Research

Nethermind DeFi Research provides technical research and advisory services to venture capital firms, hedge funds, and protocol teams. Our focus areas include protocol due diligence, quantitative modeling, tokenomics design, and risk analysis. All outputs are grounded in cryptoeconomic rigor, delivering actionable insights and technically sound recommendations.

Nethermind Research received a grant from dYdX Grants to review dYdX Chain incentives, dYdX fees, the distribution of net revenue and tokenomics, among other things.

Introduction/Abstract

On August 26, 2025, dYdX Labs published a public roadmap declaring that “dYdX is entering a new chapter of growth, innovation, and ruthless execution.” As competitive pressure intensifies, our research is directly aligned with pillars 2 and 3 of dYdX’s strategy: delivering a world-class consumer experience and maximizing token utility.

Before addressing tokenomics and incentives more broadly, our initial research phase is targeting the most immediate opportunities, on-chain parameters that are straightforward to adjust. As such, we are advancing a proposal to simplify incentives by ending protocol-level trading rewards and setting C to 0.

Simplifying Incentives: Ending Protocol Level Trading Rewards and Setting C to 0

Summary

This proposal seeks to end protocol-level trading rewards by setting the C constant to 0, simplifying the incentive structure to the less complex, transparent and predictable dYdX Surge Program. It aims to unify rewards, reduce complexity, and make participation more straightforward for traders and market makers while improving liquidity and the evaluation of dYdX incentives.

Abstract

Previously, incentives were strong but complex, with dynamic conditions frequently changing, making it hard for traders and market makers to accurately predict rewards. This uncertainty could have discouraged liquidity and reduced participation. In addition, the coexistence of protocol-level trading rewards and the dYdX Surge Program has made it challenging to isolate and measure the true impact of individual incentive changes.

We are proposing to end protocol-level trading rewards by setting the C constant to 0.

Season 6 of the dYdX Surge Program made incentives more transparent and predictable by linking rewards directly to the total fees paid. To simplify rewards, we propose unifying all dYdX incentives into a single, deterministic program: the dYdX Surge rewards. Simplifying incentives should make onboarding and participation more predictable for traders and market makers. This straightforward structure is designed to encourage more liquidity, make it easier to predict trading costs, and simplify how the success of incentives on dYdX are measured.

Motivation/Rationale

In August, $229K in protocol level trading rewards (distributed in DYDX) was distributed to 5,850 wallets, averaging $39.2 per wallet. This represented only 12.3% of the total fees paid by traders. Despite C being set at 50%, traders receive much less than half of their fees back because trading rewards are paid after deducting maker rebates and taker affiliate fee share. Below is the breakdown of trading rewards across all fee tiers.

dydx summary wallets
dydx summary wallets446Ă—248 4.78 KB

Source: Numia

For most traders, protocol-level trading rewards account for less than 6% of their fees, making the impact minimal; however, a few large market makers received up to 20%, which skews the average. When measured as a percentage of trading volume, the rewards provide a small benefit, around 0.24 bps for smaller accounts and just 0.05 bps for high-volume accounts. In Season 5, protocol level trading rewards were a minor component of overall rewards as they accounted for less than 10% of total incentives.

Source: Numia

This should also be viewed alongside the recent change to the dYdX Surge program, which adjusted rewards to 50% of fees paid plus $1M for front-end users. We modeled the median expected impact of both changes on total incentives and summarized them in the table below:

projected impact
projected impact616Ă—163 5.44 KB

Source: Numia

On average, in August 2025, users received more in incentives than the fees they paid - 3718 wallets (63.5% of total wallets) received more rewards than the fees paid. Ending protocol level trading rewards would reduce incentives to a more sustainable level for the protocol, with most users seeing only a small effect compared to their overall fees. Also, if the dYdX Surge program maintains a similar design in the coming months (rewards to 50% of fees paid plus $1M for front-end users) rewards should be distributed in a more equitable fashion among traders.

In addition, the coexistence of protocol-level trading rewards and the dYdX Surge Program has made it challenging to isolate and measure the true impact of individual incentive changes.

In August, dYdX paid 363K DYDX in protocol-level trading rewards and it is unclear whether traders factor in protocol-level trading rewards at all. By setting the trading rewards’ C constant to 0, the dYdX community could save approximately between 300K and 500K DYDX in payouts per month. Based on the rationale above, the dYdX community and Chaos Labs could contemplate a corresponding increase in the dYdX Surge Program based on market requirements.

Specification

Update the `fee_multiplier_ppm` parameter in the Trading Rewards module to 0, effectively disabling protocol-level trading rewards.

Next steps

We invite the dYdX community to provide feedback on this proposal. If there is no significant objection, we plan to submit the on-chain proposal on September 18, 2025.

Disclaimer

It is important to note that this report only contains research data points and theoretical proposals for their independent evaluation by readers. All of the proposals in this report would require an active governance decision by the dYdX community to be implemented(and, in certain cases, and in addition, the collaboration of certain ecosystem participants, such as the treasury subDAO, for example). Nethermind has no control over any decision to implement any of the proposals mentioned in this report or the way that they may be implemented.

Nothing in this report should be considered as financial, legal, tax or any other form of
advice, nor as an instruction or invitation to act by anyone. This report has been prepared and is being published for informational and educational purposes only.
Kindly note that this proposal is not intended to create a contractual relationship between Nethermind and the receiving party. Any engagement of services shall be subject to a separate agreement that outlines the terms and conditions of the engagement. Please note that the contents of this proposal may be subject to intellectual property rights owned by Nethermind.

4 Likes
2

We appreciate the depth of analysis Nethermind Research has brought to this topic — especially in modeling the real impact of protocol-level trading rewards versus Surge incentives. The drive for simplicity, transparency, and predictability in incentive design is well aligned with what many in the dYdX community long for.

1. What Works Well in the Proposal

  • Reduced Complexity: Eliminating the protocol-level trading rewards and setting C = 0 simplifies the incentive structure. This reduces uncertainty for traders and market makers who may have difficulty forecasting total exchange costs or rewards.

  • Cost Savings: The proposal suggests monthly savings of ~300K-500K DYDX by cutting down overlapping incentive layers. Assuming this estimate is accurate, that could free up treasury or other incentive pools for more efficient use.

  • Better Equity Among Participants: For many smaller traders, protocol-level rewards currently translate to a small proportion of fees; simplifying and redirecting rewards via the Surge program could lead to more equitable outcomes.

2. Potential Risks / Trade-Offs

To keep a balanced view, we also see few areas where caution (or additional mitigation) would be appropriate:

Risk Issue Possible Mitigation
Liquidity Impact Some market makers or high-volume traders currently benefit more from protocol-level incentives. Removing them could reduce liquidity or widen spreads unless Surge or other incentives compensate. Consider preserving scaled incentives or transitional mechanisms to avoid sudden liquidity drop.
Behavioral Effects Traders might respond poorly to change, especially if their ROI falls. The perception of losing something can cause exit or reduced engagement for certain users. Clear communication, phased changes, and modeling to show expected changes to earnings (positive or negative).
Transparency vs. Over-Simplification While simplicity is beneficial, overly reducing “grained” incentives may hinder nuanced behaviors (e.g., rewarding those who take on risk or provide specialized services). Maintain metrics for performance or special cases that Surge (or a companion incentive layer) can reward.

3. Our Suggested Adjustments

To strengthen this proposal in a way that balances simplicity with healthy protocol incentives, we propose the following refinements:

  1. Transitional Period

    • Phase out protocol-level rewards gradually rather than immediately. This gives market makers/traders time to adjust strategies.

    • Possibly a tapering of C over 2-3 Surge seasons.

  2. Compensatory Adjustments to Surge Program

    • If removing protocol rewards all at once, consider increasing Surge rewards temporarily to ensure that total take for active participants remains near current levels and gradually wind down to the current levels.

    • Revisit Surge’s thresholds or tiers to reward not just volume but also uptime, contributions to liquidity, etc.

  3. Targeted Support / Exceptions

    • For “special cases” (e.g. new market makers, small traders, or those in underserved geographies), consider modest bonusing (via Surge or side programs) to preserve inclusion.

    • Ensure that removing the protocol rewards doesn’t unintentionally centralize power among existing big players.

4. Our Recommendation

Govmos supports the spirit of this proposal: simplicity, predictability, and cost-effectiveness. We believe setting C = 0 is defensible if accompanied by strong mitigating measures as outlined above — especially compensatory adjustments in Surge or related programs, and a smooth transition for stakeholders.

We would vote yes, with the expectation that the governance proposal implementing this includes:

  • A more progressive transition timeline

  • Adjustments to maintain sufficient incentive for liquidity provision

  • Ongoing monitoring and rollback provisions in case unforeseen negative externalities emerge

Conclusion
This proposal presents a strong opportunity for the dYdX ecosystem to streamline incentives and reduce inefficiencies. With appropriately designed mitigations, we believe it can move the protocol toward more sustainable, transparent, and predictable incentives — in line with long-term health.

We look forward to working with the community to refine this proposal before the on-chain vote.

3 Likes
3

We are in favor of this proposal. A few reasons why:

  • Simplicity & Transparency: Unifying rewards under the Surge Program eliminates unnecessary layers of complexity. Traders and market makers will find it much easier to predict their costs and rewards.

  • Limited Impact on Users: Protocol-level rewards make up a very small portion of what most traders earn. For the majority, removing them will have little to no noticeable effect.

  • Efficiency & Sustainability: Ending protocol-level rewards could save the protocol 300K–500K DYDX per month. These savings can be redirected or preserved to strengthen long-term token utility.

  • Better Measurement: Having a single incentive system makes it easier to evaluate what works and refine incentives over time.

  • Alignment with Roadmap: This change reflects the Labs’ strategy of ruthless execution and focus on a world-class user experience.

That said, we think the comment by Govmos raises important points that should be considered in parallel. While we support the spirit of simplification, it’s worth being mindful of potential risks such as liquidity impacts or behavioral shifts from high-volume traders. Govmos’ suggestion of a phased transition (tapering C over a few Surge seasons), temporary adjustments to Surge, and monitoring for unintended side effects would strengthen this proposal and help ensure a smooth rollout without disrupting market quality.

Overall, consolidating incentives into the Surge Program is a clean step forward that reduces noise, improves predictability, and positions dYdX for more sustainable growth. With a few refinements — particularly around transition and communication — this proposal will be even stronger.

1 Like
4

Kiln is in support of this proposal:

  • Simplification: Moving incentives fully into Surge eliminates complexity from running overlapping programs.

  • Clarity: Traders and market makers benefit from a single, transparent rewards mechanism.

  • Risk awareness: We acknowledge the concerns raised by others and are open to a phased approach and/or additional compensation via the Surge program in the final proposal.

2 Likes
5

We see simplification as a reasonable step. It’s important to implement it gradually to avoid sudden liquidity outflows and closely monitor key metrics to adjust if needed.

1 Like
6

We support this proposal because it reflects a principle we value deeply: clean, resilient infrastructure scales better than complexity.

Why it matters:

  • One system, one signal: Consolidating incentives into Surge eliminates overlapping layers that dilute clarity. A unified program makes it easier for governance and the community to understand what’s working.

  • Long-term sustainability: Reducing DYDX emissions by 300K–500K/month is not just cost savings, it’s strengthening the foundation for token utility as the protocol matures.

  • Easier governance: With fewer moving parts, future adjustments to incentives will be easier to debate, measure, and refine. This creates a healthier policy cycle for the DAO.

Our lens:

While others highlight liquidity risks or transition pacing, our focus is on measurement and governance efficiency. Incentive design is not “set and forget.” A simplified structure enables the community to iterate faster, with less noise and fewer unintended overlaps.

Conclusion:

This is less about removing rewards and more about upgrading the protocol’s operating system. A single, transparent incentive engine allows dYdX to scale cleanly and sustainably, without sacrificing adaptability.

Silk Nodes Team

1 Like
7

Thank you everyone for your comments. We note the concerns regarding the sudden drop in trading rewards and the potential effects in liquidity.

Govmos supports the spirit of this proposal: simplicity, predictability, and cost-effectiveness. We believe setting C = 0 is defensible if accompanied by strong mitigating measures as outlined above — especially compensatory adjustments in Surge or related programs, and a smooth transition for stakeholders.

It is important to note that we are planning to implement this proposal in conjunction with the simplification of trading fees. removing the conditions linked to market share and exchange share on dYdX. This change aims to encourage new makers to onboard, and to incentivize both new and existing makers to provide additional liquidity on the platform, thereby increasing volumes and fees for the protocol.
We note that this proposal would benefit especially market makers which are currently generating between $25m and less than $300m of monthly volume (4% of exchange maker share). These corresponds to current users from fee tier 4 to 8 which are the users which are the most impacted by the fee tiers.

As a result, given that the trading rewards account for less than 10% of total incentives, the new fee tiers will mitigate the impact of the end of trading reward and should mitigate any adverse effect. As mentionned by many of the comments, we plan to monitor the effects of those two proposals on the overall trading and liquidity on dYdX once these are implemented.

8

Wow, I liked these simple incencetives, until realised how math is screwed towards large traders. Would like to see them go now.

9

This is a strong proposal that goes in the right direction. Ending protocol-level trading rewards and consolidating incentives into the Surge program is a great initiative. For most traders, protocol rewards were minimal (on average <6% of fees), while disproportionately benefiting a small set of large makers. By unifying rewards under Surge, incentives become simpler, more transparent, and more sustainable—saving DYDX emissions while reallocating them more efficiently and equitably.

It’s also important that this change comes alongside the fee tier simplification proposal, which removes exchange/maker share conditions and lowers the entry barrier for new makers. Together, these adjustments should strengthen participation, improve fairness, and keep dYdX competitive and attractive.

A few points to keep in mind as this moves forward:

  • Some large players may see a meaningful reduction in rewards, so clear communication on the long-term sustainability benefits will be key.

  • Liquidity depth should be closely monitored after implementation to ensure there are no adverse effects.

  • If needed, part of the savings could be redirected to Surge to maintain competitiveness.

Overall, the combined fee and incentive changes should mitigate most of the potential downsides, especially for targeted tiers. This feels like a positive and pragmatic step for the protocol.