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.
Background
dYdX is exploring a staking-based fee discount program where traders receive fee discounts by staking DYDX to increase token utility and align token holder and trader interests. This research evaluates buying pressure, protocol costs, staking yield impacts, and optimal structure. Two models were considered: one targeting large traders and a community tiered system with multiple discount and staking levels based on user fee tiers. The fee discount could be applied on all positive fees, net of the 50% Surge Rewards to limit wash trading.
Key Takeaways
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Large Trader Focus
We contemplated a simplified staking-based fee discount with two tiers: (A) a 5% discount on taker fees for staking 150,000 DYDX and (B) a 10% discount on taker fees for staking 1.5 million DYDX. Based on our analysis the previously mentioned staking discounts would likely only drive 5–7 million DYDX in buying pressure and cost $500K–$700K annually (in terms of less fees generated by the dYdX exchange). It would primarily benefit top traders, erecting barriers that undermine dYdX’s goal of equitable access. Relying on a small group of traders also makes the overall impact more uncertain compared to a program that serves all users. -
Community Tiered Model (Two Discounts per Tier)
A tiered model offering two discount levels per tier, with discounts decreasing at higher fee tiers, would require staking starting at a few thousand DYDX for Tier 1 users (25% to 50% discounts) and increasing progressively for each subsequent tier.
Below is an illustration of what the scheme could look like.
Based on a DYDX price of $0.35, our analysis shows these parameters would generate 6.5–28 million DYDX in buying pressure (8.5–35.5 million in new staking) —substantially more than the large-trader model—with tiers 2–4 users driving most of the buying pressure. Annual protocol costs, representing lower fee earnings for dYdX, are estimated between $850K and $1.8M. The optimal parameters depend on traders’ ROI expectations—that is, how much annual fee savings traders seek when staking $1 in DYDX. Notably, thresholds optimal for a 10% ROI may not be optimal at a 20% ROI, highlighting that ROI requirements significantly influence parameter selection.
Recommendation
- We recommend enabling a staking fee discount program with staked DYDX requirements and discounts conditional on user fee tier
- Implementation work is needed to integrate these rewards with existing rewards (notably Surge Rewards) and limit wash trading opportunities
- The impact of the program is sensitive to trader return expectations (buyers face capital loss risk on their stake) and trading volume expectations (higher volume makes the scheme more attractive)
- Efficiency also depends on DYDX price—as price falls, staking requirements become cheaper, increasing buying pressure
- Calibration and the setting of appropriate staking thresholds and fee discounts require impact analysis and progressive iterations.
Report
For more details, please refer to our research report
Next Steps
We are looking for feedback from the community. We are aiming to submit a formal governance proposal with final details in the upcoming days.
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.