DYDX community staking improvement proposal

[Govmos]

Balancing the pros and cons of the proposed solution is an extensive job. We will try to address this complex topic by providing the elements we perceive from our point of view. It feels essential to stress that we are obviously unable to grasp the entirety of the levers at play.

Nevertheless, we have expressed support via our votes to the initial proposition, therefore we feel obligated to answer both our delegators and the whole dYdX community to the factors that contributed to this choice:

1. The centralization issue of the VotePower

We would like to quote one of our post in which we highlighted the problem related to a centralization of the validator set’s stake distribution:

[FIX] Stabilizing the Validators' Block Miss

Hello @BritAus, We’ve delved into the block timeout issue and conducted some quick experiments. To gain insights, we developed an application that generates latency graphs for each block and validator. CONTEXT: Our tests highlighted four relevant graphs: ‘Country proposer’: the country of the validator issuing a proposal block. ‘Miss by country’: the number of validators missing a block, sorted by geographical location, using data from the observatory site. ‘Signers’: the number of validator…

It is important to remember that, back then, a few validators were accounting for a significant share of the votepower, doubled by the fact that they were concentrating execution in the same area, this lead to evident symptoms, among which the block misses. At that time, further decentralizing the stake was the number one priority to address this issue and many other inconveniences.

2. The limits to the Foundation delegation program

To quote from the original source provided by the dYdX foundation:

Stake Delegation Principles
If the dYdX Foundation decides to delegate all or part of its DYDX tokens to dYdX Chain validators, it will seek to do so based on the following guiding principles:

1. Independence. The dYdX Foundation will delegate to validators that, to the best of the Foundation’s knowledge, are independent from each other and from the Foundation itself. […]
2. Decentralization. The Foundation will strive to distribute its delegated stake across a number of independent validators. […]
3. Proportionality. Any delegations made by the Foundation to dYdX Chain validators will be made pro-rata to the stakes of such validators at the time the delegation is made. […]
4. Minority Delegation. The Foundation’s delegated stake weight in the dYdX Chain shall be lower than 10% of the total active stake weight of the network.
5. No Governance Participation. If the Foundation delegates its DYDX to dYdX Chain validators, the Foundation will not actively participate in dYdX Chain governance and, therefore, will not vote in any governance proposals. Validators that receive a stake delegation from the Foundation will inherit full control and discretion over the governance power associated with any delegated DYDX tokens.
6. Meritocracy. The Foundation will have full and absolute discretion in deciding which dYdX Chain validators it wishes to delegate to. […]
7. No Self Delegation. The dYdX Foundation will not run a dYdX Chain validator nor any other key infrastructure component in the dYdX Chain. […]
8. Periodic Reviews & Rebalancings. The Foundation will periodically review and reevaluate its stake delegations […].

Source: Stake Delegation Principles | dYdX Foundation

The point to pay particular attention to is the “Minority Delegation” which effectively puts a limit in the foundation’s ability to participate in the decentralization issue we mentioned previously. On december 15th 2023, the foundation announced their official candidates to receive the delegation round: Staking Delegation Announcement | dYdX Foundation. In order to obide by the previous rule, the amounts were capped. This further strained the chain to opt for other solution to further increase stake distribution.

3. The lack of Community Initiative

Despite multiple attempts, all were still not bringing actual fruitful solution to address the problem. One discussion was initiated in this forum right after the chain’s launch: Securing the chain by smoothing out voting power. But it lacked of significant community involvement and hasn’t been woken up since then. On the contrary, the centralization problem remained prominent despite the foundation delegation program.

4.The Proposal to use Stride

After months of dormant community discussion on the matter, the Reverie team decided to propose an alternate vision using Stride as a service provider to delegate a portion of the community pool funds to provide a community delegation program.

[DRC] dYdX Community Staking Proposal

This proposal was co-authored by Reverie and Stride Labs. Disclosure: Reverie is an investor in Stride. Summary As of today, the total value locked (TVL) or total deposits on the dYdX Chain are roughly $140 million, with the chain having slightly more than 114 million DYDX tokens staked, which are valued at approximately $456 million (at a market price of $4). The rate of DYDX being staked to validators has plateaued and deposits to the exchange are growing at a tremendous pace. Over $140M US…

This proposed to use Stride’s ability and experience to choose and update curated set of validators with the clear target to improve the decentralization of the vote power.

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Conclusions:

Following the sequence of events, we agreed to the proposed solution as it felt like an absolute necessity to deploy more capital in a targeted manner with a specific task to further distribute the vote power. This new deployment also allowed the foundation to further increase its own delegation program more recently. More recently, we saw renewed interest into a potential community delegation program. Engagement in the community is still relatively low and therefore we invite everyone to express their opinions there: Native staking of funds from the Community Pool

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Thanks for reading us!
Govmos