dYdX LP Rewards Programme Review

Thanks @0xCLR !

  1. The purpose of DMMs would be to enable a much smoother trading experience for the markets they are assigned to. In fact, the altcoin markets are clearly dominated by 1 - 3 MMs with easily 50-80% of volumes for each market. If so, perhaps providing a little more incentives can motivate them to strengthen the books. Clustering can be done to identify common LPs across the markets instead since this is a historical trend that certain LPs are more specialised in particular markets based on their strategies. Ideally, the larger alts can have 2 DMMs while the smaller ones can simply have 1. There’s not a need for too many when there are very few high-volume MMs for alts and it’s roughly the same group.
  • The suggested governance approach is in the schematic diagram to open source this process. A key consideration would be the enforcement of these contractual obligations. Ideally, a group will oversee it and a legal structure can be implemented too for monitoring. (Eg. Validator & Market Maker Council as suggested here by @Foxlabs)
  • Dynamics will change, but for the better. After all, these are altcoins and imbalances + volatility will be relatively higher. As mentioned, it’s the same few MMs dominating each alt market / group of alt markets. They will be further incentivised to provide liquidity when necessary.
  1. Based on the current scheme + order book distributions, mathematically, I feel that it’s not possible for altcoin markets to just have a rebate-only tier. Rather it still has to be well calibrated with rewards.
  • In terms of graduation between tiers (aka a little permissionless market research involved which is out of scope), frameworks consisting of the fundamentals - volumes (on dydx vs cex), number of trades, MMs, order book distribution, price volatility can be considered. Epoch / Quarterly reviews can be conducted for this movement.
  • To extend it further, we would need to consider: Should we still be incentivising liquidity in those markets in the lower tiers? (Esp Tier 4) since there are very few trades happening and all that’s needed is just a few MMs on the other side to absorb these low volumes. Can we perhaps have higher rebates for these long tail markets, and lower rewards instead?
  • DYDX incentives should be given to markets which need it the most (volume → fee revenue per market vs incentives given). In v4, data availability will be crucial to know how much we are exactly paying for markets (more dashboarding) as well.
  1. Another key recommendation here would be the tightening of max spread parameters. This is an absolute term in tightening, rather than other relative forms such as squaring distance from mid etc. And based on the observations, we don’t need 40bps of liquidity for larger alt markets when trades can be cleared within 20bps on normal days.