We generally support the proposal to establish a Treasury SubDAO for dYdX, as reducing reliance on token emissions for operating expenses and validator rewards is crucial for stabilizing the DYDX token price. Transitioning to revenue-based funding is a smart long-term strategy. Key positives include reducing emissions to create a healthier economic environment, establishing an endowment to lower financial risk, and optimizing revenue allocation to ensure efficient resource use for sustainable growth. However, we would like to ask a few questions and highlight aspects that require further attention.
Validator rewards and reducing emissions
While reducing token emissions to decrease inflation is beneficial, there is a risk of decreasing validator incentives too sharply. Validators currently receive significant rewards through token issuance, and simply cutting back on these rewards could lead to participant churn or short-term unprofitability. A gradual reduction of rewards or offering alternative incentives may help keep validators engaged while transitioning to a more sustainable model.
Attracting new users
To maintain and grow trading revenue, simply improving the protocol may not be enough. dYdX operates in an increasingly competitive environment, and attracting new users will be key to driving revenue. Improving user experience, marketing strategies, and targeted incentives or partnerships could play a role in boosting the user base and trading volumes. Without a clear focus on user acquisition, there is a risk that trading volumes may stagnate or decline.
Risks of declining revenue
The proposal addresses reducing reliance on token emissions, but what happens if trading volumes drop or there’s a market downturn? Declining revenue could significantly impact the protocol’s ability to cover operating expenses, which could result in long-term unprofitability. A plan or reserve fund will provide financial security and stabilize rewards during periods of declining revenue, reducing the risk of validator churn.
Our vision:
Focus on user growth and liquidity: Attracting new users and improving liquidity is essential for sustaining revenue growth. Developing more concrete strategies for user acquisition, such as competitive conditions for traders, loyalty programs, or partnerships with external platforms, will be crucial for consistent revenue growth.
Transparency and regular reporting: The SubDAO should have a clear structure for transparency and accountability. Regular updates on financial status, performance metrics, and decision-making processes will be critical for building trust within the community. Establishing clear KPIs for the SubDAO’s performance is essential to ensure that the new structure is working effectively.
Gradual transition to new reward models: Changing validator rewards too quickly could lead to participant churn and short-term unprofitability. We recommend a phased approach to transitioning from token emissions to revenue-based rewards, allowing the network and its participants time to adjust. This will help prevent validator loss and maintain network security during the transition.
We fully support the direction of this proposal, as it addresses key challenges dYdX faces in terms of long-term financial sustainability. For this proposal to succeed, careful management of validator incentives, user growth, and revenue risks will be essential. We look forward to continuing the discussion and contributing to the further development of these ideas.