dYdX V4 Launch Incentives Proposal

Summary

Chaos Labs’ Launch Incentives Program Proposal for V4

Chaos Labs proposes a 6-month Launch Incentives Program to be deployed on V4. This program is designed to motivate the seamless migration of volume and users to V4.

Our proposal is structured in distinct phases:

  1. Preliminary Research: An in-depth exploration to tailor the incentives for optimal user engagement.
  2. V4 Analytics and Risk Portal Creation: This portal will offer real-time insights, enhancing user understanding and trust in incentive distributions.
  3. V4 Rewards Leader Dashboard: The portal will serve as a leaderboard where users can view accounts accruing the highest rewards.
  4. Rewards Distribution Oversight: Ensuring a transparent and efficient allocation of rewards post-launch.

Description

As dYdX approaches the launch of dYdX V4, a significant challenge awaits: effectively transitioning and expanding the existing V3 user base. Ensuring liquidity and facilitating migration is critical to the success of V4. Historically, Liquidity Mining or token reward programs have consistently demonstrated their efficacy in spurring protocol growth and bootstrapping trading volume. Consequently, a strategic Launch Incentives program will be crucial in effectively incentivizing a transition to V4. It is important to note that the proposed Incentives program is in addition to the native V4 Rewards program. With a focus on robust reward distribution, the Trading Rewards program is designed to catalyze migration, amplify adoption and volume, and reward early users.

The Goal: V4 Adoption Through Launch Incentives

Our aim with the proposed Launch Incentives Program is to amplify the incentives, motivating traders to migrate to V4.

We suggest an allocation of $20M USD worth of $DYDX Tokens to be distributed among V4’s early adopters over ~6 months. Predicting V4 adoption with precision is challenging; hence, our role includes regularly evaluating the program’s success and its rate of adoption. We will compare these findings against our preliminary expectations and spending, making appropriate modifications to the distribution quantum and the program’s duration as necessary. The metrics and criteria for gauging the program’s success are detailed in the subsequent sections.

Motivation

Why Do We Users Need Incentives?

Recognizing Early Adopters

Early and aggressive adoption is critical. The main goal of the native V4 Rewards Program is to automatically send rewards, capping at 100% of a fill’s net trading fee. This is a powerful mechanism for reducing trading friction costs. However, V4 is a large migration for the dYdX community, as described below. Users taking risks and investing time and resources to become the earliest adopters deserve rewards for their contributions to the dYdX community.

Early Aggressive Growth is Needed

Empirically, the early months after a new protocol launch are critical. Momentum, early adoption, and initial trading volume are telltale indicators of a protocol’s prospective success. Simply put, we haven’t observed many protocols that see little to no adoption over the first year and suddenly skyrocket in usage later. We can utilize a portion of the community treasury to bootstrap explosive growth and ease the migration to a protocol.

What Will the Community Get From This Program?

If successful, the program will drive significant early adoption and help solidify dYdX’s current and future market share as an industry leader. Furthermore, this program serves as a lever to reward dYdX contributors who will play a pivotal role in enabling the successful launch of V4.

Migration Challenges

Chaos Labs understands the intricacies of shifting liquidity and the nuances of migrating users, as this has been a core focus with numerous protocols for which Chaos manages Risk and Economic security. Drawing parallels, Chaos Labs’ oversight of the Aave V2 to Aave V3 migration over the recent year provides insight. Even with Aave V3’s enhanced risk management and capital efficiency, the adoption trajectory has been gradual, and we expect a similar path for dYdX. V4 is a new financial product with a few critical changes, including the following:

  • A new protocol with a new mechanism design as we consider the introduction of validators, on-chain matching, and more.
  • Migrating from Ethereum to Cosmos.
  • Introduction of On-Chain MEV
  • New infrastructure (e.g., Bridging, CCTP bridge)
  • Decentralization risks - Additional governance-driven changes are expected as the protocol moves towards decentralization.

Chaos Labs’ dYdX Contributions

Chaos Labs has had the privilege of contributing to dYdX extensively over the past 2 years. Our collaboration has spanned diverse domains, including parameter optimization, mechanism design research, analytics, asset listing, developer tooling, and fine-tuning trading rewards for V3. A more comprehensive list can be found below.

Furthermore, Chaos Labs is an industry leader in Risk, Economic Security, and Optimization and has worked closely on Incentive Optimization with protocols such as Aave, Venus, Osmosis, Benqi, and more.

Our multi-disciplinary team is unique in its track record and ability to execute across the research, engineering, and product requirements of leading a successful Trading Rewards program.

Specification / Implementation

Chaos Labs proposes a 6-month program, iterative in nature. This proposal can be delineated into pre-launch and post-launch phases, as detailed below:

Prelaunch Research and Platform Prerequisites

A program of this magnitude requires research and engineering resources. Here, we detail two core work streams: V4 Launch Incentives Genesis Research and V4 Analytics and Risk Portal.

V4 Trading Reward Genesis Research

Establishing and Defining Good Behavior

Research is critical for determining the methodologies and framework to govern the reward distribution. Rewards are a powerful lever for incentivizing desired behavior, and the goal of this phase is to align the desired behaviors and punishable behaviors as seen fit by the DAO.

Incentivizing Desired Behavior

The rewards program will focus on incentivizing organic, positive usage of V4. We can define four activities that should qualify users to receive rewards.

1) Deposits - Users depositing funds on the platform are a prerequisite for any trading activity. We’d like to see funds migrating to V4 in the early days of the launch and believe that deposits should be awarded accordingly.

2) Trading - Trading is at the core of dYdX. Rewards should be a function of volume driven and fees paid throughout this time period.

3) Staking - Staking is integral for the security of V4 and should be rewarded.

4) Governance - Participation in governance increases the decentralization and distribution of the dYdX community and is imperative for ensuring a vibrant community of contributors and users. The early days of V4 will see important governance initiatives, and the community will benefit from hearing the voices of our users.

Launch Incentives Distribution Formula

Deposits and Trading are foundational to our reward distribution, whereas Staking and Governance, though valuable, have a lesser impact on our migration goals, primarily focused on platform volume and TVL. We won’t disclose the complete rewards formula to prevent potential manipulation, such as the wash trading issues dYdX previously faced. Instead, we’ll emphasize the behaviors we wish to incentivize and maintain transparency in distribution insights and trading analysis. Recognizing the challenges of discerning genuine activities in a blockchain context with pseudo-anonymous wallets, we prioritize transparency but are cautious of adverse actors manipulating the trading rewards program and benefiting disproportionately. Hence, we’ll communicate the core principles and expected outcomes of specific actions, like trading and deposits, without detailing the exact distribution mechanics.

Assuring the dYdX community controls the distribution and oversees Chaos Labs’ recommendations

We propose and elaborate below on the reward distribution’s total flow, including making incentive distribution recommendations. These recommendations will be posted publicly, along with a verifiable trading report and supporting data for community members to observe. While the precise formula driving our recommendations won’t be made public, anyone should be able to easily confirm that accounts receiving significant rewards drive significant volume and accrue real fees on the platform. The community will be able to verify this via trading season reports, which Chaos will publicize with every recommendation and with the dYdX Chaos Labs Risk Portal. Of course, for any community member preferring to verify the data independently, everything can be confirmed on-chain.

Wash Trading Detection

Wash Trading refers to buying and selling the same asset without any net change in ownership, often to create a misleading impression of trading volume or market activity. This practice can give the illusion of high demand or satisfy exchange requirements for activity, or in this case, be used to ‘game the system’ to maximize reward accrual.

Chaos Labs will customize our market integrity and wash trading modules to detect wash trading on V4. Chaos Labs’ internal platform is used across DeFi protocols to detect fraudulent activity and market manipulation. Chaos will extend this tooling to cover V4 to ensure that trading rewards are distributed to users who drive healthy, non-toxic flow. Historically, wash trading has been a challenge for the community, with Epoch 0 rewards being canceled and various iterations and improvements made to reduce the distribution of rewards to accounts exhibiting toxic flow.

A rewards program of this magnitude is bound to attract adversarial actors, aiming to maximize rewards. The goal of developing this module is to deter actors from driving toxic flow to make sure liquidity incentives are well spent and incentivize organic trading behavior.

V4 Analytics and Risk Portal

We can only optimize what we can measure. Furthermore, since the exact distribution methodology will not be public, tooling enabling verification of wallets receiving rewards is critical. The portal’s goal is to represent a publicly available source of truth, allowing us to measure the efficacy of reward distributions while enabling community members to verify the activity of accounts receiving rewards.

Analytics and Risk Portal

Chaos Labs will build a public-facing portal to be utilized by the community. The portal will be an all-encompassing data hub for all things V4, allowing for complete transparency across all markets and aggregating top-level data.

This will be an asset for the community, allowing us to explore all markets to better understand user activity and market interest.

However, the function this will serve in the context of the Rewards Program is critical. The portal will serve as a platform enabling the monitoring of accounts receiving rewards and will allow us to measure the effectiveness of the distribution methodology. The portal will feature the ability to dive deep into all accounts and review open and historical positions.

The portal will also allow a deep dive into specific accounts and subaccounts.

The portal is a large-scope initiative that warrants a post to collect feedback, which we will post shortly with greater detail.

V4 Reward Leaderboard Portal Overview

The dYdX Rewards Leaderboard Portal is envisioned as a platform dedicated to transparent representation of user engagements and the rewards they’ve accumulated.

Key Features of the Leaderboard Portal:

  1. Wallet Ranking: The leaderboard will ensure that users can see the results of their trading actions and the associated rewards.
  2. Historical Data: Users will have access to historical performance, allowing them to track their progress over time and understand trends and behavior.
  3. Filter and Search: The leaderboard can be filtered based on different criteria – daily, weekly, monthly performances, or specific activities. A search function will also enable users to locate their position or view the standings of others quickly.
  4. Educative Content: To assist new users or those looking to improve their position, the portal could also feature tips, tricks, and best practices to maximize rewards.

By serving as a transparent and interactive hub for the dYdX community, the Rewards Leaderboard Portal will not just be a tool of recognition but will play a pivotal role in incentivizing and educating users, fostering a spirit of healthy competition, and enhancing community engagement.

Post-Launch Incentive Iterations

The Trading Rewards program will comprise several discreet trading seasons, similar to epochs. At the end of each season, rewards will be distributed.

Trading Season Analysis Reports: Insights and Analysis

Chaos Labs will deliver reports after each trading season (epoch). We intend to enhance transparency, fostering a richer comprehension of market dynamics, user behavior patterns, and overarching protocol efficacy. These reports will spotlight prominent traders and the primary contributors to the dYdX protocol’s fee generation. Such insights will be instrumental in shaping reward allocation decisions.

Season Incentive Distribution Recommendations

Chaos Labs will make reward distribution recommendation proposals after analyzing epoch trading data per the framework established in the research phase. Every proposal will include exhaustive data, ensuring clarity on which accounts will receive rewards, complemented by a detailed account of their trading behavior. This facilitates an open platform for the community to weigh the distribution dynamics.

Incentive Distribution Governance Proposals**

Consequent to each Chaos Epoch Report and recommendations, there will be a governance proposal. A passing proposal will result in reward distribution per the Chaos recommendations.

Incentices Distribution Refinements and Evolution

Reward Distribution isn’t a static mechanism but requires oversight based on real-time adoption metrics. To this end, Chaos Labs will invest substantial effort between seasons, finetuning the reward strategy and enhancing our capabilities to detect wash trading anomalies. As our models collect more data and calibrate, we expect them to improve precision. Our goal is a progressively refined reward distribution mechanism as we journey forward.

Measuring Success

The rewards program aims to facilitate the transition of trading activities from V3 while propelling us beyond V3’s current trading volume. This transition mirrors what we have observed in various protocols, where adopting new versions is ongoing. While rewards can support the migration of a new version, it’s crucial to acknowledge that there are additional variables beyond the direct purview of the rewards program, including:

  • Ecosystem Dependencies: Notably, actors active on Ethereum mainnet might not experience a seamless transition to the Cosmos ecosystem.
  • Battle Testing: User confidence is bolstered over time as they witness the system being utilized extensively and with significant trading volumes.
  • Overall Market Sentiment: Historical data indicates that overall market sentiment and liquidity significantly influence the adoption of new protocols and are likely to impact V4.
  • V3 Deprecation: Since the current user base of V3 is, in large part, the target audience for V4, the steps taken to wind down V3 are expected to have an impact on the success of the migration and will impact the extent of the reward distribution plan.

While these exogenous growth factors are not integral to the reward program, assessing its success is paramount. These factors cannot directly translate into precise growth projections, but they can offer valuable insights. During the research phase, we will emphasize analyzing previous protocol version migrations and the expansion of trading venues. This analysis will enable us to establish growth benchmarks guiding KPIs for the incentive program.


1. Criteria for Evaluating Success:

It’s crucial to set a clear metric for success post-launch. For instance, if we witness a $50M volume within weeks post-launch, should that be considered a positive outcome? Our evaluation criteria should be multifaceted:

  • Asset Diversity: Depending on the variety of traded assets.
  • Market-wide Fluctuations: Consider the overall changes in perpetual contract volumes across the market.
  • Volume Sources Analysis: Determine the significant contributors to this volume. This would involve observing volume dynamics in both the CeFi and DeFi sectors. Platforms like dYdX V3 and GMX will be mainly under our radar.

2. Establishing Benchmarks for Niche Assets:

While the current model acknowledges that "Trading Rewards don’t effectively boost volume in these markets,” we believe there’s room for improvement. The proposal is to:

  • Analyze Niche Markets: Understand the dynamics and requirements of niche asset markets.
  • Strategize Incentives: Design and implement actionable strategies that target and bolster volumes in these areas.

3. Strategic Transition from V3 to V4:

We recognize that V3 and V4 are tailored to cater to similar user demographics. With V3 accounting for half of the on-chain perpetual contract volume, it provides insights into potential V4 adoption rates. Our proposal:

  • Phased Deprecation of V3: Strategically phase out V3, ensuring no abrupt disruption for our users.
  • Monitor V4 Growth: Track the growth of V4, particularly emphasizing those assets that consistently augment volume.
  • Feedback Loop: Maintain a continuous feedback mechanism to refine and adjust our strategies based on real-time user responses and market dynamics.

Milestones and Timelines

Pre-Launch Phase: Wash Trading Model Development

Customizing the Chaos Labs Asset Protection and Market Manipulation Tool to monitor trading activity on dYdX V4 and ensure honest actors earn rewards as intended on the platform.

Development Time: 5 weeks

Pre-Launch Phase: V4 Trading Reward Genesis Research

Conducting research, culminating in a Trading Rewards Distribution Framework.

Development Time: 5 weeks

Pre-Launch Phase: V4 Analytics and Risk Portal

Deploying and publically launching the dYdX V4 Analytics and Risk Portal. The portal will be general purpose in nature but allow community members to independently analyze the accounts receiving rewards, increasing transparency and distribution accountability.

Development Time: 8 weeks

Post-Launch Phase: Retroactive V4 Launch Incentive Distribution Report & Proposals

The end of the trading season will result in a Chaos Labs Recommendation set, specifying reward distribution per account. These recommendations will culminate as a governance proposal shared with a Season Trading Analysis report for the community’s review.

Post-Launch Phase: Incentive Distribution Ratification

Should the community choose to accept the recommendations, Trading Rewards will be distributed accordingly.

Ask

With this proposal, we request the community’s approval to allocate a $20M notional value of $DYDX tokens to the V4 Reward Program.

If community governance approves this program, Chaos Labs will request funding from the DGP to lead the Trading Rewards program. This includes all pillars mentioned above, specifically, research, engineering, and deployment of the dYdX Analytics and Risk Hub, administering trading seasons (epochs), trading analysis reports, reward distribution recommendations per season, government proposals, and ultimately a report to measure the efficacy of the program once it is complete.

  1. Research & Engineering: Comprehensive research, including creating and deploying the dYdX Analytics and Risk Hub.
  2. Trading Seasons Administration: This involves overseeing the trading epochs, ensuring smooth transitions and adherence to proposed strategies.
  3. Trading Analysis Reports: Regular insights and analytics related to trading behaviors, patterns, and potential areas of enhancement.
  4. Distribution Recommendations: Periodic suggestions on reward distribution for each trading season aligned with the broader objectives of the V4 migration.
  5. Government Proposals: Drafting, presenting, and refining proposals that ensure the program’s alignment with the community’s vision and aspirations.
  6. Efficacy Report: At the conclusion of the program, we commit to delivering a comprehensive report gauging the effectiveness of the Trading Rewards program, highlighting achievements, challenges, and insights for future endeavors.

Next Steps

If this receives support, we will move forward to a signaling snapshot proposal.

Note: The post title has been edited to V4 Launch Incentives Proposal to minimize any confusion with the native on-chain rewards, meant to cover a proportion of user trading fees.

Appendix

Previous dYdX Contributions by Chaos Labs

9 Likes

Dear @chaoslabs

I agree that having a well-thought-out and planned trading rewards system is crucial for liquidity migration to V4. I don’t think anyone doubts that.

I have a few questions and concerns about your proposal.

1. Why does Chaos Labs believe that the native V4 rewards program won’t be enough for this? From what I understand, the native program involves practically free trading in the early stages. So why overstimulate users and create additional inflation when it’s something we’ve been trying to avoid over the past year by reducing rewards?

2. Why does Chaos Labs think that a centralized service provider responsible for rewards is a good choice for a fully decentralized protocol? Why can’t we create a corresponding subDAO similar to the operations subDAO that will be responsible for such a program?

3. Wash trading. I understand that this could be a big problem in the initial stages if users receive more rewards than they spend on fees. In the native program, users will receive up to 99% of fees back as trading rewards, which already opens up the possibility for holders of large amounts of staked dydx to earn more in rewards than they pay in fees. If we add additional rewards, it will turn into trading rewards mining.

4.

I see a huge problem in this statement. A centralized party (Chaos Labs) will have access to critical information, and how will the community know that individual players don’t have exclusive access to this information, giving them an additional competitive advantage?

In my opinion, the trading rewards formula should be fully transparent. If someone can gain an advantage, it should only be because they have done better analysis than other market participants, not because they have access to secret information. We can change the formula pretty quickly if the analysis shows that someone easily exploits it.

I would like to hear @Jordi opinion as an expert on this matter.

Those are my comments for now. I’m happy to participate in discussions on this topic, given my extensive experience in game theory.

3 Likes

Dear @chaoslabs and Community,

I’d like to echo the concerns brought up by @RealVovochka regarding the proposed Trading Rewards Program for V4.

Unnecessary Complexity and Redundancy

Firstly, the existence of a native rewards program already provides incentives for user migration and adoption. Adding an additional layer of rewards not only complicates the system but also risks inflating the $DYDX token unnecessarily. Why not focus on improving and fine-tuning the native rewards program to discourage undesirable behaviors like wash trading? For example, a rewards cap could be implemented based on the number of eligible trades per hour, providing a built-in mechanism to thwart manipulation. Only main accounts be eligible for rewards and not sub accounts. And so on.

Centralization vs Decentralization

I share the concern about entrusting a centralized entity with overseeing rewards in what is supposed to be a decentralized ecosystem. This is particularly problematic when you propose to keep the rewards formula hidden. As @RealVovochka rightly pointed out, this opens up potential avenues for exploitation and unfair competitive advantages.

Feasibility Concerns

Without public access to an indexer, proposing these comprehensive plans seems premature. How can you ensure the program would work as intended without a complete understanding of the data available? Although there will potentially be alternative methods and workarounds to achieve these objectives, it seems logical to first explore the capabilities of the indexer before contemplating other approaches.

Budget and Transparency

I’m puzzled by the funding structure laid out in this proposal. Chaos Labs has already been advanced a $300K grant that was pointed out by the community. It would be reasonable to assume that such a grant should cover the development costs of the analytics dashboard and risk portal for V4, which are the deliverables most directly related to Chaos Labs’ expertise. Could you clarify why additional funds are being requested? Transparency in how these funds are allocated and used is crucial for maintaining the community’s trust.

Alternative Solutions

While trading is a fundamental aspect of dYdX’s growth, we believe there are more effective and sustainable methods to encourage this than simply stacking another rewards program on top of the existing one. A leaderboard, highlighting individuals’ rewards, likely won’t inspire or motivate users to trade more. We support the creation of your analytics dashboard and risk portal, as these could provide tangible benefits to the community. However, the other aspects of the proposal should be reconsidered in light of these concerns.

Lessons from Past Rewards Decisions

It’s worth noting that the community has already experimented with reducing rewards twice in the past year. These reductions correlated with significant drops in user adoption, growth, and trading volume across the exchange. Despite warnings about the potential risks of such reductions, the decisions went ahead, and it appears they have had a detrimental impact.

Had rewards been maintained at their original levels, it’s likely that we would be facing the upcoming transition to V4 with a much larger and more engaged user base. As we consider new proposals for V4, it’s crucial to learn from these past experiences. We hope that in the future, the community and its major members will exercise greater caution before making decisions that could stifle growth, especially in these early stages of the project.

Looking forward to further discussion on these matters.

1 Like

I always think that the growth of token value and a good token economy will better motivate traders to trade contracts on DYDX. It’s a pity that the team, the Foundation including the teams it worked with never really thought about it. As a financial industry, the effect of making money will bring more traffic.

1 Like

Given the significant financial commitment from dYdX’s treasury that this Trading Rewards proposal would entail, we’ll center our discussion on the program’s potential benefits and necessity for V4. At Chaos Labs, based on observing/leading multiple migrations across DeFi, we are convinced that early growth and volume are critical and strong indicators for a new protocol’s long-term success and adoption. Rewards are highly impactful in incentivizing existing users to migrate and will attract net new users. We have invested substantial time internally deliberating over the correct program architecture. @RealVovochka / @CipherLabs , thank you for flagging concerns. We’ve considered them carefully, and below is the outline of our rationale.

Prioritizing Long-Term Growth

The ultimate aim of dYdX is to maintain a long-term leadership position within the market. To secure this goal, growth is critical, and the treasury plays a pivotal role in achieving it. The launch of our V4 platform marks the most significant dYdX innovation since its inception. Given the transformative nature of this change, there’s a considerable learning curve for users. A Launch Incentives program can mitigate this friction, serving as a potent incentive that benefits both long-standing and new V4 adopters. In essence, one of the reasons the treasury exists is to support opportunities like this—spurring innovation and rewarding our committed community.

Administering the Program Effectively

If we concur that Launch Incentives are a critical growth engine, the next step is to discuss the most efficient way to implement the program. Allocating a notional value of $20 million in $DYDX tokens from the treasury is not a light decision. Consequently, we must ensure these tokens serve their intended purpose and reward genuine, value-generating activity. While market surveillance mechanisms are in place to monitor misconduct like wash trading—a particularly challenging problem in the DeFi space—disclosing our distribution algorithm would disproportionately empower malicious actors. Our goal is to strike a balance: the incentive program should be as transparent as necessary to earn community trust and guarded enough to prevent manipulation. To reiterate, we believe two pillars should directly affect reward accrual.

  1. Primary Behaviors Resulting in Reward Accrual - Trading Volume and Deposits. These actions should generate the vast majority of rewards.

  2. Secondary Behaviors Resulting in Reward Accrual - Governance Participation and Staking. These actions should generate a minority of the rewards.

Maintaining confidentiality around the exact distribution formula is crucial for aligning with the community’s broader aims of encouraging genuine user participation and fostering organic growth. To put this into perspective, consider the common practice of issuing airdrops to early adopters in many protocols. Typically, the underlying logic behind such distributions is not disclosed. What sets our approach apart is our advanced communication with the community, outlining the types of behaviors we intend to incentivize and the pool of rewards to be distributed, thus establishing a transparent foundation for the program.

Reward Recommendation Oversight and the Role of Governance

We acknowledge the concerns regarding a centralized entity overseeing the program. In a perfect world, governance would be entirely decentralized. However, given the technical complexities outlined above, full decentralization of the proposed 6-month program is impractical.

It is also critical to emphasize that Chaos Labs will not receive custodial control over $dYdX tokens at any time. Furthermore, the results of our analysis will be a recommendation at the end of each ‘trading season.’ These recommendations require community approval via a complete governance cycle.

We commit to abstaining from participating in these votes.

If this proposal is accepted by the community, our role will be to equip the community with recommendations, in-depth analytics, and a leaderboard dashboard that fosters transparency. Of course, any community member can verify data on-chain directly if they prefer. An array of data/analytics choices enables community members to verify and challenge any reward allocations independently, ensuring only contributors of significant value to the platform are compensated.

4 Likes

Dear @chaoslabs, thank you for continuing to engage with the community on plans to incentivize migration to the v4 platform. While the conversation has been rich and insightful thus far, there are some specific points I’d like to dig deeper into.

Firstly, let’s touch on the concept of a “steep learning curve” mentioned earlier. In practice, the transition from v3 to v4 is relatively straightforward, given the similarities in user interface and functionality. Could you specify what you believe this learning curve entails? It’s important that we pinpoint any challenges so they can be properly addressed, without making assumptions that may not align with user experience.

Additionally, the urgency to migrate should be inherent for most users, as keeping open trades on a platform that is winding down is not ideal. This urgency is even more pronounced if we consider the risks associated with lower liquidity, namely slippage. The existing native rewards program could be adjusted to reflect not just fees but also the slippage users face when trading, as this is likely to be a significant deterrent in the early stages of the v4 launch.

As for a rewards leaderboard, if it is seen as a beneficial addition, why not use the tallies from the native rewards program for this? We could submit a proposal to adjust the formula to include other considerations, such as preventions for wash trading and slippage considerations.

I appreciate the ongoing dialogue and look forward to hearing your thoughts on these matters.

1 Like

Hey, @chaoslabs

I think your proposal is missing important information. How much money will you be asking for from DGP? Can we see a detailed budget?

1 Like

Hi @chaoslabs,

Thank you for the detailed proposal for the long-term success of dYdX and having the continuous discussions with the community. We are honored to work with your team who has done tremendous works on various DeFi protocols like Aave.

There is no doubt on the importance of the migration to a new protocol, especially considering the fact that migrating to v4 involves bridging to a new chain, and the smooth migration should lead to the assurance of keeping the leadership position within the decentralized perpetual trading market. We believe we all agree that careful and extensive considerations on how the protocol rewards early adapters on the v4 are critical.

With Tané, we are in support of the general direction laid out in the proposal. Although a few concerns that @RealVovochka and @CipherLabs made are valid and need to be addressed, bootstrapping the momentum of the user flow into the new version is so critical that it’s worth allocating additional rewards to users with good intensions and potential to give value back to the protocol.

We have a couple of questions and suggestions in addition to the ones RV and Kagan had:

On the amount of the allocation: $20M USD

Has your team run simulations of migrating users with your undisclosed rewards formula and different amounts of allocations? How did the team get to this number other than other amounts? If it’s difficult to estimate those, are we planning to review the target and actuals over time with the community?

On rewards to Deposits

While acknowledging the above is valid, there will many users who are just looking for “airdrops” by depositing their money into v4. We believe we shouldn’t consider only the deposits “desired” behavior or degrade the importance of Deposits.

Wash Trading

Reviewing the Epoch 0 report, dYdX Trading has knowledge and already-working system to tackle the wash trading. How would your team work with dYdX Trading?

New trading rewards vs. native rewards

The native rewards system has also the time-limited maker rebate, which would confuse users if these additional rewards are awarded separately. We will not necessarily suggest that the protocol should choose one or another for trading rewards, but at least clear explanations to users should be promised upon v4 release.

Address the confidentiality of the rewards formula

We completely agree with the concerns from the both sides. It is too “early” (though we believe we should eventually achieve something similar to a decentralized organization on this matter) for dYdX to have a fully decentralized program to tackle the urgent migration challenge. Here is our suggestion: how about having a mini-committee or working group to review the formula to ensure the validity and effectiveness of it and reduce the centralization aspect a little bit for the start?

3 Likes

We also love to get opinions and feedback from @tncintra and Xenophon Labs team since they have extensively covered the impact that the new v4 native rewards will make in this forum post and we are sure that they continuously look into the implications of the rewards as a whole.

2 Likes

I totally agree, Xenophon Labs team has been researching the utility of the dydx token for quite some time. They even have an unfinished grant on this topic. So I think they can share a lot about this issue.

1 Like

Launch Incentive Notional Allocation Amount

Chaos Labs holds dYdX in high regard as one of its foremost partners. Recognizing that transparency is the cornerstone of a robust and enduring collaboration, we want to provide a deeper insight into the rationale behind the allocation amount for the Launch Incentive.

Clarifying the Allocation Request Versus Deployment Commitment

As we discuss this proposal, we want to underscore a critical distinction: Chaos Labs requests a $20 million Launch Incentives treasury allocation in $DYDX tokens, not committing to deploy that amount fully.

The primary intent of this program is to act as a catalyst for boosting trading volume and overall adoption of the dYdX V4 platform. We’re committed to achieving these objectives as efficiently as possible, aiming to optimize the allocation rather than exhaust it. Our approach is designed to be dynamic, with ongoing evaluations and adjustments throughout the six-month duration of the program.

Should we meet or exceed our key performance indicators—namely, a successful migration of trading activity to V4—prior to the end of this six-month period, we will recommend an early termination of the program. This will ensure that we steward community resources responsibly and cease the rewards initiative when it has fulfilled its purpose. We’d like to reiterate a few core measures for the proposed program:

Ensuring Governance and Transparency in Fund Management

To set the record straight and preempt any concerns about the management and control of funds, we want to explicitly outline the governance measures that will be in place for this rewards program:

Community Treasury Control

  • No funds will be transferred to an address that is not under the direct control of the Community Treasury. This ensures that the community retains complete oversight over the allocation and distribution of $DYDX tokens.

Role of Chaos Labs

  • Chaos Labs will not hold custody of any $DYDX tokens at any stage—before, during, or after the program. Our role is purely advisory, focused on optimizing the allocation and effectiveness of the rewards.

Governance Oversight

  • Chaos Labs will submit governance proposals recommending incentive distributions to specific addresses. These proposals serve as recommendations and are not automatically enacted.
  • All recommendations must receive approval from community governance to trigger a distribution. This allows the community to exercise its collective wisdom and oversight.
  • Each recommendation must undergo and successfully pass a complete governance cycle. This ensures multiple layers of review and approval, minimizing the risk of hasty or poorly-considered decisions.

Exclusion from Voting

  • Chaos Labs will abstain from participating in any governance votes concerning reward distributions. This maintains an unbiased and transparent decision-making process.

Post-Program Token Management

  • Any tokens that remain undistributed at the end of the program will revert to the dYdX Foundation Treasury. This ensures that any leftover funds are managed responsibly and can be redeployed for other community initiatives in the future.

By outlining these governance procedures, we aim to instill confidence in the community that this program will be executed with the utmost integrity, transparency, and accountability.

If the community is not in favor of any distribution proposal they can simply vote, “no”. Therefore, the requested allocation should be considered a ceiling, not a target, and provide us with the flexibility to adapt the program in real time based on performance metrics and community needs.

Launch Incentives: A Dynamic, Data-Driven Approach

Incentive programs have been the cornerstone of user acquisition in DeFi, as evidenced by the unprecedented boom during ‘DeFi Summer’ in 2020. While these programs have effectively driven user engagement, volume, and liquidity, it’s important to approach their implementation with nuance and precision.

The Complexity of Incentive Programs

There are multiple factors at play—ranging from the subjective perception of a new protocol’s risk to the competitive yields in the market, not to mention the impact of rising U.S. interest rates over the past two-plus years. Therefore, incentives are more of a multi-variable experiment than a guaranteed formula for success. In this context, we look to past incentive campaigns to draw correlations and insights rather than treat them as definitive proof of effectiveness.

Rigorous Monitoring and Iterative Adaptation

Our proposal acknowledges this complexity by incorporating a robust evaluation phase. This involves continual monitoring and data-driven assessment of the program’s impact on user behavior, trading volumes, and overall platform adoption. Based on these insights, we plan to make periodic adjustments—what we call “seasonal tuning”—to optimize the return on investment for the dYdX DAO.

A Living, Breathing Program

Chaos Labs is committed to ensuring the incentive program remains agile and adaptable. Markets are in constant flux; as such, a rigid, one-size-fits-all program risks becoming obsolete or misaligned with community objectives. Our philosophy is that the best incentive programs can pivot in response to market dynamics, user preferences, and empirical outcomes.

In summary, Chaos Labs advocates for a rewards program that is implemented, actively managed, evaluated, and refined. We aim to responsibly steward the community’s resources, striving for maximum efficacy and ROI.

Reframing the Proposal

Chaos Labs recognizes the gravity of proposing a $20 million notional allocation in $DYDX tokens for the Trading Rewards program. While this is undoubtedly a significant commitment, it’s crucial to contextualize this figure within the broader financial landscape of the dYdX community.

The community treasury has a total allocation of ~241 million DYDX tokens (including tokens which are not yet vested). The actual figure of may have slightly reduced due to expenditures, but it remains in the hundreds of millions. In this context, a $20 million allocation will ultimately represent a relatively modest portion of the treasury.

Moreover, the primary mission of the community treasury is to catalyze the growth and development of dYdX. This Launch Incentives program aligns with that mission, aiming to boost user engagement, increase trading volume, and attract valuable liquidity providers. As such, the proposed allocation should not be viewed as a mere expense but rather as a strategic investment into the objectives the treasury was designed to support.


From the official dYdX Community Treasury Documentation.

The Perpetual DEX landscape is as competitive as ever, and we firmly believe that this program can catalyze transformative growth, attracting a diverse set of users ranging from individual retail investors to large capital allocators seeking risk-reduced yield. With the existing treasury’s substantial size, the $20 million ask is proportionally reasonable and stands to deliver a compelling return on investment for the entire dYdX community.

A High-Level Framework for Incentive Allocation Request

When implementing such a plan, it’s crucial to establish a clear goal and measure of success. For the dYdX V4 Launch Incentives, we’ve identified the transition of existing trading volume to V4 as our key success criteria. Though deposits and liquidity are desirable, we focus most of our efforts on rewarding trading volume.

When planning Launch Incentives for a new protocol version, we rely on existing data and user behavior to analyze which actions will yield the desired results. In this case, we have a valuable reference point in the success of dYdX’s initial reward program. Examining rewards distributed in the first six months (Epochs 1-6) from September '21 to February '22, we find that the average ratio of rewards to fees was about 1.74.

Put simply, rewards exceeded total user fees by approximately 74%. This level of incentive significantly contributed to driving trading volumes.

\frac{OriginalLaunchProgram Incentives}{OriginalLaucnhProgramFees} = 1.74

Of course, various other factors influence the adoption of a new version, including usability, technological barriers, marketing efforts, and general market sentiment at launch.

Applying this ratio to recent trading activity on dYdX (epochs 24-26), where average trading fees were around $5 million per epoch, we aim to incentivize similar trading volume on V4. This suggests that monthly rewards should be around $5 million * 1.74, totaling approximately $8.6 million. Currently, the distribution rate in the current Reward Program is approximately $5.4 million per epoch. To reach the desired $8.6 million, an additional allocation of $3.2 million per epoch, or $19.2 million over six epochs, is needed.

As mentioned above, the rewards-to-fee ratio employed in the initial Rewards program was pivotal in driving user adoption of dYdX. However, there is potential for optimization. Consequently, this historical measure is an upper limit for the forthcoming initiative’s budget. Our primary objective is to minimize this ratio and fine-tune the incentive spending through the described iterative process while closely assessing its impact.

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Thanks, @chaoslabs for the post. I have a couple of questions regarding the incentive program as outlined.

  1. What type of users are we trying to attract through each phase?
    If the same phase could be used to attract the same type of users (retail, institutional, etc…) it seems somewhat redundant to continue to use resources in a program that is unlikely to have any real effect on the user base.
  2. Aren’t we moving away from trading rewards?
    Through the epochs, more and more research came in that the rewards formula (at least in its previous state) was prone to be abused and was subject to many tweaks and changes over time, mostly to reduce its overall significance. It seems like a reversion to go back and place even more emphasis on the formula. Also, to reiterate what was said by CipherLabs and RealVovochka, keeping the formula secret seems like a step backward regarding the numerous centralization risks that come with one party holding and tweaking the formula…

Thank you!

Hey @chaoslabs ,
I’m not quite understanding why you continue to focus on things that no one has questions about. No one said that Chaos would have access to multisig, no one said that Chaos would vote, and again, I haven’t seen you participating in the voting either. All payments for your services were made in USDC, so I don’t know if you even have dydx tokens in the first place.

You suggest that the community should vote every time to distribute tokens to the list of addresses provided by Chaos Labs. How can the community vote if they don’t know the formula and can’t verify the fairness of the distribution? Plus, most of the rewards will go to addresses with the highest amount of staked dydx tokens because they will not only benefit from the rewards program (native and from Chaos) but also profit from the protocol itself based on their stake. Mathematically, they will be incentivized to drive up trading volumes to extreme values in order to get a return of 1.74x on their fees. So, the idea of voting for reward distribution after each epoch seems strange.

I believe that the community should instead vote on a specific formula, and that formula should be transparent.

Furthermore, you claim that 1.74x rewards will be enough for 6 months. How will they be enough if it’s logical to assume that fees will be much higher than $5 million? If fees in the first epoch reach $15 million, these rewards would only last for 2 epochs.

I’m not saying this is how it’ll be, but a closed formula allows friends of Chaos Labs to maximize their reward process. The architecture itself encourages this. In my opinion, this completely contradicts the ideas of decentralization.

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I’m still puzzled about the rationale for layering one rewards system on top of another. Wouldn’t it be more straightforward to enhance the existing rewards and adjust the formula as previously discussed? This proposed structure appears needlessly complex, especially when we already have a decentralized and automated solution that doesn’t require community voting or additional layers.

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We still forgot about one detail.
Chaos Labs received $300k from DGP without any scope of work. DGP claimed there is some service provider agreement. I would like to clarify whether Chaos Labs has completed all the work according to that agreement or if they still need to do any tasks for DGP.
Before any additional funds are allocated, I’d like an official statement regarding this contract from @chaoslabs and @carlbergman .

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Thanks @chaoslabs for the proposal!

We support this initiative and agree that bootstrapping activity on V4 from the beginning is super important.

Over the past 1-2 years, we have been a big advocate for reducing emissions/rewards which we think has been largely successful and diverted a lot of emissions to the rewards/community treasury which was earmarked to fund various programs for V4. We believe this initiative is a good use of the accrued rewards. To add to this, we now have extra utility for DYDX through staking to validators which earn a % of trading fees.

dYdX is the largest decentralized derivatives platform with a very strong brand. However, despite this, there is always a cost for users to migrate to new platforms and/or chains e.g., integration costs, bridging, familiarity, time, etc. This is why a strong incentive program is needed to 1) ensure user migration from V3 and 2) invite new users who have never used dYdX to try out V4.

We agree that having an undisclosed rewards formula brings some concerns about private information, however, with the outlined process it should be rather easy for the community to identify and disqualify certain addresses if needed. Also, with public dashboards and reward reports users will be able to adjust their behaviour to infer what leads to higher rewards (which would be behaviour that is positive for V4) without being able to explicitly game the rewards formula.

imho having an undisclosed rewards formula with the outlined process is okay. We’ve been told what behaviour they’re incentivizing → users act accordingly by their best guess → reward reports are introduced alongside data → community discusses if they agree with the level of payout to users according to the value they bring → user adapt their behaviour to higher earning activities based on reports → this will likely lead to greater trading volume, fees, and deposits → achieving the purpose of the program → repeat.

Some additions we would like to see to the program:

  1. Releasing the rewards formula at the end of the program + a retroactive write-up would be nice to explain the rationale behind it and how things evolved over time.

  2. Inclusion of maker volume in the formula - while this is not explicitly stated, I think it’s important to encourage MMs to move from V3 to V4 to support trading volume growth + they have higher integration costs.

Thanks!

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@Callen_Wintermute
Wintermute is a seed investor in Chaos Labs. How can other market players be sure that WM won’t have access to the undisclosed formula? Personally, I see a major conflict of interest here

But of course I can see an advantage of using undisclosed formula.

I think we can discuss a compromise where part of the formula is made public (obviously, the fee paid is the most important parameter), and another part of the formula uses a multiplier based on randomly chosen 10 different parameters at the end of each epoch (OI, number of deposits, number of active trading days, activity in a specific market - you name it). These 10 parameters will be transparent, but nobody, not even Chaos Labs, will know which ones will be used as multipliers. For example, there could be 2-3 parameters out of the 10 as multipliers in one epoch and then another 2-3 in the next epoch and so on.
@chaoslabs will have access to all the data and can modify the list of random parameter before each epoch.
There can be a random “market of the day” multiplier or something so users have to trade on different markets because they can have a huge bonus with this multiplier.

I think this would be a great idea to brainstorm

Because with my idea we can be sure that nobody gets unfair advantage and with fine tuning of the list of random parameters Chaos can propose only those parameters that affect the liquidity.

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Your fears are understood, but i believe WM has always been on the font line pushing for the success of dydx at all levels. He won’t do what will compromise the success of dydx, not at tjhis level we are in now. You can notice Anotnio is very much active again on socials. That’s to tell you all hands are on desk working.

i reason well with your points @CipherLabs new metrics should be adopted and one that would be benefcial to dydx chain, one that would increase user base and also keep them. About the body to be in charge of this, i belief a DeX firm with proven experience should be driving this aspect, except if the track record of a CeX like @chaoslabs out ranks the DeX firm available. I also understand the fear of some forum members on this matter because @Callen_Wintermute is a seed investor of @chaoslabs
Let’s keep this discussion going

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You’re on point here. Very much on point. Opening it to discussion is good and restructuring it as well is needed, giving the fact that there was a detrimental effect of some actions taken in the past about rewards(such as reducing incentives, twice if i may add), making it complex is exactly what i don’t think is needed and the leather board stuff(i don’t think it’s necessary.

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