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.