[PASSED SNAPSHOT] DRC - Introduce a Market Maker Rebate Program

Proposals
1

Proposed Changes:

  • Introduce a Market Maker Rebate Program

719×250 9.03 KB

Note: the community has no power over the Trading Fee Schedule, this is simply a signal to dYdX Trading on behalf of the community.

Summary:

As part of our V4 Vanguard Post, we proposed to introduce a Market Maker Rebate Program. As we begin to think about the sustainability of V4, it’s important to reduce the reliance on LP rewards and incentivize liquidity in a natural way.

Description:

A large proponent of dYdX’s overall sustainability is retaining liquidity providers and traders. If we assume DYDX rewards are non-existent, how do we incentivize liquidity providers?

Compared to its competitors, dYdX lacks a separate Market-Making Fee Program. This is arguably a result of the LP rewards program. However, as the number of markets, products, and competitors increases, the average reward per MM is expected to decrease with a fixed reward pool. Therefore, it’s imperative for dYdX to introduce a Market-Making Fee Program with rebates to naturally incentivize liquidity and reduce the reliance on rewards.

719×250 9.03 KB

The proposed Market-Making Fee Program as shown in Figure 5 consists of 5 tiers based on maker volume as a % of the 30D exchange volume on dYdX. Such a program with these proposed fee tiers is standard across most top-tier CEXs. As a result, MM’s rewards are directly proportional to their maker volume and not bound by the size of the reward pool. Furthermore, by introducing a Market-Making Fee Program:

  • MMs become more inelastic to changes in the current rewards program given rebates are more predictable and their reward surplus is now larger than before.
  • The protocol now has a way to naturally incentivize liquidity, providing increased freedom when altering DYDX rewards.
  • The protocol is no longer constrained by an increasing number of markets that are expected in V4.
  • Obvious liquidity improvements by incentivizing maker volume.

Next Steps:

We’d like to request feedback from fellow LPs on dYdX, we believe our proposal in conjunction with LP rewards is fair. However, this is assuming there is an increase in taker fees. If the community is against increasing taker fees, it may be worth revising rebate levels.

Pending community discussion, we will look to initiate a Snapshot Vote on Friday 17th of Feb.

There will be a binary vote that signals to dYdX Trading the wishes of the community, with:

  • Yes - Introduce a Market Maker Rebate Program as described above.
  • No - Do nothing.
1 Like
2

@Callen_Wintermute Thank you for submitting those ideas. My team is unsure of the results of the vote on February 17th. Have you had a webinar or AMA discussion about this proposal? We’d like to better our knowledge.

1 Like
3

Hey,

the Snapshot Vote can be found here: Snapshot

1 Like
4

Hey @Callen_Wintermute,

Realised Im super late to this post as the proposal has already passed on snapshot… But I just have some concerns about this:

  1. Are there any reasons for the negative maker fee structure adopted for all 5 tiers? From my understanding, this isnt really the standard for crypto CEXes unless your of a particular VIP tier in the exchange (eg. Okx). Other CEXes continue to implement positive maker fees albeit lower (eg. Coinbase, Binance (USDT))

  2. With these rebates, I’m of the view that LP rewards should be reduced as well as a compensation. Likewise, takers should also enjoy further discounts for those with dydx tokens and more rewards on the contrary. Otherwise, I don’t see why the protocol should double spend on maker rebates and LP rewards and hence, the proposal should have consisted of a reduction in LP rewards + maker rebates (although I understand this is for future discussions as highlighted in your post).

2 Likes
5

Hey @0xcchan, thanks for the questions!

Regarding 1: These negative maker fees are equivalent to the ‘VIP’ tiers that CEXes market, albeit without the ‘VIP’ label. Most of these VIP tiers are volume-based similar to the implementation given above. Note, this is on top of the regular fee schedule which still includes positive maker fees and only affects large LPs on the dYdX platform.

Regarding 2: I agree with your thoughts on double spending and the full V4 Vanguard proposal introduced reductions in rewards over the next couple of years. My main goal is to transition LPs towards receiving sustainable incentives through rebates and therefore reduce the reliance on dydx rewards. However, given we currently don’t have control over setting fees we must be very cautious with the timing and don’t want to end up lowering LP rewards without the maker rebate implemented first.

I think moving into V4, Node Operators and LPs will play an important role in servicing the exchange and ultimately will provide the greatest value to users who want to trade on the platform. So we must be very cautious of changes that may reduce LP participation!

1 Like
6

Thanks @Callen_Wintermute for the quick response!

  1. To my knowledge, CEXes such as Binance (USDT) does not have a negative maker fee structure, okx only has it from VIP 6, Coinbase does not support it too.

Therefore, can I ask how were these numbers obtained for maker fees? Perhaps there is another maker fee schedule for MMs which I don’t have access to. But agree that this will definitely lift the pressure on LP rewards.

  1. You brought in the concept of volume, which seems to be the standard across CEXes. As dYdX has consistently recorded daily volumes from 0.8 - 1 b, should a volume metric be adopted as well rather than using maker volume as a percentage (since this likely enables more leeway for MMs to reach that particular %, as opposed to having hard figures as targets)

Hope to hear your thoughts again!

1 Like
7

Hey thanks for this,

Typically CEXes run MM rebate programs separately to the trading fee schedule shown to regular users. For example, Binance Upgrades USDⓢ-Margined Futures Liquidity Provider Program (2022-07-20) | Binance Support (Not sure if this has changed since)

FTX also had a very clear market-maker rebate system before it collapsed (which had influence on the numbers we chose above). This was used for our research before FTX website was taken down:

image
image1732×287 29.6 KB

You can also find Bybit’s MM program here.

The specific numbers that we chose were our best ‘guess’ based on competitors, DYDX LP rewards, and our experience and involvement as a large LP on the platform. However, we would’ve loved for other LPs to chime in.

Most static volume metrics are used for regular traders and not MM programs. I do see the merit in enforcing hard volume bins as it’ll make MMs want to trade more to receive higher rebates. However, in the end, I believe it will result in a poorer experience for LPs. There may be periods in which volume is significantly lower and therefore achieving rebates is a lot harder for LPs, or where volumes are significantly higher and it’s easy for LPs to achieve a high rebate and then not change their behaviour to stay competitive. So with a dynamic (% of 30D volume) LP rebates scale with the exchanges volume :slight_smile:

1 Like
8

Thanks @Callen_Wintermute!

(Sidenote : never a fan of FTX structure :sweat_smile:), but thanks for sharing this and how it was used as the reference instead.
In addition, just to clarify, it appears that Bybit’s MM programme does not adopt a negative structure as well - Bybit Fee Structure

But nevertheless, I definitely agree that there is room to debate on this structure, esp on numbers for each tier, as you’ve mentioned this alleviates LP rewards emissions.

As for the hard targets, I’d agree with that and perhaps can we instead introduce the OR condition for these metrics so that on better days, the higher of the 2 can be attained, encouraging more volume as well.

eg. 0.1% of maker volume OR 350m

Since the protocol is at a more mature stage, a static + dynamic OR condition can be introduced. Not too sure if this might be more effective to in increasing liquidity too and would be great to hear from more LPs.

1 Like
9

Hey as explained above, most exchanges run a separate MM rebate program and here is Bybits

1 Like