Revised dYdX Incentives Relaunch

Proposals
1

Following up on the previous text proposal to relaunch the Incentive Program, we propose to change the Incentive Program significantly. As such, we are sharing this proposal and plan to launch a new text proposal.

Aligning with the state of the dYdX Chain and the up-coming launch of dYdX Unlimited, Chaos Labs proposes the following incentive structure to bring maximum impact to the upcoming dYdX Unlimited upgrade.

We have carefully analyzed each aspect of this proposal, designing it using community feedback and learnings from the 9 month Launch Incentive Program.

Detailed Proposal

The proposed rewards will continue to be earned as points over each one month season. As before these will be split into dedicated allocations for traders, and market makers to incentivize these activities separately.

Liquidity on the dYdX Chain has been discussed in depth, and with permissionless markets launching, deep, thick orderbooks will be needed to allow traders the freedom to trade across the wide range of markets. To achieve this goal, 60% of rewards are being directed towards market maker incentives, with the remaining 40% earmarked for traders.

To better size the incentive program for this liquidity focus, we propose reducing the overall size to $6m in DYDX, over 4 months (1.5M per month) to allow for an impact analysis before committing further tokens.

Proposed Incentive Structure for Traders

Trading points are being simplified for the dYdX Unlimited relaunch to make them easier for traders to understand and optimize for, while rewarding them for performing the activity most beneficial for their segment to the dYdX Chain, paying fees.

A traders trading points are proposed to be represented as their fees paid with a 2x boost for fees in non top-5 markets.

This is multiplied by the trading points multiplier to arrive at a final points number. The multiplier is constant across markets.

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Proposed Incentive Structure for Market Makers

The value provided by market makers can be measured across different dimensions. It is important that market maker rewards approximate the positive impact that market makers provide to the dYdX Chain ecosystem. This aligns the rewards-maximizing strategy most closely with positive outcomes for the dYdX Chain.

It is also important that the rewards formula is simple and easy for market makers to optimize for. To meet these two objectives of aligning rewards with value provided, while remaining simple and easy to optimize for, the market maker rewards will focus on differentiated incentives across three dimensions:

  • Maker volume satisfied: The total volume of maker volume over each period.
  • Orderbook liquidity provided: Orderbook liquidity plays a crucial role in enabling larger trades and liquidations to clear. This will be measured by randomly sampling the orderbook at different depths.
  • Long-tail market serviced: To simplify the definition of long-tail and align with the trading rewards methodology, we will define long tail as all markets other than the top 5 by volume. These top 5 by volume will be announced at the beginning of each season, measured as the 5 highest volume markets of the previous season.

Proposed Methodology

We propose measuring the value provided by market makers using the two-factor Cobb-Douglas production function. This function widely used to represent the technological relationship between the amounts of two or more inputs and the amount of output that can be produced by those inputs.

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α and β in this case represent the output elasticities of volume and liquidity which are in the process of being calibrated, while κ represents a multiplier boost for long-tail markets. They should be measured and calibrated in a way that best incentivizes behaviors beneficial to dYdX.

A benefit of measuring market maker contributions like this is that the formula can be thought of as measuring the volume weighted liquidity provided. The volume weighting will naturally upweight liquidity provided in more active markets, and over more active periods, tying the value of the liquidity to its utilization to an extent.

The volume score and the liquidity score should be measured over a defined period in each market. At the end of the period, the Q score should be computed in each market, and summed across markets for an overall value. This will provide protection against excessive liquidity being provided in markets that do not require it as the low volume scores there will weight this liquidity low because of the product formula.

The proposed measure of liquidity is to track the sum of liquidity at 25bps (L_{25}) and 50bps (L_{50}) and weight this by the inverse square of the spread to value tighter liquidity more:

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The final Q score is multiplied by the market maker points multiplier to arrive at the final market maker points score.

To limit this rewards segment to market makers providing a dedicated service to the dYdX Chain, only makers doing over 0.25% of maker volume over a season are eligible for maker rewards.

Summary of the Revised Proposal

  • The duration of this iteration of the program is proposed to be reduced to 4 months.
  • The total size of this iteration of the program is proposed to be $6m in DYDX, with $1.5m allocated to each 1 month season.
  • 60% of each season’s rewards allocated to improving liquidity through market maker incentives making up $900k per month.
  • Market maker incentives to add a liquidity component to the current volume-based formula.
  • 40% of each season’s rewards allocated to trader incentives, making up $600k per month.
  • Trader incentives will be fee weighted, with a 2x multiplier for fees paid in non-top 5 markets. The top 5 markets will be announced at the beginning of each season as the highest volume markets from the previous season.
  • There will be a deeper integration with the trading front ends with APIs being built to track metrics associated with user rewards.

There will no longer be trading leagues in the incentives re-launch.

Next Steps

In the absence of strong dissent, we will submit an on-chain proposal on November 7, 2024 to ratify this proposed incentive structure for the dYdX Unlimited launch.

3

I’m not quite sure what we’re trying to achieve with this rewards program. It definitely doesn’t seem aimed at attracting retail users. Why do we assume that market makers are unhappy with the rebates or the rewards program? I haven’t seen a single post from market makers claiming this. Maybe Chaos Labs has other information, but why isn’t it publicly available? There’s a clear information asymmetry here. Perhaps market makers aren’t providing liquidity because there’s no retail to act as takers? Until there are open posts from market makers explaining why the current conditions on dydx don’t satisfy them compared to other platforms, it’s completely unreasonable to make the program so retail-unfriendly.

4 Likes
5

League rewards are being removed?
Where is the incentive for retail customers?

6

In this proposal, we are voting negatively, as we did during the development of the previous program. The results, I believe, show—as we explained—that, as designed, it fails to achieve the goal of increasing protocol clients. Instead, it generates trading volumes that disappear once the program ends. It represented one of the project’s main expenses, remunerated in dYdX, which created significant selling pressure on the token from the few market makers who receive these funds and have no commitment to the project. This new version of incentives addresses some of the design issues we pointed out, but it will still mean $6 million that the project will spend with limited value creation. The alternative we believe would be much more efficient is to internalize this activity with a team within the project that could either implement it directly or contract it out to third parties to ensure specific service levels.

In this regard, if, as an investor, you do not agree with this proposal, it is important to review your delegations because we believe that if implemented again, it will impact the project. Most comments in the forum shared our view, and only two other validators voted against it. The validators who voted in favor did not provide positive arguments for this program. It is true that this time it comes with a more limited budget, and it might perhaps be offset by other initiatives being undertaken. However, with the experience of poor results in the past, we believe this program is likely to repeat them

5 Likes
7

After careful consideration of both the revised proposal and feedback from our community members, we have decided to vote against it. The current proposal appears misaligned, as it disproportionately allocates the expected rewards to the market maker cohort. This approach could significantly weaken the program’s impact by disrupting the existing incentive structure on the dYdX chain. We suggest that the proposer reassess the situation and consider adopting a more balanced distribution mechanism.

pro-delegators-sign

1 Like
8

It seems like we’re once again facing shortcomings in governance. No one bothered to explain their decision to support this initiative. Why is there such a skew in rewards in favor of market makers? Essentially, none of the users’ suggestions in previous discussions have been considered, yet a huge number of validators are voting YES without any explanation of their position.

3 Likes
9

My friends,

This is an obviously centralized protocol, which was made apparent during the liquidity allocation to LSTs proposal, discussion, and vote:

It’s centralized between the VCs, market makers, and team. The users come last.

It’s been hacked 3 times.

It’s constantly funneling money to market makers, selling the unlocking DYDX token from VCs and team members, and lowering trading rewards for users.

In my view, every governance decision effectively is designed around this insider centralized cartel funneling as much money out before 2026 when the unlocks are finished, after which I expect the protocol to be burned to the ground.

It released the TRUMPWIN market which was obviously broken rather than think if it made sense for 30 minutes.

It releases refferal programs which are extremely exploitable and don’t work at all in web3 environments lacking sybil resistance.

These revised proposals are just decentralization theater on how to loot the protocol better.

I could go on…but the picture I’m explaining is: this protocol is a flaming dumpster fire and I’m leaving not intending to return.

The arguments here are just not benefitting the users, it’s insiders bickering on about how to loot the protocol.

I hate the low liquidity in trying to get out, but I’ve seen an abundance of bad decisions.

2 Likes
10

To correct for some cases where maker reward points can decrease slightly due to liquidity being averaged over the season, Chaos Labs will implement a small permanent fix to the portal backend calculation that will marginally affect users maker points.

Users relative points will still align with the previously communicated maker points formula where each hour makers average liquidity score and volume score is calculated and used to compute that hour’s maker points score.

makerPoints_t = L^{0.3} \times V^{0.7}

Maker points earned in each hour are then summed over the season to date to arrive at the current maker points score: makerPoints_T = \sum_{t\leq T}{makerPoints_t}.

Makers points will change, but their points relative to other makers should be minimally affected. This will ensure that final payouts reflect their contributions according to the previously announced methodology.