main points
Original source:Messari
Compilation of the original text: The Way of DeFi
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main points
Compared to Q2, the median usage of dYdX increased, while the total volume decreased mainly due to fewer volatility events in Q3.
Despite healthy user and volume activity, depositors continue to withdraw funds from dYdX. So far, this does not appear to have affected liquidity and trading.
Governance in the third quarter focused on optimizing incentive payouts. Proposals voted to include shutting down the liquidity staking module, increasing the volume weight in the LP reward formula, reducing LP rewards from 40 to 20% for BTC and ETH markets, and reducing transaction rewards.
secondary title
About dYdX
The dYdX protocol operates a derivatives exchange on the Layer 2 (L2) StarkEx network. The hybrid decentralized exchange offers perpetual futures contracts similar to Binance, FTX and other centralized exchanges. The ultimate goal of the protocol is to have a fully decentralized derivatives exchange where no party, including the team itself, can claim the right to manage the basic operations of the protocol.
dYdX was founded in the summer of 2017 by former Coinbase engineer Antonio Juliano. The protocol's first two products, Expo and Solo, were built for margin trading on Ethereum. After seeing the explosive growth of perp trading on Bitmex in 2019, dYdX decided to become the first DeFi protocol to offer perp trading. Launched perps for major tokens like BTC and ETH are rapidly gaining popularity among traders looking to use margin. In 2021 dYdX added StarkEx L2 rollups, further improving ease of use.
introduce
introduce
The third quarter lacked the buzz of the second quarter, but the merger was an important event that inevitably had an impact on the quarterly numbers. On a median basis, daily transaction volume and users on dYdX were as active in Q3 as they were in Q2. ETH’s transaction ratio is higher than in previous quarters as traders prepare for the Ethereum merger. Despite healthy trader activity, dYdX continues to see large withdrawals from the network.
Governance efforts this quarter focused on optimizing inflation rewards for DYDX, the protocol’s native token. In another quarter, the protocol generated more revenue than the dollar value of tokens paid out as rewards. Revenues currently go to dYdX Trading and not to the community treasury, so only DYDX tokens are in the treasury to fund activities.
The dYdX chain is now expected to launch in Q2 2023, creating a decentralized order book and improving alignment between token holders and the protocol.
performance analysis
dYdX trading revenue fell 22%, from $29 million in Q2 to $22.6 million in Q3. Despite token price drops, rewards paid (measured in USD after claiming) still exceed revenue. Net costs of $9 million were the lowest in the past four quarters.
In the third quarter, dYdX trading volume fell 14% to $91.6 billion. Volumes in the second quarter were boosted by three large volume events in April, May and June. Ethereum merged in September, which drove an increase in ETH's share of transaction volume. Despite the reduction in total transaction volume, dYdX’s median daily transaction volume (median) was actually $115 million higher in Q3 than it was in Q2.
Similar to transaction volume, both daily active users (DAUs) and the total number of transactions declined in the third quarter. This may be a result of fewer incidents. Network activity remains healthy, with median DAUs and daily transactions rising from the second quarter. In Q3, dYdX had a median volume of 167,000 deals and 1,667 DAU.
Despite healthy usage as measured by transaction volume and DAU, dYdX continued to see divestments in Q3. Outflows of $233 million followed in the second quarter of $362 million. The timing of larger withdrawal events does not appear to coincide with the timing of reward reductions, but may be concentrated towards the end of the cycle.
dYdX’s open interest (OI) halved in Q3 due to falling deposits. In terms of contracts, BTC OI fell by 50%, and ETH OI fell by 38%, which performed relatively well. Things were much worse for other tokens: SUSHI, SOL, LTC, EOS, and AVAX all lost over 80% of their OI, while AAVE, DOGE, DOT, FIL, MATIC, MKR, and UNI dropped at least 70%. The only growth for OI was ETC, which rose 59% in token terms in Q3.
Less market volatility meant fewer liquidations in Q3, which fell 58% to $340 million. Ethereum liquidations increased from 52% in Q2 to 65% in Q3. Bitcoin’s reduced volatility resulted in a 77% drop in liquidations, with BTC liquidations accounting for only 14% of total liquidations in Q3.
proposalproposaldiscussdiscussStarting in June, the TVL in the module dropped from $130 million to $42 million within a week of the snapshot vote. September 27,On-chain votingpass. October 29, asnapshot votingPass, support closing the security pool and sending the allocated DYDX tokens to the treasury. This still requires on-chain voting to enforce.
On-chain events in Q1 and Q2 lead to an increase in dYdX’s volume share in the first half of 2022. A positive for the agreement is seeing volume spikes normalize towards the end of the cycle. This typically unproductive transaction is incentivized through rewards. Modifying the rewards program appears to have had the desired effect.
ETH perp transactions across the five exchanges grew 17% from $350 billion in Q2 to $420 billion in Q3. Before the merger, there was a popular trade to hedge ETH long positions and perps short positions to hedge technical risk or game ETH POW fork. dYdX maintained a 10-15% share throughout the quarter, showing competitive funding rates compared to the largest CEXs.
qualitative analysis
Liquidity Staking Module
dYdX provides aLiquidity Staking Module(LSM), anyone can deposit USDC, which can be used as collateral by community-approved market makers to provide liquidity on dYdX. Stakers are rewarded with DYDX tokens. Market makers have access to cheap (zero interest) capital that can only be used within the ecosystem. On September 27th, the dYdX community voted in favor of closing the borrowing pool, setting the DYDX rewards associated with staking USDC to 0.
While the design is attractive, it does not appear to allocate resources to the protocol efficiently. Funded by dYdX Grants, Xenophon Labs released aLSM Research ReportIt was found that “81% of rewarded tokens were in USDC that was not loaned to any market makers.” The problem is primarily that the amount of USDC pledged depends on the price of dYdX, and the variability in available funds leads to very low utilization by market makers.
July 6,community voteClose the borrowing pool associated with the LSM and reuse the remaining DYDX token rewards.
On July 31, Ryan Rodenbaugh of TrueFi posted aProposals on the forumTransform your LSM with TrueFi's Automatic Line of Credit (ALOC) product. Ideally, TrueFi's floating rate ALOC would charge variable interest based on the utilization of the loan pool. These rates are primarily based on USDC, but are also incentivized by some dYdX, which should reduce the volatility of available capital and thus increase utilization. An important question, however, is at what rate are market makers willing to borrow?
Transaction Reward Equation
dYdX incentivizes usage of its exchange by rewarding transactions using DYDX tokens to help compensate for fees paid. Previous versions of the trade reward formula included fees paid, open interest (OI), and stkDYDX (DYDX staked).
A new study in March showed that the opportunity for large OI rewards creates a very large play space for Farmers to earn dYdX without adding liquidity or paying fees. In April, the project team made initial changes to the rewards equation, reducing the weight given to OI, and the community voted to remove any rewards attributed to larger open positions. The vote also reduces the total transaction rewards by 25% per epoch.
OI has declined significantly since these changes, but OI does not necessarily affect liquidity. In fact, OI and exchange volume do not appear to be highly correlated.
The reduction in block rewards helps boost the treasury pool, making more money available for long-term investments.
LP reward equation
Managing token rewards was a major theme this quarter, with liquidity provider rewards also being addressed. The first change came in February, lowering the threshold for LPs and opening up rewards to more suppliers. Then in May, at the request of Wintermute (one of dYdX's largest market makers), the community voted to add a quantitative factor to the LP reward equation. In August of this year, the community took the plan one step further. The August vote increased the weight of the volume factor for all markets.
Importantly, it increases the weighting of the BTC and ETH markets due to fears that excessively lowering the depth factor could negatively impact less liquid markets. To further balance this incentive, the community reduced the share of rewards for the BTC and ETH markets from 20% each to 10% each, now allowing more rewards to go to other markets. These are two of the deepest markets on the exchange and probably don't cost much to attract liquidity.
So far, these changes have reduced payouts for attracting depth without hurting liquidity in general. As DAOs focus on optimizing resources spent in bear markets, adjusting the rewards they offer users is a key lever they are using.
Funding V1.5
July 15, Communityvote fundingA second grant program run by Reverie. The initial proposal was for a 33% increase, from $6 million to $8 million, while the value of the tokens that make up the treasury has dropped roughly 85%. After some discussion at the forum, the grant program was reduced to $5.5 million for the next 6 months.
The updated grants program highlights dYdX's decentralized governance process. The trustees of the dYdX Grant Program (DGP) make funding decisions and execute them, while they outsource management and curation to Reverie. The community agrees to fund the central planner, Reverie, which funds tools, research, and contributors.
Final funding decisions are made by the DGP Trustees. althoughReceived 65.5% of the vote, but the Ambassador program (Ambassador program) did not meet the 67% vote margin requirement, so it is not binding. The program offers community members the opportunity to join Burrows and work for the DAO in a part-time capacity. It is reported that the Ambassador Program is a decentralized alternative to applying for grant funds through Reverie, and it has produced many positive contributions.
dYdX Chain Update
August 23, dYdX TradingpublishedPosted a blog to update the progress of V4. The main announcement is that Milestone 1, the launch of a developer testnet, is complete. In addition, this update gives a timetable for the mainnet launch, which is expected to be released in the second quarter of 2023. Other programs include:
Milestone 2: Internal Testnet - Q3 2022
Milestone 3: Private Testnet - Q4 2022
Milestone 4: Public Testnet - Q1 2023
in conclusion
in conclusion
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