On March 14, the dYdX community voted through the DIP-20 proposal, deciding to reduce transaction rewards by 45% (about 1.3 million pieces), and the remaining 55% (about 1.58 million pieces) of rewards will be retained by the treasury and can be changed through community voting He used it, with 83% of the votes in favor, reflecting a real step forward by the dYdX community around the improvement of the DYDX token.

In a climate of turbulent market conditions, under the pressure of emerging competitors such as GMX, reducing transaction rewards can lock up part of the circulation to support token prices, and can give the community more financial margins to plan for the future development of dYdX .

Currently, the 24-hour trading volume of dYdX is about 2 billion US dollars. The reduction of trading rewards will inevitably have an adverse impact on the trading volume. On the whole, this is part of dYdX’s V 4 Vanguard plan. The core is to pass the use of DYDX and release standards Make a transformation. To redesign the incentive path, hoping to solve the transaction inefficiency problem existing in dYdX.

Crack down on inflation, return to the treasury

The direct reason for updating the distribution mechanism this time is the change in the market environment. DYDX tokens have fallen by nearly 70% in the past year, and the market share is also facing the pursuit of rising stars GMX from 95% a year ago to the current level. 70%.

Although some community members disapproved, in view of the current market conditions, a total of 776 participants voted in the voting test on February 15th, and finally passed with 91.6% (approximately 27 million) votes in favor.

Moreover, the rewards allocated to liquidity providers are too high compared to the community/reward treasury, so the transaction rewards need to be greatly reduced. Additionally, reducing transaction rewards is also in line with the new distribution model devised in the V 4 Vanguard proposal.

In the initial five-year distribution model of the total supply of DYDX, 25% is allocated to transaction rewards, while LP (liquidity provider) and treasury only account for 7.5% and 5% respectively, and during the stable period when the agreement goes online, although the Trading rewards to 20.2%, but still higher than LPs (7.5%) and vaults (16.2%).

Among them, 50% of the total supply of DYDX (500 million DYDX) will be allocated to the community within 5 years, and the remaining 50% will be allocated to early investors, protocol developers, community members, and treasury. But for now, the focus can only be limited to the community distribution ratio, because this is the only thing that can be changed.

According to the design of the dYdX mechanism, starting five years after its launch, 2% per year is the highest limit for the inflation rate of $DYDX. Therefore, the overall trend of dYdX is to gradually reduce the circulation in the market to counteract the value dilution brought about by inflation expectations .

After the DIP-20 reduces the transaction rewards this time, the excess DYDX will be deposited into the treasury. In fact, it is dYdX's traditional practice to reduce the transaction rewards and deposit them into the treasury. In the previous DIP-14, the reward for staking USDC was set to 0, and about 380,000 DYDX previously allocated to USDC pledgers were stored in the treasury; while in DIP-16, the community has decided to reduce it by 25% and reduce the transaction rewards from about 3.8 million DYDX to about 2.8 million DYDX, and the remaining about 950,000 DYDX will be deposited in the treasury; and in DIP-17, the rewards for pledged DYDX have been reset to zero, and Deposit approximately 380,000 DYDX previously distributed to stakers into the treasury.

After several rounds of nerfs, transaction rewards still account for a disproportionately high proportion. Even after the 25% reduction in transaction rewards after DIP-16, transaction rewards still account for 44% of all token releases, and there is still a high room for decline.

first level title

V 4 upgrade coming soon

The direct reason for reducing trading rewards is to provide financial support for the V4 upgrade, but in the early stages of implementation, it is necessary to face the dilemma of traders fleeing and trading volume declining.

At present, large traders with more than 50 million US dollars have "threatened" to leave dYdX, but in the community's view, the trading volume relying on subsidies cannot be maintained, and a robust protocol must serve real users.

Yet another consequence would be a tendency toward greater centralization of voting power. The main value of dYdX lies in community governance, and voting rights are directly proportional to DYDX holdings. By reducing future supply, reducing transaction rewards will directly increase the value of existing DYDX.

According to the part of the dYdX V4 upgrade agreement, transaction rewards are part of a series of improvement plans, which generally follow the goal of increasing the value of DYDX tokens and promoting dYdX trading volume. The specific content includes the following parts:

• Reduce transaction rewards by 45%;

• Adjust Maker & Taker fees;

• Introduce a market maker rebate plan;

• Cancel DYDX/stkDYDX transaction fee discount;

• Reduce the release of DYDX and modify the distribution of rewards every year;

• Adjust the transaction reward distribution mechanism for market segments.

Based on the introduction of a new weight design for the reward distribution mechanism and the reduction of transaction rewards by about 45%, it is hoped that before inflation, the amount of DYDX released will be controlled by reducing community rewards, so as to eventually reach an inflation rate of 2%.

If you want to further remove the barriers to entry for traders and LPs, the best way is to reward LPs only based on transaction volume, rather than adopting a complicated staking model.

Therefore, the current transaction fee discounts and transaction rewards are unfair mechanism designs. On the one hand, transaction fee discounts cause DYDX holders to reduce their own transaction costs, which is unfair to non-currency holders; on the other hand , transaction rewards already function as rebates based on fees paid by users, and 94% of DYDX/stkDYDX holders are not active traders on the protocol.

Summarize

Summarize

Transaction rewards are generally a simple and effective incentive system at the initial stage of the protocol. Rewards are proportional to transaction fees paid by users in a given period. This mechanism used to work very well in terms of the growth rate of active users because it was essentially a reward for all trading activity, regardless of the segment they traded in and the reward. However, the efficiency will be very low if the transaction rewards are developed to stimulate the long-tail market or increase the market transaction volume.

After the dYdX protocol enters a stable development period, the simple and crude incentive model in the early stage of entrepreneurship is no longer suitable for the new era, and needs to be replaced by more refined market operation measures. The most direct way is to turn to provide a better user experience. Speculators and arbitrageurs are driven away to stabilize the real user group.