dYdX v4 Launch Incentives Proposal

In reference to this discussion: https://dydx.forum/t/dydx-v4-launch-incentives-proposal/1075

Simple Summary

This proposal seeks $20M in DYDX from the dYdX Chain Community Treasury (if and when deployed on mainnet and subject to the migration of the dYdX v3 Community Treasury through dYdX governance) for a 6-month Launch Incentives Program to be deployed on v4. This program is designed to motivate the seamless migration of volume and users to the dYdX Chain.

Note this proposal serves as a temperature check to gauge the dYdX community’s support of the Launch Incentives Program. The first distribution of DYDX rewards under the Launch Incentives Program is subject to a dYdX governance proposal on the dYdX Chain.

Abstract

As the dYdX ecosystem approaches the launch of dYdX Chain, it faces the significant challenge of effectively transitioning and expanding the existing dYdX v3 user base.

Ensuring liquidity and incentivizing migration to the dYdX Chain is critical to the success of the dYdX Chain. Historically, Liquidity Mining or token reward programs across DeFi have consistently demonstrated their efficacy in spurring protocol growth and bootstrapping trading volume. Consequently, a strategic Launch Incentives Program could be crucial in effectively incentivizing a transition to v4.

It is important to note that the proposed Launch Incentives Program is in addition to the native v4 Rewards program. With a focus on robust reward distribution, the Launch Incentives Program is designed to catalyze migration, amplify adoption and volume, and reward early users.

We are proposing an allocation of $20M USD worth of DYDX tokens to be distributed among v4’s early adopters over ~6 months in separate dYdX Chain governance proposals.

Motivation

Why Are v4 Launch Incentives Needed?

Recognizing Early Adopters

Incentives are a powerful lever for encouraging aggressive v4 adoption. In the dYdX Chain open source software, the rewards are designed to automatically issue rebates, with a maximum limit set at 100% of a fill's net trading fee, reducing trading friction costs. However, v4 is a large migration for the dYdX community. Users taking risks and investing time and resources to become the earliest adopters deserve additional rewards for their contributions to the dYdX community.

Early Aggressive Growth is Important

Empirically, the early months after a new protocol launch are critical. Momentum, early adoption, and initial trading volume are telltale indicators of a protocol’s prospective success. Simply put, we haven’t observed many protocols that see little to no adoption over the first year and suddenly skyrocket in usage later. As such, the dYdX community can utilize a portion of the dYdX Chain Community Treasury to bootstrap explosive growth and incentivize migration to the dYdX Chain.

What Will the Community Get From This Program?

The program should drive significant early adoption and help solidify dYdX’s current and future market share as an industry leader. Furthermore, this program serves as a lever to reward dYdX contributors who will play a pivotal role in enabling the successful launch of v4.

Migration Challenges

Chaos Labs understands the intricacies of shifting liquidity and the nuances of migrating users, as this has been a core focus of numerous protocols that Chaos Labs has worked with. Drawing parallels, Chaos Labs’ oversight of the Aave V2 to Aave V3 migration over the recent year provides insight. Even with Aave V3’s enhanced risk management and capital efficiency, the adoption trajectory has been gradual, and we expect a similar path for the dYdX ecosystem with the migration from Ethereum to the dYdX Chain. v4 is a new financial product with a few critical changes, including the following:

• A new protocol with a new mechanism design as we consider the introduction of validators, on-chain matching, and more.
• Migrating from Ethereum to Cosmos.
• Introduction of On-Chain MEV
• New infrastructure (e.g., Bridging, CCTP bridge)

Specification

Chaos Labs presents a comprehensive 6-month program for the transition to dYdX v4, encompassing a pre-launch and post-launch phase.

Pre-Launch

• v4 Trading Reward Genesis Research focuses on establishing reward distribution methodologies to incentivize desired behaviors within the dYdX Chain ecosystem, such as deposits, trading, staking, and governance participation. The program aims to drive organic and positive usage of v4 by rewarding users for these activities while maintaining transparency in distribution insights. Chaos Labs proposes a public distribution process subject to approval by dYdX governance to ensure community oversight, posting incentive distribution recommendations, trading reports, and supporting data for community scrutiny. The program also addresses wash trading concerns, implementing measures to detect and deter such activities on v4.

• v4 Analytics and Risk Portal is designed to provide transparency and enable dYdX community members to verify the activity of accounts receiving rewards. It will serve as a comprehensive data hub for v4, offering insights into user and market-specific activity. The v4 Reward Leaderboard Portal will transparently display user engagements and accumulated rewards, fostering healthy competition and community engagement.

Post-Launch

The Launch Incentives Program will be structured into several trading seasons. In order to facilitate fine-tuning of the reward strategy and to improve our ability to detect wash trading anomalies, the initial trading season will be shorter. Subsequently, the following seasons will be determined randomly to introduce an element of unpredictability, thereby reducing the potential for manipulation. Each trading season will be followed by:

• Trading Season analysis reports after each trading season. We intend to enhance transparency by highlighting market dynamics, user behavior patterns, and overarching protocol efficacy. These reports will spotlight prominent traders and the primary contributors to the dYdX protocol’s fee generation. Such insights will be instrumental in shaping reward allocation decisions.
• After analyzing season trading data per the framework established in the research phase, reward distribution recommendations will be made. Every proposal will include exhaustive data, ensuring clarity on which accounts will receive rewards, complemented by a detailed account of their trading behavior. This facilitates an open platform for the community to weigh the distribution dynamics.
• Governance proposals At the conclusion of each trading season, we will create a governance proposal to distribute DYDX rewards from the dYdX Chain community treasury to the prospective recipients.

The program will continuously refine reward distribution mechanisms based on real-time adoption metrics.

Rationale

Drawing insights from the vulnerabilities exploited in the v3 incentive program, our goal is to implement a more fortified incentive distribution system that prioritizes genuine traders contributing authentic volume. While fully open-sourcing the formula can skew the security balance, making it susceptible to manipulation, we remain committed to ensuring the highest degree of transparency without sacrificing security. In light of these considerations, Chaos Labs proposes the following measures:

1. No funds will be transferred to a dYdX Chain address that is not under the control of the dYdX community. This ensures the dYdX community retains complete oversight over allocating and distributing DYDX rewards under the Launch Incentives Program.
2. Chaos Labs will not hold custody of any DYDX tokens for the purposes of distribution under the Launch Incentives Program at any stage. Our role is purely advisory, focused on optimizing the allocation and effectiveness of the rewards.
3. Chaos Labs will submit governance proposals recommending incentive distributions to specific addresses. These proposals serve as recommendations, subject to approval through dYdX governance, and will not be automatically enacted.
4. The distribution of DYDX rewards at the end of each season ensures multiple layers of review and approval, minimizing the risk of hasty or poorly considered decisions.
5. Chaos Labs will abstain from voting in any dYdX governance votes concerning reward distributions under the Launch Incentives Program. This contributes to an unbiased and transparent decision-making process.
6. Any DYDX tokens remaining undistributed at the program's end will remain in the dYdX Chain Community Treasury.
7. Chaos Labs will incorporate community feedback in the formula design:

• Incorporating an element of randomness in the timing of season resets. This will increase the difficulty of manipulation by reducing predictability.
• Introducing randomness into the selection of variable weights within the formula. This approach introduces an element of unpredictability while upholding fairness, effectively discouraging sophisticated gaming tactics.

Implementation

This Snapshot is intended as a community temperature check. Final governance proposals will be created on dYdX Chain at the conclusion of each trading season.