DRC: A Step Towards a More Equitable Liquidity Provider Reward Structure

Summary

Wintermute recently conducted research on the type of liquidity dYdX incentivizes for on its platform and its implications on reward distribution, LP competition, and the trading environment for users. We found that:

• Liquidity provider rewards have been largely dominated by 2 addresses for a significant period of time
• dYdX is overpaying for deep liquidity, while more active liquidity is being penalized, i.e., Liquidity providers are rewarded for their ability to show size, rather than compete for market share
• Introducing maker volume into the calculation of rewards and reducing the weight on stkDYDX, depth & spread, will allow for a more equitable reward share -Rewarding maker volume will incentivize active liquidity at the top of the order book; tightening spreads and creating a better trading environment for users

Wintermute proposes to introduce maker volume through Proposed Change A with a parameter weight of v = 0.45, as well as reduce the parameter weighting of stkDYDX and depth/spread to s = 0.2 and d = 0.35, respectively.

Voting options

1. Yes: Execute proposed change A with weights v = 0.45, d = 0.35, s= 0.2
2. No: Do nothing

Links

Liquidity Provider Rewards Forum Discussion