DYdX's attack? Learn the ins and outs of the 45% reduction in trading rewards

On March 14, the dYdX community voted to pass the DIP-20 proposal, deciding to reduce transaction rewards by 45% (about 1.3 million tokens). The remaining 55% (about 1.58 million tokens) of rewards will be retained by the treasury and can be used for other purposes through community voting. The approval rate was 83%, reflecting that the dYdX community has taken a practical step towards improving the DYDX token.
In the context of turbulent market conditions and the pressure from emerging competitors such as GMX, reducing trading rewards can lock in part of the circulation to support token prices and give the community more financial leeway to plan for the future development of dYdX.
Currently, dYdX's 24h trading volume is around $2 billion. Reducing trading rewards will inevitably have an adverse impact on trading volume. Overall, this is part of dYdX's V4 Vanguard plan, the core of which is to transform the use and release standards of DYDX and redesign the incentive path in the hope of solving the problem of inefficient trading on dYdX.
Fight inflation and return the money to the national treasury
The direct reason for this update of the distribution mechanism is the change in the market environment. The DYDX token has fallen by nearly 70% in the past year, and its market share has also fallen from 95% a year ago to the current 70% as it faces competition from up-and-coming players such as GMX.
Although some community members disagreed, given the current market conditions, a total of 776 participants voted in the voting test on February 15, and it was finally passed with 91.6% (about 27 million tokens) of votes in favor.
Furthermore, the rewards allocated to liquidity providers are too high compared to the community/reward treasury, so trading rewards need to be significantly reduced. In addition, reducing trading rewards is also in line with the new distribution model designed in the V4 Vanguard proposal.
In the initial five-year distribution model of the total supply of DYDX, 25% was allocated to trading rewards, while LP (liquidity providers) and the treasury accounted for only 7.5% and 5% respectively. During the stabilization period after the protocol was launched, although the trading rewards were reduced to 20.2%, it was still higher than LP (7.5%) and the treasury (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 the treasury, etc. However, for now, we can only limit our focus to the community allocation ratio because this is the only thing that can be changed.
According to the dYdX mechanism design, starting from five years after its launch, 2% per year is the maximum inflation rate limit of $DYDX. Therefore, the overall trend of dYdX is to gradually reduce the circulation in the market to counter the value dilution caused by inflation expectations.
After DIP-20 reduces the trading rewards, the excess DYDX will be deposited into the treasury. In fact, reducing the trading rewards and depositing them into the treasury is a traditional practice of dYdX. In the previous DIP-14, the reward for staking USDC was set to 0, and about 380,000 DYDX previously distributed to USDC pledgers were deposited into the treasury; in DIP-16, the community has decided to reduce the trading rewards by 25%, and reduce the trading rewards from about 3.8 million DYDX to about 2.8 million DYDX, and the remaining about 950,000 DYDX will be deposited into the treasury; in DIP-17, the reward for staking DYDX has been set to zero, and about 380,000 DYDX previously distributed to pledgers will be deposited into the treasury.
After multiple rounds of nerfing, transaction rewards still account for too high a proportion. Even after DIP-16 reduced transaction rewards by 25%, transaction rewards still account for 44% of the total amount of all tokens released, and there is still a high room for decline.
After updating the token model, the DYDX share of the transaction reward reduction will be transferred to the treasury to ensure that there are sufficient funds to support the development of the protocol with the upcoming dYdX V4. The dYdX DAO will evolve into an autonomous body including multiple subDAOs, including the potential Growth SubDAO, which will require financial support from the community.
V4 upgrade is coming soon
The direct reason for reducing trading rewards is to provide financial support for the V4 upgrade, but in the initial stage of implementation, it is necessary to face the dilemma of traders fleeing and declining trading volume.
Currently, there are large traders with more than 50 million US dollars who have "threatened" to leave dYdX, but the community believes that trading volume relying on subsidies cannot be sustained, and a robust protocol must serve real users.
Another consequence is a trend towards greater centralization of voting rights. The main value of dYdX lies in community governance, and voting rights are proportional to the amount of DYDX held. Reducing transaction rewards will directly increase the value of existing DYDX by reducing future supply.
As part of the dYdX V4 upgrade agreement, trading rewards are part of a series of improvements that are generally aimed at increasing the value of DYDX tokens and boosting dYdX trading volume. The specific content includes the following:
Reduce trading rewards by 45%; Adjust Maker & Taker fees; Introduce a market maker rebate program; Cancel DYDX/stkDYDX trading fee discounts; Reduce the amount of DYDX released each year and modify the reward distribution; Adjust the trading 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 approximately 45%, it is hoped that before entering inflation, the amount of DYDX released will be controlled by reducing community rewards, so as to eventually reach an inflation rate of 2%.
If we want to further remove barriers to entry for traders and LPs, the best way is to reward LPs based solely on trading volume rather than adopting a complex 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-coin holding users; on the other hand, transaction rewards have played the role of rebates based on the fees paid by users, and 94% of DYDX/stkDYDX holders are not active traders in the protocol.
Reducing transaction rewards and removing transaction fee discounts will no longer reward inefficient staking and inactive traders, but instead reward any participant based solely on the value they bring to the protocol.
 Summarize
Trading rewards were generally a simple and effective incentive system in the early days of the protocol. The rewards were proportional to the transaction fees paid by users in a given period. This mechanism was very effective in terms of the growth rate of active users because it was essentially a reward for all trading activities, regardless of the market segment they traded and the returns. However, trading rewards are used as a mechanism to develop long-tail markets or increase market trading volume, which will be very inefficient.
After the dYdX protocol entered a stable development period, the simple and crude incentive model in the early stage of entrepreneurship was no longer suitable for the new era and needed to be replaced by more refined market operation measures. The most direct way was to shift to providing a better user experience, drive away pure speculators and arbitrageurs, and stabilize the real user group.