We invite you to delegate to our validator if you find these analyses interesting.

Mintscan

Interchain block explorer and data analytics for sovereign blockchain networks.

https://www.mintscan.io

                                *Derivatives are a zero-sum game*

It is important to analyze the capital flows that the governance proposals ultimately generate, in order to assess the value created for the protocol.

The protocol's profitability should come from charging fees on all trading activity and creating the necessary conditions to become the most competitive exchange possible.

We would add an additional component to the two that were highlighted in the forum regarding the competitive qualities a trading venue should have. @carlbergman

1. Orderbook liquidity. Can users easily trade on any market with minimal slippage?

2. Execution. Can users execute with low latency and fast guarantees?

3. Funding Rate. Is it the competitive interest rate for long-term leverage?

However, in traditional exchange models, profitability often comes from sources other than commissions, making it important to ensure that these do not create conflicts of interest with clients. This is where regulation usually plays a role, to ensure clients are not taken advantage of, which is necessary.

In this zero-sum game, we have different types of players

1. Traders: Non-professional traders in this leveraged betting environment typically lose money, with around 80-90% of them facing losses. Only about 10% manage to be consistent in their trading

2. Hedgers: This type of trader seeks to hedge their assets. Depending on the type of activity they engage in, they may look for long or short hedges. Their goal isn’t to make or lose money but rather to cover their risks, and they’re willing to pay an interest for this protection

3. Market Makers: This type of trader seeks to earn returns by using capital to provide liquidity to the market and generate profits. Arbitrage can be performed across different exchanges to profit from price differences, thereby synchronizing various prices

The long-term clients of exchanges will be sustainable traders and hedgers. The platform will need to make a significant effort to attract new traders, as 80% of them will cease to be clients over time.

Let’s analyze the different proposals through this lens.

Our analysis of capital flows led us to conclude that the flow in this program was as follows:

        *dYdX Holders Dilution > Market Makers (example: wintermute)*

Our main conclusion was “We believe there is room for improvement in the incentive design to regain leadership in growth” And it would not generate long-term trader retention, as has ultimately been observed. For that reason, our vote was negative.

The concentration of incentives in a few wallets confirms this capital flow. Over 20 million tokens were primarily distributed to Market Makers, who sold on the market, further pressuring the price. The increased liquidity was not a sufficient incentive to attract more traders or to grow the project.

• 20% of all protocol revenue routed to the MegaVault and 20% routed to a Vault with a negative correlation to the traders' P&L

The data we currently have on the Vault's operations is better than that of the incentive program, as it appears to generate liquidity at a lower cost, though capital flows are similar. In the end, a few wallets concentrate the capital invested in these vaults. However, if volume figures are high, this may offset this capital flow. Ideally, instead of going to these few market makers, these gains could be distributed more broadly among profitable traders.

The main risk is that the market makers end up draining all the capital from the Vault, especially if they are able to identify and exploit inefficiencies in price formation.

We would consider it a much more sustainable strategy to counter non-profitable traders so that these vaults could provide liquidity to these traders, thereby aligning the vault's performance directly with the traders' P&L on the platform. These types of strategies have been successfully implemented in platforms like GMX and Hyperliquid.

Our recommendation would be 20% allocated to the current Vault strategies and 20% to strategies with a negative correlation to the traders' P&L on the platform. This allocation could be reviewed based on the performance data.

• 20% of all protocol revenue routed to the Treasury subDAO.

It’s important for the project to capitalize itself with a solid treasury, so we would increase that percentage to 20% in these initial stages. This capital can later be allocated to strategies once they have a more established track record.

• Above an $80M level of annual protocol revenue, the Treasury subDAO could consider a buy & stake program

We find this proposal to make perfect sense in aiming to use capital for growth once a certain level has been reached

Given the goal of enhancing dYdX performance and considering that the current explanation of profitability did not contribute to the project’s objectives, I believe minimum performance and latency conditions should be established to validate the project.

In this regard, validators with significant delegation but poor efficiency should be encouraged to delegate validation to top node professionals.

A dedicated group should be formed to study the optimal configuration. Ultimately, the project would maximize its value by improving performance with the highest possible number of validators

Enabling ETH as collateral would allow for better funding rates within the protocol. This would enhance the exchange’s competitiveness, making it a more attractive option for long-term positions. Additionally, it would enable investors to offer short positions, which are typically the most challenging to provide. In this case, the capital flow would be as follows:

          *ETH-holding investors share profits > Leveraged investors.*

This would create long-term investors for the protocol. It would be a product that competes directly with Ethena and could later be expanded to other assets.

This option could also be implemented by swapping USDC to DAI under an agreement that could allow the protocol to generate additional revenue.

It would make the exchange much more competitive by reducing the funding rate.

It is interesting to carry out this reduction, although given the potential impact on an operation that has already been significantly reduced, we would favor a much more gradual reduction to be able to study the impact and the traders' sensitivity to this incentive.

The reasons outlined in the report are reasonable; however, we believe that this policy could generate a significant reputational impact for the project. At the very least, we would always provide the option to recover those tokens through a more manual process at some point. I think closing off that possibility could cause significant reputational issues, particularly with traders who, due to some issue, might not be able to meet the window.

I would at least extend that manual option for a few years. And it could have an associated cost of 5% for the foundation's administrative tasks, but at least it would provide that option