The derivatives market is often described as a zero-sum game. In a zero-sum game, the gain of one participant is exactly balanced by the loss of another. This means that the total amount of wealth in the system remains constant; it is merely redistributed among the participants.

In the context of derivatives, such as options or futures, when one party profits from a trade, another party must incur a corresponding loss. For example, if a trader buys a futures contract betting that the price of an asset will rise and it does, the seller of that contract (who bet on the price falling) will lose money. The total profit and loss in the market, when summed up, equals zero.

However, to this equation, we should also add another important element: platform commissions or fees. Trading platforms typically charge fees for executing trades. These commissions mean that, in reality, the total wealth in the system decreases slightly with each trade, as a portion of it is taken by the platform. Therefore, while the market is theoretically a zero-sum game between participants, the presence of commissions makes it a negative-sum game overall, where the total value available to be redistributed among the participants decreases over time.

This can be offset if the participants have external sources to compensate for these losses. Therefore, they could even add funds to cover the losses, and if they generate additional profits externally, they might even be able to increase their positions in the market despite their losses. In such cases, even though they are losing in the derivatives market, their external gains could allow them to continue trading, or even expand their trading activities. This dynamic can introduce new capital into the system, which can influence market behavior and participant strategies.

Retail traders are often the weak link in this type of trading and rarely have strategies that can compensate for these losses. Unlike institutional traders, who may have access to advanced tools, algorithms, and large capital reserves, retail traders typically operate with limited resources and information. This lack of sophisticated strategies and external income streams makes it difficult for them to recover from losses incurred in the derivatives market. As a result, retail traders are more vulnerable to the negative-sum nature of the market, where not only do they face potential losses from their trades, but they also have to contend with platform fees, further eroding their capital over time.

Market makers are often the big winners in this type of trading. They typically prefer to operate in markets with a high presence of uninformed trading, which often comes from retail traders. Since market makers provide liquidity by constantly buying and selling, they benefit from the spread between bid and ask prices. In markets where uninformed traders dominate, market makers can more easily exploit the price discrepancies that arise from less sophisticated trading strategies.

Market makers are often the big winners in this type of trading. They typically prefer to operate in markets with a high presence of uninformed trading, which often comes from retail traders. Since market makers provide liquidity by constantly buying and selling, they benefit from the spread between bid and ask prices.

Given this situation, is it realistic to expect that we will find retail traders who will engage in long-term trading? The reality is that very few of them will be able to sustain themselves in a leveraged environment. This is why derivative brokers typically allocate significant resources to marketing, aiming to attract new traders as the majority of the previous ones lose their capital. In the long term, the goal should be to identify informed traders who, like market makers, can sustain themselves in a more sustainable manner.

• **There is an opportunity to take care of our retail traders.***

This is the harsh reality, but it can certainly be mitigated in several ways. First, by providing better education to traders or guiding them toward more sustainable strategies, such as pair trading or long-term investment strategies with lower leverage (while making an effort to explain the risks involved). In other words, taking care of your traders and striving to cultivate participants who, even if they experience losses, can still derive external benefits. For example, the strategy of incorporating ETH as collateral is also a way to create external benefits.

Another approach is to internalize market making so that the project can capture the profits from retail traders' losses by acting as their counterparty. This capital could then be used to provide more education and attract additional traders, ultimately increasing the platform's overall capital.

It makes little sense for the project to pay an additional $20 million in tokens for an activity that is already extremely profitable for market makers, especially when these tokens will later be sold on the market, putting downward pressure on the price of dYdX. A more viable approach might be to internalize this activity with full transparency to ensure that conflicts of interest do not work against our traders. However, if the asset's price is anchored to oracles, this provides a strong safeguard against creating prices that could liquidate traders to increase protocol profits. Another option is to find a market maker willing to share these profits with the protocol, where we can explore various alternatives

 *The new incentive strategy should shift away from paying Market Makers*