Liquidity Provider Rewards

Overview of the Liquidity Provider rewards Program.

3.2% (31,643,838 $ethDYDX) of the token supply is allocated to be distributed to liquidity providers ("LPs") based on formulas that reward a combination of maker volume, uptime, two-sided depth, bid-ask spreads, and the number of markets supported. Initially, 7.5% (75,000,000 $ethDYDX) of the token supply was allocated for LP rewards.

  • In DIP 24, the dYdX community voted to reduce Liquidity Provider Rewards by 50% from 1,150,685 $ethDYDX per epoch to 575,343 $ethDYDX per epoch. As a result, the allocation for LP rewards decreased from 7.5% to 5.2%.

  • In DIP 29, the dYdX community voted to reduce LP rewards by ⅓ from Epoch 30-32 on dYdX v3 to the following values:

    • Epoch 30: 383,562 $ethDYDX

    • Epoch 31: 191,781 $ethDYDX

    • Epoch 32: 0 $ethDYDX

    After Epoch 31, there will not be any LP rewards on dYdX v3. As a result, the allocation for LP rewards decreased from 5.2% to 3.2%.

Since there is no distribution of Liquidity Provider rewards on dYdX Chain, the dYdX community in DIP 29 voted to migrate the remaining allocation for Liquidity Provider rewards to the dYdX Chain Community Treasury.

Objectives

  • Improve two-sided liquidity and programmatically reward liquidity providers.

Overview

To incentivize market liquidity, $ethDYDX will be distributed to liquidity providers based on formulas that reward participation in markets, maker volume, two-sided depth, spread (vs. mid-market), and uptime on dYdX v3. Any Ethereum address can earn these rewards, subject to a minimum maker volume threshold of 0.25% of maker volume in the preceding epoch. $ethDYDX will be distributed on a 28-day epoch basis over five years and are not subject to any vesting or lockups.

The following functions are used to compute how much $ethDYDX should be rewarded to each liquidity provider per epoch. In DIP 15, the dYdX community voted to revise the LP rewards formula by splitting the functions for BTC/ETH markets and non BTC/ETH markets. In DIP 19, the dYdX community voted to re-allocate the 0.05 stkDYDX weight to MakerVolume.

The above formula is broken out into step-by-step calculations below for detail:

Each market will have its own rewards pool that will be weighted differently. In DIP 15, the dYdX community voted to reduce the allocation of total rewards in BTC-USD and ETH-USDC to 10% each. The set of weights applied to each market is as follows:

FAQ

Who is eligible for liquidity provider rewards?

All liquidity providers who have achieved a minimum of 0.25% of maker volume on dYdX v3 in the prior epoch are eligible to receive ethDYDX as rewards in a given epoch.

dYdX v3 is not available to liquidity providers in the United States or Restricted Territories, as defined in dYdX Trading Inc.’s Terms of Use.

How much $ethDYDX did I earn in the Liquidity Provider Rewards program?

How do I claim my Liquidity Provider Rewards?

Liquidity Provider Rewards are surfaced in the dYdX API. Although not surfaced on the governance user interface, they are still claimable via the governance at the end of every epoch here.

When can I withdraw and transfer my claimed $ethDYDX Liquidity Provider Rewards?

$ethDYDX tokens rewarded via the Liquidity Provider Rewards will become claimable and transferable once the initial transfer restriction period is lifted.

Starting in Epoch 1, $ethDYDX tokens rewarded via the Liquidity Provider Rewards will become claimable 7 days (Waiting Period) after the end of each epoch.

How are two-sided depth, bid-ask spread, and uptime defined and measured?

Two-sided depth

A two-sided liquidity provider is a firm or individual who actively quotes two-sided markets on dYdX v3, providing bids and asks for a given market. They provide liquidity to the protocol overall.

For instance, a liquidity provider in the BTC-USD market may provide a quote of $30,000-$30,100, 10x50. This means that they bid (they will buy) 10 BTC for $30,000 and also offer (they will sell) 50 BTC at $30,100. Other market participants may then buy (lift the offer) from the liquidity provider at $30,100 or sell to them (hit the bid) at $30,000.

Liquidity providers are assessed on their ability to provide both bids and asks on a given market. Liquidity providers who only quote on 1-side (either just bids or asks) are excluded from receiving rewards due to the min() function.

Mid-market spread

One common measure of liquidity is the bid-ask spread: the spread between the highest bid (order to buy) price and the lowest ask (order to sell) price in a market. The difference between the bid and the ask, the spread, is the principal transaction cost of trading (outside commissions), and it is collected by the liquidity provider by processing orders at the bid and ask prices. The spread measures the cost of transacting immediately to a user.

The mid-market spread specifically takes the midpoint of the market. With this formula, orders below the MinDepth amount for each market are excluded also.

For instance, if a liquidity provider’s bid price for BTC-USD is $30,000 and the ask price is $30,100, then the bid-ask spread is $100. The mid-market price is $30,050, and the mid-market spread is $50.

Uptime

Uptime is defined as the percentage of time orders are in a given market providing liquidity on a minute-by-minute basis (with randomized sampling). Uptime excludes periods of time when outages exist on the dYdX Layer 2 Protocol itself. There may be edge cases where the exchange is slow or not accepting orders (but is not an outage)—in which case the above would not apply (but that would be considered a bug and all liquidity providers would be similarly affected, as with outages).

How is the maximum spreads per market defined?

The initial Max Spreads are as follows:

How is the minimum depth (size) per market defined?

The initial Min Depths are as follows:

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