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Liquidity Provider Rewards

Foundation
Foundation
liquidity-provider-rewards
Foundation
Foundation

While dYdX’s Trading Rewards program rewards users based on a combination of their fees paid and open interest, the Liquidity Provider Rewards program rewards users that provide deep, liquid two-sided markets that benefit the overall dYdX user community.

The Liquidity Provider Rewards program focuses on the “supply” of liquidity by incentivizing two-way traders—such as market makers, high-frequency traders, and pro traders—to provide liquidity to the market.

In traditional markets, centralized exchanges run “jump ball” style incentive programs to incentivize their biggest traders to trade significant volume. Jump ball programs generally allocate a fixed amount of rewards to the most active market participants in a market based on certain criteria.

Using a similar high-level framework, the Liquidity Provider Rewards program provides a set amount of DYDX that can be programmatically earned in each market/pair in each epoch period by two-sided traders.

The amount of DYDX earned by users is proportional to their relative Q-score, which is a representation of their two-sided quoting performance in a given epoch in a given market.

How It Works

7.5% of the initial token supply (75M DYDX over 5 years) is allocated to Liquidity Provider Rewards. 1,150,685 DYDX will be distributed per 28-day epoch.

Any geographically-permitted Ethereum address can earn these rewards, subject to a minimum maker volume threshold of 5% of maker volume in the preceding epoch (resets every epoch). This maker volume requirement helps to prevent gaming of the liquidity rewards with vanishing liquidity.

Refer to the following visualizations of the relevant data explained below:

During a given epoch, trader quoting activity is scored based on the below criteria (mathematically defined at bottom):

  • Two-sided depth: Quoting on both

    the bid and the ask side of the order book simultaneously (two-sided), with more size receiving a higher score. Each order unit must be larger than the order minimum in order to count. Current order minimums are specified below for each market:

  • Mid-market spread: Quoting a tight spread vs. mid-market on both bid and ask side. Mid-market spread must be less than the maximum spread in order to count. Current spread maximums are defined below for each market:

  • Uptime: Maintaining uptime on both sides (always being online). Uptime is exponentially important based on the below formula, and it is calculated over the entire epoch. Note that uptime only occurs when both the bid and the ask (larger than minimum order sizes) are within the maximum spread of the mid-market price. (It is not simply the time spent quoting in the market.)

This Liquidity Provider Rewards dashboard highlights uptime performance for current eligible participants as well as the importance of uptime for earning rewards.

  • Per-market: Each market has a different allocation of rewards that can be earned. Current allocations are defined below (20% for BTC and ETH, and 60% split equally across the other long-tail markets):

Formula

The following function is used to mathematically compute how much DYDX should be rewarded to each liquidity provider per epoch in each market. The amount of DYDX earned is determined by the relative share of each participant’s QFINAL in that market:

Orders below a certain minimum depth (size) per market are excluded, and orders over a certain maximum spread (mid-market spread) are excluded as well. Quoting insufficiently means orders will be excluded from the Q-score calculation.

Liquidity provider performance is monitored and calculated on a minute-by-minute basis (using randomized sampling) and aggregated into a QFINAL for a given market. Given minute-by-minute sampling, each epoch has 28 days 24 hours 60 minutes of data points for a total of 40,320 data points per epoch in total.

Liquidity providers earn rewards based on their relative QFINAL share per epoch.

Visualization

The Liquidity Provider Rewards Dashboard provides a visualization of the above methodology and data. It will be useful to any current participants in the Liquidity Provider Rewards Program as well as any future participants that want to understand the mechanics and position for success. The data shown here is cumulative, so the latest data point is the most relevant (and can shift significantly before the end of an epoch).

The Reward Coefficient on the dashboard is a measure of how much rewards a user can get for providing liquidity into a given market/pair. Anything at 1 is average rewards. It is more efficient for users to focus liquidity on markets with a high reward coefficient (undersubscribed).

Users can also track their eligibility for the Liquidity Provider Rewards Program in the next epoch by seeing their maker volume contribution % here.

Liquidity provider rewards data can also be pulled from the API.

Next Steps

  • Read the documentation for more detail on the Liquidity Provider Rewards Program.

  • Start trading now at https://trade.dydx.exchange/ or via the API.

  • Go here to check your current maker volume contribution % to see if it is >=5% at the end of an epoch (granting eligibility for rewards in the next epoch).

  • If you’re eligible for rewards in a current epoch, you can see your expected rewards via API or GUI.

  • Optimize your rewards using the analytics, dashboard, and Reward Coefficient.

  • Earned DYDX can be claimed 7 days after the end of every epoch at https://dydx.community.

  • Participate in governance at https://forums.dydx.community/.