On August 5, 2024, dYdX Trading published an overview of the MegaVault. MegaVault is a user-facing feature that enables dYdX Chain users to deposit USDC to provide liquidity to markets and receive yield in return. 

The MegaVault is a key innovation and important liquidity management tool for the dYdX Chain, designed to enhance market depth and leverage the volume-liquidity flywheel, a key driver of efficient and liquid markets.

Users will be able deposit USDC into MegaVault at any time and start earning yield immediately. At a high-level, depositors can think of deposits as owning a percentage of the vault’s net equity (i.e. vault’s USDC and position values). Yield (or loss) is distributed pro-rata among MegaVault depositors and can come from various sources: PnL on vault positions, trading fee revenue shares, and other potential incentives devised by the dYdX community.

An increase in PnL from vault positions or trading fee revenue shares will boost MegaVault’s total TVL, thereby proportionately increasing each depositor’s share of the vault’s holdings based on the total amount of USDC a user has deposited. As such, yield (or loss) is only realized upon withdrawal from the MegaVault.

In the initial version of MegaVault, users will be able to withdraw from MegaVault at any time after depositing, though users may experience “slippage” based on MegaVault’s status and positions as well as market conditions.

How MegaVault Works

USDC will accrue in the MegaVault from user deposits and potentially a percentage of protocol revenue, subject to dYdX Chain governance.

MegaVault serves as an aggregator vault that pools USDC and enables the MegaVault Operator to distribute USDC across various market-specific sub-vaults. Each market-specific sub-vault uses part of the deposited USDC to run an automated market-making strategy for a given market. When a user deposits USDC into the MegaVault, the funds are spread across these sub-vaults. 

Participants

1. User - A user who deposits USDC into the MegaVault.
2. Operator - MegaVault Operator elected via governance, allocates USDC between sub-vaults and adjusts parameters that control each sub-vault’s quoting strategy and behaviors.
3. Instant Market Listing Proposer - For listing new markets permissionlessly and instantly, a Market Proposer deposits and locks up a fixed amount of USDC (currently, 10k USDC, but this parameter can be increased or decreased with a dYdX Chain governance proposal) for a certain period of time (currently, 30 days, but this parameter can be controlled via dYdX Chain governance).

User Actions

Deposit

To begin, users must first transfer USDC onto the dYdX Chain, after which they can deposit it into the MegaVault or utilize it for trading. When a user deposits USDC into the MegaVault, behind the scenes the user is issued “vault shares” that represent their proportional ownership in the vault, with their share determined by the current value of MegaVault's net equity. For simplicity, users will only see the value of their position in USDC on the front-end.

At any given moment, a user’s MegaVault position is their initial deposit plus any profits or losses from all sub-vaults, along with their share of any extra USDC added to the vault (like trading fees or rewards decided by the community). User’s shares in the MegaVault are non-transferable and are a mere representation of the user’s position in the MegaVault. 

Withdrawal

Withdrawals are processed proportionately across the sub-vaults, with a withdrawal amount applied in a pro-rata fashion. Users can request withdrawals at any time, and the vault will allocate the necessary funds accordingly. 

When a user withdraws an amount of USDC, they may experience "slippage" due to changes in market conditions. This ensures that liquidity is balanced across all sub-vaults while allowing flexibility for users to access their funds whenever needed.

Note again, returns are only realized when a user withdraws some or all of their assets from the MegaVault. 

Instant Market Listings

To list a new market instantly, users need to deposit 10k USDC which is subject to a 30 day lockup period  (note that the locked deposit amount and the length of the lockup period can be modified at any time  via dYdX Chain governance). After a user makes an instant market listings deposit, the protocol executes an additional transfer to allocate these funds to the specific sub-vault associated with the new market, ensuring immediate liquidity. This initial deposit is locked for a period of 30 days to provide consistent liquidity for newly listed markets. This lockup period applies exclusively to deposits for instant market listings and does not affect other MegaVault deposits.

The lockup mechanism helps ensure that the vault maintains sufficient liquidity to support trading and yield generation, stabilizing the new market as it gains traction. If needed, the Operator can reallocate funds from the newly created sub-vault (the market-specific sub-vault established through the instant market listing) to other sub-vaults or hold them as unallocated equity within MegaVault. Likewise, if the new market gains traction and requires additional liquidity, the Operator can allocate more funds into this sub-vault, ensuring dynamic and responsive liquidity management across the vault’s holdings.

Lockup periods are designed to balance liquidity provision and user flexibility. For instance, when MegaVault allocates funds to a new market listing, these locked deposits ensure that there’s a reliable pool of USDC to meet trading demand and sustain market depth. This structured approach helps maintain robust liquidity, particularly in early-stage listings.

Vault Mechanics

MegaVault Net Equity

MegaVault Equity represents the total value of the vault, including USDC holdings and any market positions.

MegaVault Equity = Unallocated USDC in MegaVault + Sum of Equity of all Sub-vaults

Equity of Sub-vault

Each sub-vault has its own equity, which consists of USDC amount and the value of the sub-vault's open market positions.

Equity of Sub-vault1 = USDC in Sub-vault1 + Sub-vault1 positions

User Vault Share

When a user deposits USDC into the MegaVault, the amount is added to the vault and the user owns a given share of the MegaVault net equity. The concept of shares is abstracted away and the user will only interact in terms of USDC.

User Vault Share at Deposit = User USDC Deposit / MegaVault Net Equity

Returns

At a high-level, depositors can think of deposits as owning a percentage of the vault’s net equity (i.e. vault’s USDC and position values). Yield (or loss) is distributed pro-rata among MegaVault depositors and can come from various sources: PnL on vault positions, trading fee revenue shares, and other potential incentives devised by the dYdX community. Returns are only realized when a user withdraws some or all of their User Vault Share from the MegaVault. 

Returns = Sum of PnL of sub-vaults + % of Net Protocol Trading Revenues + the funding rates

To summarize, MegaVault is an aggregated liquidity pool composed of returns from multiple sources, all of which continuously contribute to the vault's overall holdings. MegaVault depositors indirectly share in the gains and losses of all sub-vaults, with their positions increasing in value if the combined holdings of MegaVault grow over time. Thus, depositors have access to the advantages of diversified, continuously compounding value without needing to directly manage or interact with individual strategies themselves.

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