1) The $DYDX tokenomics model is broken, with several key issues: - Revenues flow to dYdX Trading instead of to tokenholders - High Inflation & Large upcoming unlocks - V4 Shipping delays A thread on the problems & suggestions 👇 h/t @Crypto_Alex17 @MattHepler8

2) Over the past 6 months we observed other $DYDX stakeholders highlight these same issues on DYDX’s public channels. We expect significant improvements to the value & sustainability if the tokenomics are fixed, especially as users move from CeFi to DeFi derivatives post-FTX

3) Arca has engaged the @dydxfoundation , DYDX Trading & major stakeholders to address some of these issues but have been met with resistance and apathy. With product delays ahead of a major bear market unlock, it is time to make this discussion public. Let’s dig in:

4) Revenue flows $DYDX is a governance token mostly used for incentives/rewards. The token is most well known for its volume incentives. Like most incentive tokens in a bear market - there are more sellers than buyers and $DYDX now finds itself down -94% from its peak.

5) At the same time, since inception, dYdX generated ~$378m in revenue to the protocol (@tokenterminal), with ALL revenues flowing to dYdX Trading LLC Not exactly stakeholder alignment.

6) In reality, dYdX Trading seems to look a lot like Grayscale at the moment; both entities continue to accrue significant fees for themselves at the cost to investors with a lack of stakeholder alignment and no real accountability.

7) To be fair, we think the dYdX DEX is a much better product than $GBTC & has the opportunity to really benefit from FTX’s collapse. But from a tokenholder’s perspective, why do fees continue to accrue to dYdX Trading LLC when a token has been publicly traded for over a year?

8) At a minimum, dYdX Trading should provide a transparency report on how this $378m is being used. Is it being invested or distributed? Is it being paid out to employees/foundation members via salaries? How exactly does $378m just go unreported? dydx.exchange/blog/values

9) re: lack of transparency, the revenue numbers publicly displayed on Token Terminal have been reduced twice with no update from DYDX... this is what happens when your revenues accrue off chain to a privately owned vehicle instead of to the DAO with no transparency reports.

10) Incentives & Unlocks In February, DYDX will be unlocking 150m tokens for future employees, consultants and investors. This represents a 104% increase to the current circulating $dydx supply according to @MessariCrypto

11) The only way to offset inflation is via growth/profits & good tokenomics. Unfortunately the $DYDX growth/profits flow to dYdX Trading while the inflation goes to DYDX tokenholders. This creates the exact opposite incentive mechanism of what crypto is supposed to enhance.

12) Giving dydx the benefit of the doubt here, if you look at FDV, there is still value to dydx the business (if the tokenomics get fixed). But the supply / demand imbalance due to the unlocks will likely be more powerful than long-term value mechanics.

13) Even if the fees flowed to $DYDX tokenholders it would not solve the whole problem. The incentives structure initially led to growth in volumes and a majority share of the DDEX market, but volumes have declined as the rewards/fee arb has contracted (due to decreased price)

14) DYDX incentives should have been cut last year to focus on sustainability. Since revenues flow to dYdX Trading, none of this inflation has been offset. $DYDX governance also recently cut their “staking safety” module, which was the only supply sink. dydx.community/dashboard/propo...

15) Delays dYdX said tokenomics will change via V4 release, but this was slated for end of 2022 & has now been pushed off until end of Q3'23. Building good tech takes time, fine, but the fees should have flowed to the DAO from the start while we wait. dydx.exchange/blog/v4-full-dec...

16) Last week, $DYDX quietly updated a blog post from November to include a further delay (Q2 to end of Q3) without any public announcement. Again, improved transparency is requested, especially as fees continue to be siphoned away from the DAO. dydx.exchange/blog/v4-mileston...

17) If fees had been flowing to $DYDX tokenholders instead, tokenholders could subsequently vote on what to do with the fees and find creative ways to create tokenholder value to help offset some of the inflation.

18) How can $DYDX Trading & governance fix this? a) Recognize that good tokenomics catalyzes tokenholders to use their platform. $GMX grew significantly in 2022, and ate into dYdX’s market share. Some outperformance was due to them passing revenues to tokenholders.

19) b) Reduce unnecessary incentives. Sustainable token models succeed in both strong and challenging markets relative to models that promote growth at any cost. Continuing to provide a superior user experience will enhance growth as demand improves in a more sustainable way.

20) c) Distribute fees to the DAO ahead of V4. This will allow for treasury diversification and increase tokenholder alignment ahead of the tokennomics upgrade coming with V4.

21) $dYdX could be a profitable project with strong tokenomics in one of the few places in the market that has clear tail winds post the failures of FTX and other centralized platforms. However...

22) ... its tokenomics structure remains incredibly questionable going into a giant unlock, & the transparency is simply not good enough. It will remain that way until more tokenholders push for change. We’re happy to get the ball rolling, & hope we hear back from @dYdX

23) Disclosures: Arca and/or its affiliates own or trade $DYDX & $GMX, & we look forward to participating in tokenomics discussions. This tweet is not investment advice, investment research, legal advice, tax advice, a research report, or a recommendation.