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dYdX: Liquidity Providers' Incentive Programme Review

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  • Colin Chan

Abstract

Liquidity providers are currently incentivised to provide liquidity through the LP Incentives Programme on dYdX. Based on the various parameters - makerVolume, depths and spreads, they are rewarded accordingly based on their activities. Given the maturity of the BTC and ETH markets, alongside other altcoins which enjoy a consistent amount of liquidity, this paper aims to update the formula to encourage more active and efficient liquidity, improving the overall trading experience. In this research, I begin by providing a basic understanding of spread management, before introducing the methodology with the various metrics and conditions. This includes gathering orderbooks on a minute interval and reconstructing the depths based on historical trades to establish an upper bound. I end off by providing recommendations to update the maxSpread parameter and alternative mechanisms/solutions to improve the existing market structures.

Suggested Citation

  • Colin Chan, 2023. "dYdX: Liquidity Providers' Incentive Programme Review," Papers 2307.03935, arXiv.org.
    • Handle: RePEc:arx:papers:2307.03935
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    References listed on IDEAS

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    1. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(1), pages 33-53.
    2. Lo, Danny K. & Hall, Anthony D., 2015. "Resiliency of the limit order book," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 222-244.
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