Baldwin moved to Rodney Parade this season on an initial one-year deal.
The 29-year-old has made eight appearances in all competitions, scoring against parent club Worcester in the European Challenge Cup.
Dean Ryan, Director of Dragons Rugby, said: “Luke has made a big impression in his time with us both on and off the field and we’re pleased to now extend his stay.
“He is a talented scrum-half who adds competition and depth to our senior squad alongside the likes of Rhodri Williams and Tavis Knoyle.
“Luke’s experience is also beneficial for the scrum halves in our academy as we look to develop young Welsh talent at the region.”
Baldwin said: “I’m delighted to be at Dragons for another season.
“It has been enlightening to be part of such a challenging, elite and professional set-up.
“Dean and the coaching staff understand how to get the best from the playing group which I believe is fundamental in building a successful culture.
“I’m looking forward to enjoying another year with the boys.”
