Deciding on the future of the Fee Switch

Background

There has been lots of discussion recently within the Minswap community regarding $MINomics. The overall sentiment is that $MIN as a token lacks a use case and a role within the platform. $MINomics V2 was envisioned as a series of changes to strengthen the use case of $MIN within the Minswap protocol. The first of these changes is deciding on the future of the Fee Switch.

The Fee Switch refers to the 0.05% of swapping fees paid on the DEX. These are currently used to zap that $ADA into $MIN/$ADA LP Tokens which go to the DAO Treasury. As such, the Fee Switch is currently being exclusively directed towards one aim: to increase DAO owned $MIN/$ADA Liquidity. With this Liquidity being close to 14.5mn $ADA worth currently (August 2023), the case can be made to commence directing the Fee Switch towards another aim.

Option 1 - Directing Fee Switch $ADA towards other Assets

In the original Fee Switch post two options were laid out, to focus on increasing Liquidity on the $MIN/$ADA Liquidity Pool, or to focus on using the Fee Switch $ADA to a wider range of LPs (such as Tiger Farm assets like $WMT, $MELD, $LENFI, etc.). The focus on the $MIN/$ADA liquidity strategy won, likely because having a strong $MIN/$ADA Pool especially in earlier stages of the project is incredibly important.

As the Minswap protocol grows and matures, it might be worth exploring other options to increase and diversify the DEXs Protocol Owned Liquidity (POL). At the time the Fee Switch vote was done, there were no stablecoins on Cardano. There currently are options such as $DJED and $iUSD or incoming ones like $USDM and $USDA. With the incoming launch of the Minswap Stableswap, it could be interesting if the protocol owned stablecoins and provided them in the Stableswap to earn yield on them. Another option would be if Fee Switch $ADA would be used to acquire shares of “blue chip” Cardano assets in their $ADA Liquidity Pools such as $LENFI, $WMT, $MELD, etc.

It is to be noted that when it comes to Protocol Owned Liquidity (POL), there are other ways to acquire it such: the Launchbowl service (used by projects to bootstrap liquidity, the projects pay a share of their LP as a fee) and Batcher Fees (which starting August will begin to be distributed 50% to the DAO Treasury).

If this Option is chosen, it would be necessary to conduct a second vote to evaluate whether to focus on Stablecoins, on other assets, or both.

Option 2 - Directing Fee Switch $ADA towards $MIN stakers

In the original $MINomics article, we evaluated the staking model of DEX Tokens that was trending then. This model had two main issues:

  • The staking of doesn’t have any real purpose: unlike staking $ADA in the Cardano network (where you contribute to the validation of blocks), in the case of DEX tokens where one can stake to get more of the DEX token, the staking does not have any necessary function in the protocol.

  • Misaligned incentives: the idea that fees collected from swappers are used to buy the DEX token on the open market to increase the buying pressure and then given to stakers, is usually counterproductive. Because this means that for stakers, there’s no way to take profits from staking the DEX token except to just sell it.

Both of these issues can be solved through the following:

  • Require $MIN stakers to “soft-lock” their $MIN for a certain amount of time: by locking up $MIN for a certain amount of time, $MIN stakers assume an economic risk. It benefits the protocol as this $MIN remains out of circulation. It’s a “soft-lock” in that you may unlock your $MIN at any time, however doing so early means you would forfeit your accrued rewards. Forfeited rewards from early unstaking would be distributed to the other $MIN stakers.

In order to accommodate different risk profiles, the staking periods could be 1 month, 3 months, 6 months or 9 months. Each period should have a different boost on rewards, so that the longer you stake, the more your rewards are boosted. The boosts would work the following way:

      1) Staking $MIN for 1 month - gives an unboosted $ADA APR
      2) Staking $MIN for 3 months - gives a 3x boosted $ADA APR
      3) Staking $MIN for 6 months - gives a 6x boosted $ADA APR
      4) Staking $MIN for 9 months - gives a 9x boosted $ADA APR
  • Distributing rewards directly in $ADA: rewards to $MIN stakers should be distributed strictly in $ADA and not $MIN. This way $MIN stakers wouldn’t need to sell $MIN to capitalize on their yield, they could directly claim $ADA. It’s important to highlight that this way $MIN stakers earn Real Yield directly coming from Swap Fees, in $ADA. It doesn’t consist of inflationary rewards, it’s purely coming from organic Trading Volume. Note that the Fee Switch $ADA Revenue would exclude that coming from the $MIN/$ADA Pool in irder to avoid selling $MIN for $ADA to rewards $MIN stakers.

So, how would these $ADA Real Yield rewards look like?

Here is the approach we took to estimate them:

First, taking $ADA generated from the Fee Switch data from December 2022 (when the Fee Switch was activated) until July 31st. The average number will be taken to estimate the annualized $ADA earned.

Second is assuming how much of the circulating $MIN gets staked, and how much gets staked for each particular staking period. This data is hard to estimate. We are assuming the higher % towards longer staking periods as they have more boost:

MIN Staked (% of circulating) = 55% (given around 45.5% of circulating $MIN is in $MIN/$ADA LP)
 Staked $MIN for 1 month - 20%
 Staked $MIN for 3 months - 20%
 Staked $MIN for 6 months - 30%
 Staked $MIN for 9 months - 30%

With those assumptions, here are the APR based on Historical data:

 Staking $MIN for 1 month = 0.982% $ADA APR
 Staking $MIN for 3 months = 2.947% $ADA APR
 Staking $MIN for 6 months = 5.894% $ADA APR
 Staking $MIN for 9 months = 8.842% $ADA APR

Making these assumptions is not an exact science, and it’s nearly impossible to predict how $MIN stakers will behave. As such, we are making public the calculator for anyone to estimate $ADA APR for staking $MIN for different scenarios:

https://min-apr.minswap.org/

Please also be mindful that these are historical numbers based on the Fee Switch $ADA revenue earned from December 2022 to July 2023, it does not ensure similar future returns.

Option 3 - Keep directing the Fee Switch towards accumulating $MIN$ADA LP

The third option is to keep things as they are now redirecting the Fee Switch towards accumulating MIN/ADA LPs. This option would be to continue prioritizing the $MIN/$ADA LP through the “soft-buyback” mechanism where $ADA from the Fee Switch is used to Zap into this Pool periodically.

Should this vote go on-chain?

  • Yes
  • No
0 voters
7 Likes

Very cool. Is it inappropriate to consider the 1 ada batcher fee as part of the revenue mix or is this exclusively concerning fee switch, with batcher fees solely going to treasury where its purpose can be determined at a later date? Are these options an either/or proposition or could there be a mix? Thanks Purrito.

4 Likes

Very impressed guys. Very impressed. I was waiting to see if the Min lockup would be in ada or min for the same reason and you guys are already ahead of me on it. Lets get this darn thing voted on!

3 Likes

Hi. Thks to the team. Great Work!
Why not considering another option similar to nr 1 but where you also derive part of the fees to Ada min farmers? Ie 50% destinated to increase liquidity of the dao (in Ada min pools and in other pools) the other 50% destinated to reward in Ada Ada min farmers. I personally dont like that much min stacking.

1 Like

One thing I would recommend that we add is the ability to withdraw staked MIN early and forfeit all accrued rewards which are redirected to the POL

This would:

  1. Allow people to stake more calmly knowing that they can still pull their funds if needed and use them (at the cost of the rewards)
  2. Further allow the POL to grow while giving users more flexibility to manage their staked MIN
4 Likes

Good and well prepared proposal!
let make it a vote please!

5 Likes

GM, farmers have a significant advantage with this proposal which is to lock their rewards to directly harvest ada, I think this is how farmers should see this proposal.

I am unsure that giving up your rewards is enough of a penalty. But i am open to this idea if it is feasible.

This would only work if you as the MIN locker could not harvest your ADA real yield until the lock period is over. Idk if that is possible.
We would need devs to comment saying it is possible

I prefer this idea… MIN that is locked is automatically vesting. So if you lock for 1 month, after 15 days you could remove 50% of your MIN (because its vested).
If you want to unlock the rest of ur MIN, you have to pay a penalty in MIN. That penalty is x% of ur unvested MIN. And that penalty MIN is burnt or sent to DAO.

For example, say u locked 1000 MIN for 6 months and the penalty is 10%. If after 3 months u decide to withdraw all ur MIN you will get back 950. 500 is vested. 500 unvested and gets the 10% penalty removed (which is 50)

2 Likes

this is kind of brutal but necessary for min stakers to forecast the fee switch revenue from the protocol. In this way min staking incorporates stakers into a concern for the health of the protocol.

This vote concerns the Fee Switch $ADA exclusively.

1 Like

thanks, and what about the other concerns? Any possibility compromising some fee switch from stakers to POL or do you anctipate Batcher fee to treasury for POL accumulation?

Yeh, some good points. So, there is some points we have uncovered since posting the original forum Proposal:

  1. Should $MIN/$ADA Fee Switch Revenue be included in the $ADA directed towards $MIN Stakers? - If it is, it would mean actively selling $MIN for $ADA to give back the $MIN stakers. I personally would favour and include in this proposal the option that $MIN/$ADA LPTs (as you might remember, Fee Switch accrues in form of LPTs which are sold for $ADA) are not market sold for $ADA and instead that POL is accumulated for the Treasury.

  2. In case the condition is implemented for $MIN stakers to be able to unlock their $MIN anytime at the expense of forfeiting their rewards, where would the forfeited $ADA be directed towards? In my opinon, and what I would include in the Proposal (still discussing how the implementation would work with devs) the forfeited rewards would all go back to all other $MIN stakers who do not unlock. This way the more people unlock early, the more incentive not to unlock early.

  3. Regarding POL, Batcher Fees could be still be used towards that as well as other Revenue Sources.

3 Likes

what a time to be alive

2 Likes

If I understood the first part correctly you are saying that we just keep the lpts in the treasury right? One more question, what exactly are we planning on using the POL treasury for again? I know that the community will have votes to make use of it but were there any things that I missed which it helps with achieving currently?

Also I think if the fee switch continues to accumulate lps for the treasury, the heavy liquidity would make it harder and harder for the needle to actually move on price. What if we instead had the fee switch just use the ada portion of the fee switch to buy more min and then hold that in the treasury? That way the needle would still move easily on asset value and more min will essentially be taken out of circulation to be used by the treasury.

Little bit hard to figure out what exactly you are asking, but let me try to answer.

The post above suggests that to avoid causing sell pressure on $MIN, the Fee Switch should avoid using $MIN/$ADA LPTs (which is the form of how Fee Switch revenue accrues from Trading Fees) sell the $MIN for $ADA to distribute the $ADA to $MIN stakers. Instead, the Fee Switch should consider all LPs except $MIN/$ADA, and $MIN/$ADA LPTs accrued should not be sold, but just kept to grow that POL.

Regarding plans for POL, you should clarify which POL you mean. Is is $ADA from Batcher Fees? Or POL in Minswap Liquidity Pools? I dont see a clear reason to touch the POL in Minswap LPs, it should stay there to strengthen Liquidity on the DEX. regarding Batcher Fees, we outlined some ideas here: https://minswap-labs.medium.com/51a96c0449a0

I (and I dont think many people im DeFi really) dont view high liqudity as an issue. It makes trading the token cheaper and less volatile. More liquidity is always better.

1 Like

Ahhhh ok I see. So we would still do it for all other lpts except min. I think that answered my question.

Also you are right as for the liquidity. I was just shootin the shit in terms of ideas to get some viees on it haha. :grin::+1:

1 Like

I love Option 2, this would greatly improve the protocol, and the first one I don’t like.

I have a small concern, if the change from Fee Switch to Option 2 is approved and done, in the future will they propose something new to change it to FeeSwitch or add liquidity to other Assets?

Because I like it, I would like to make this proposal permanent, if they want to change the fees in the future, let’s say, I would propose to leave 0.05% for Staking and 0.05% fee switch and 0.2% Liquidity Providers.

Time will tell buddy, but if this works as expected and there are 9 month lockup periods then you wont have to worry about it changing for a while because we cant just yeet the 9 month stakers and repurpose the fee switch lol

1 Like

When will they launch the proposal in the DAO?

Forfeited rewards from early unstaking would be distributed to the other $MIN stakers.

Very cool my friends, im comming back to Cardano now and its a great time to be in a good dex