Minswap V2 Fee Structure and MIN/ADA Fee [MIP 2.1] - Temp Check

Background

Minswap Labs has been working on Minswap V2 since before it was announced in November 2023 at the Cardano Summit. This new Smart Contract brings a set of improvements in scaling, composability, new features and more which you can find here. Deployment of a new Smart contract requires laying out an initial plan for how Minswap V2 will work, potential Fee Sharing programs and the Fee on MIN/ADA. We describe the plan below and seek DAO approval.

Scope of Change

By voting affirmatively, the DAO will:

  • Approve the initial Minswap V2 Fee Structure strategy
  • Approve setting the Fee of MIN/ADA at 1% Sell Fee 0.3% Buy Fee
  • Approve the Fee Sharing Pilot program with SNEK
  • Approve not changing the Fee Switch for MIN stakers, leaving it at 1/6th for all Pools
  • Approve the MIN/ADA Additional Fee Switch to MIN Stakers

Minswap V2 Fees

In Minswap V2, liquidity pools can be created with a transaction fee ranging from 0.05% to 20%. To prevent liquidity fragmentation and ensure efficient market operations, only one liquidity pool per asset pair will be allowed.

Our research has shown that for teams looking to deploy their own liquidity and who control a majority of their LP tokens, the standard fee of 0.3% Minswap V1 might be too low compared to what markets dictate. Our default recommendation for base fee would be more around 0.6%-0.75%. Please read the Dynamic Fees and Impermanent Loss and Minswap Dynamic Fees articles for more information. A token that has higher concentration on Minswap (1 DEX) will likely be able to increase the base fee (generating more fees for LPs) without affecting trading volumes much.

Since liquidity pools are permissionless, Minswap Labs will exceptionally be reaching out to top projects to configure this fee on V2. Labs will also seed the pools manually at market prices on V2 to prevent any unexpected or malicious actors and reduce the chance of any negative impact or wrong fees, ratios etc.

After the launch, the trading fee on a liquidity pool can be adjusted to any amount within the range of 0.05% to 20% following a vote via the LP Governance Dashboard. Please note that this dashboard will not be available at the launch of V2 but will be introduced thereafter. This governance feature will empower liquidity providers to directly influence fee settings, ensuring that our fee structures remain competitive and aligned with the evolving market conditions.

Approve setting the Fee of MIN/ADA at 1% Sell Fee 0.3% Buy Fee

This Fee setup is proposed by Marco and Elder Millennial themselves, who co-authored the 2 articles linked above and have done extensive research on optimizing Fees on Liquidity Pools. The logic for this Fee Structure, as explained by them, has to do with the fact that MIN/ADA Liquidity pretty much exists only on Minswap. Since the fees are lower on the way up than the way down, the movement in the buy side price impact is larger than the movement on the sell side price impact.

Fee Sharing Pilot program with SNEK

SNEK was the first team that reached out to Minswap Labs inquiring about a Fee Sharing feature with other projects. Sharing Protocol Fees with projects has several benefits, as if projects make direct revenue from Trading Volumes on Minswap, they’re highly incentivized to increase Volumes, Liquidity and Liquidity Incentives. The fact that SNEK has been the single biggest token contributing Volume to Minswap, makes them an ideal candidate to be the first ones to have access to this program.

That being said, this Pilot Program ought to be managed carefully, studying the market reaction and being able to adapt to them. Hence, we suggest starting by implementing this feature at first in a limited pilot program with limited Pools like with SNEK/ADA to test the waters. Later, it shall be implemented with an appropriate structure, with more pools. This initial pilot program will span three months, during which its impact on Snek and Minswap stakeholders will be evaluated. The findings will be presented to the DAO for informed decision-making regarding the future of this initiative.

Minswap V2 Fee Switch

The 1/6th fee switch to MIN stakers will remain just like it is in V1 regardless of the Trading Fee chosen. It may be changed by the DAO following a Governance vote.

MIN/ADA Additional Fee Switch to MIN Stakers

Similarly to the Fee Sharing Pilot with SNEK, we would like to propose an extra 1/6th of the Swap Fees on the MIN/ADA Pair go to MIN stakers instead of Liquidity Providers. This has two main reasons:

  1. MIN/ADA Liquidity is too large, as was explained in the Report by Deus Ex DAO. Minswap DAO controls over 30% of this Liquidity, and hence the Fees.

  2. The extra MIN and ADA generated from this Additional Fee Switch will be directed to stakers to make MIN Staking more attractive.

  3. Normally, all fee sharing is converted into ADA to distribute to MIN stakers. However, ADA/MIN fee sharing will be kept as ADA and MIN to distribute.

Thus, if approved, for MIN/ADA LPs, 4/6ths of swap Fees would be kept for LPs, but 2/6th would go directly to MIN Stakers in the form of MIN and ADA.

9 Likes

I just bought more min.

1 Like

It would be a good move for Protocol, especially MIN stakers.

2 Likes

All in all I really like this proposal.

It would be nice if the fee switch rates ratcheted up or down depending on the adjustments to the transaction fee.

That way revenue to min stakers has the possibility to grow more than just the base fee switch.

That would also make staking min more attractive

2 Likes

This is why Minswap is the no.1 in Cardano.

1 Like

What if fee switch adjusted incrementally with fee adjustments?

Say 0.001% for each 1% fee increase. That would put the max fee switch at 0.05% if a pool is running at 20% fees.

Thats a 66% increase to the minimum fee switch and allows liquidity providers to stake earned $Min for a small hedge against that level of volatility.