Turning on the Fee Switch

Proposals
1

Summary

The Fee Switch consists of directing 0.05% of the 0.3% Variable Fee swappers pay towards increasing Minswap’s POL (Protocol Owned Liquidity). Every epoch, assets accumulated from the Fee Switch are to be deployed. Bear in mind, assets accumulated from the Fee Switch come in the form of LP Tokens (if you are curious about the logic, please read Section 2.4 on the Uniswap V2 Whitepaper) .

In short, there are two Options proposed to the DAO to vote on the use the assets derived from the Fee Switch:

  • Option 1: focus on MIN/ADA LP:
  1. Every hour, any LP Tokens accumulated through the Fee Switch that aren’t $MIN/$ADA LP Tokens and that are worth more than 100 $ADA are sold in the open market for $ADA. For example, if 100 $ADA worth in $LQ/$ADA LP Tokens was accumulated, the 50 $ADA worth of $LQ would be sold for $ADA.
  2. The rest of LP Tokens worth less than 100 $ADA are kept and accumulate until they reach the value of 100 $ADA.
  3. Any $ADA generated are zapped into $MIN/$ADA LP Tokens.
  4. $MIN/$ADA LP Tokens are farmed.
  • Option 2: focus on overall LPs:
  1. Every hour, a set of tokens (in the form of LP Tokens) from a basket of tokens that are worth more than 100 $ADA are retrieved from the Fee Switch Wallet and Yield Farmed.
  2. At the beginning, the basket of tokens could for example consist of all Tiger Farm Assets ($MELD, $WMT, $LQ and $AADA).
  3. The rest of LP Tokens received are to be sold for $ADA if their balance is more than 100 $ADA worth. Any $ADA generated is zapped into $MIN/$ADA LP Tokens and LP Tokens are farmed.

We encourage discussion on the topic and suggestions for improvements before submitting the Proposal to on-chain Governance.

Introduction

In a recent Proposal, the DeFi-savvy Minswap Kitty Farmer @marco_112358 advocated for the activation of the “Fee Switch”, arguing why, and how that could be structured. Given our on-chain Governance module is ready, it is important to kickstart a discussion and elaborate a coherent structure to present to $MIN holders and LPs to vote on.

As you might now, every time someone swaps an asset on Minswap, they pay 2 fees:

  1. A Variable 0.3% Fee of the asset they are selling which goes to Liquidity Providers. So currently, each swap incurs a 0.3% fee that the swapper must pay. Liquidity Providers in the respective Pair of assets being traded receive this 0.3% fee pro-rata. For example, if you swap 100 ADA for MIN, you get 99.7 ADA (minus slippage) worth of MIN, and collective Liquidity Providers get the other 0.3 ADA.
  2. A Fixed 2 $ADA Fee (or less, depending on their $MIN Discount they qualify for) which goes to the Minswap DAO Treasury.

The Fee Switch affects the 0.3% Variable Fee swappers pay. It can be turned on to redirect 0.05% of the 0.3% of each swap to a Treasury/Fee Switch wallet, while allowing the other 0.25% to continue to go to Liquidity Providers.

Aim of the Fees

While collecting this Revenue from the Protocol perspective is attractive, it should only be done insofar as it is under a coherent structure. In particular, we believe Revenue collected from the Protocol should be used towards 2 main objectives:

  1. To continue to fund development (audits, hiring, infrastructure, etc.).
  2. To grow Minswap’s Protocol-Owned-Liquidity (POL).

Before going into more detail, here is some data on the $ADA that would have been collected from these revenue sources for the last 8 months:

In a previous article, we talked about Fee Sharing, its disadvantages and how it ought to be implemented to overcome them. Minswap is at an early stage, where there are significant costs related to audits, hiring, and infrastructure. As 0xSami put it in a recent article: “for the premature (nearly all projects), the choice to point those fees to the token holders instead of the DAO will cause some issues to arise.”

As such, we believe that in the short-term, the Fee Sharing should be divided into two streams:

  1. Batcher Fees: to be used fully in the short-term to fund development.
  2. Fees from the Fee Switch (Variable Fee:) to be fully redirected in a framework that grows Minswap’s POL.

Structure for using Variable Fee to grow POL

We propose structuring the flow of fees from the Fee Switch in 2 different Options, for the DAO to evaluate and choose one.

  • Option 1: focus on MIN/ADA LP:
  1. Every hour, any LP Tokens accumulated through the Fee Switch that aren’t $MIN/$ADA LP Tokens and that are worth more than 100 $ADA are sold in the open market for $ADA. For example, if 100 $ADA worth in $LQ/$ADA LP Tokens was accumulated, the 50 $ADA worth of $LQ would be sold for $ADA.
  2. The rest of LP Tokens worth less than 100 $ADA are kept and accumulate until they reach the value of 100 $ADA.
  3. Any $ADA generated are zapped into $MIN/$ADA LP Tokens.
  4. $MIN/$ADA LP Tokens are farmed.
  • Option 2: focus on overall LPs:
  1. Every hour, a set of tokens (in the form of LP Tokens) from a basket of tokens that are worth more than 100 $ADA are retrieved from the Fee Switch Wallet and Yield Farmed.
  2. At the beginning, the basket of tokens could for example consist of all Tiger Farm Assets ($MELD, $WMT, $LQ and $AADA).
  3. The rest of LP Tokens received are to be sold for $ADA if their balance is more than 100 $ADA worth. Any $ADA generated is zapped into $MIN/$ADA LP Tokens and are farmed.

Option 1 revolves around using Fees to strengthen the Liquidity in the MIN/ADA Pool. Having a strong MIN/ADA Pool, especially in earlier stages of the project, is incredibly important as we highlighted in our LBE article. Option 2 is more geared towards increasing and diversifying the Minswap POL over a basket of assets instead of focusing on MIN/ADA Liquidity. While the basket of assets proposed are Tiger Farm Assets ($MELD, $WMT, $LQ and $AADA), if Option 2 is chosen it would be necessary to also consider, evaluate and vote on different options for the Basket of Assets.

Should this Proposal be submitted to on-chain Governance?

  • Yes
  • No

0 voters

18 Likes
2

Keen for this and agree for proposal version 1. Looking forward regarding version 2 (diverse POL and POA), I submit that the criteria for accumulating POA should not be determined by the YF categories (e.g. Tiger farms Meld, WMT, LQ and AADA) but whether any token have launched a viable product with established revenue stream, which may correlate with Tiger farms in the future - but Tiger farms are not necessarily indicative of the revenue generating token criteria. Token valuation is mute without revenue in context of tokenomics. This will require a dedicated team of portfolio managoors/consultants and, therefore, more funds for hiring in the future.

If anything, Minswap is the most robust platform with a consistent and reliable revenue that stems from providing a necessary service. Of all the projects on Cardano, Minswap is the one I am most bullish on for this very reason. Most other tokens are quite speculative. So, from a risk reward perspective, it only makes sense to buttress the value of Min through the value that it provides to the community through its service via a non-discriminate Fee Switch, at least in the short to medium term while the rest of ecosystem develops and comes online. Thus, Minswap should focus on accumulating revenue in the form a fee switch before looking to accumulate diverse POA and POL in a responsible and accountable way. I am insinuating consitutional restrictions and a robust governance protocol is necessary for proper management of a diverse POA and POL due to counterparty risk that threatens to unravel Min through contagion.

18 Likes
3

Given portion of fees in scope of fee switch ild be supportive of option 1

7 Likes
4

I 100% agree with Contra’s logic here.
Lets start with 1 and evolve towards adding more LPs.

I would like to see the additonal LPs accumulated at least have a mainnet MVP. These tokens need to have live products, none of this token pre product stuff (we just saw a horrible case of this with Ardana).
I would also like to see the protocol have true streams of revenue, and building a treasury, not just a public good built for free.

Lets come up with a set of criteria that allow a Lp to be added to the Minswap Fee Switch POA.

At a minimum the token needs to have mainnet product live.

Thanks for posting this purrito! Love the fee switch idea.

8 Likes
5

I was initially in favor of immediate option 2, but after some thought, and Contra’s input, I am currently in favor of option 1 to begin with. I also believe that we should look extremely carefully at the protocols we accumulate POL in, and I don’t necessarily believe that Tiger Farm assets are where to start. In fact, I think one of the things we should be discussing in governance in the near future is a complete realignment of all farm allocations, focusing on projects that are operational, have delivered, and are less subject to insta-rug events, such as Ardana.

After a farm realignment, we can then discuss moving to Option 2 in this proposal, and deciding which assests the Minswap DAO will accumulate POL in for the long term.

13 Likes
6

I also agree (option 1).

In addition to having some criteria that allow a Lp to be added to the Minswap Fee Switch POA there should also be a separate governance vote for each additional project so that we can think carefully before adding.

My knee jerk reaction was option 2 as I thought it would create more total TVL but after reading and thinking I think it would add too much risk to the POL.

9 Likes
7

This is the way to go. Option 1 for sure and we can re-evaluate option 2 later.

6 Likes
8

I agree with most of what has already been said.

To begin with Option 1 is the best solution and Option 2 should be introduced iteratively with a lot of care. As long as the DAO tools with a multi-sig setup are available, I also stand by my opinion that managing the treasury should remain with the team and their closest advisors for now. However, it should be abundantly clear that as the ecosystem and Minswap continues to decentralize, this decision-making power must gradually become more decentralized and handed over to the actual DAO of MIN owners.

Before moving to Option 2, explicit rules should be put in place for choosing the basket of project assets to help secure POL for the long term. Risk-averse rules, such as having a live, audited service with a long history on mainnet. I don’t think the current Tiger Farm requirements are sufficient enough for that.

Furthermore, the decision to turn on the fee switch is another decision against Liquidity Providers without a farm. 5 basis points of all profits are being cut and instead given to Minswap as a whole. Liquidity pools without a farm are already at a disadvantage by the lack of ADA delegation rewards and this would be an additional blow to all non-incentivized LPs. We should be careful not to lose too many active providers to the competition in this area.

Overall, I am very positive about turning on the fee switch. It is yet another novel feature for Cardano DeFi coming from Minswap. It is a strong signal that Minswap as a protocol is built for the long-lasting future. And it is the first step towards transitioning to a true revenue sharing project.

7 Likes
9

I do like the general train of thought here trying to increase the value of the DEX overall not simply pamping random crap.

But something I would like to consider is combining the options, as per the emission rebalance that occurs bi-weekly you can also apply this to fees and also make it so fees can be lowered if not by vote but like with emissions on auto-pilot.

Increase the value of MIN first and foremost but also attract tokens to the platform and liquidity and incentivise that so there is a reason to do so. For all parties involved, so Minswap, altcoins and users.

Not sure if selling tokens when it happens at a larger scale would account for greater sell pressure that would be bad. But tokens can be added to their respective pools making the LP’s more valuable. Thus preventing sell pressure. If sell pressure after some math since I do not have any accurate numbers is negligible then fine some conversion to ADA or even other coins would not be a massive problem.

my 2 cents,

1 Like
10

This is interesting. Could you please elaborate on how you conceive of dynamic fees operating? varying fees after periods of deviation from a mean?

11

MS could use the same 30-day median on APR as they operate in their current form on the dex. Or use oracles but this would add costs to pay for the price feeds. Here it would help if you used other DEXes and those of CEXes in terms of price charts. Fees itself from my own experience with day trading up to 100 units you pay 1.50USD per trade over 100 units you pay a % based fee that scales with the volume. But these are for each entry and exit, so if you buy 2 x 95 shares of SPY you pay 3.00 dollars. And then another 1.50 per exit, with only one exit you end up paying 1.50 USD. So I guess to get whales onboard you want to make it attractive to have lower fees and go for total volume and insensitive holding MIN in LP or in wallets as we have now already. This would cover the batcher fee and the LP provider fee.

The Median can be the RSI for instance. Day traders like to use smaller time frames like 9-11 as described here: The RSI Indicator for Intraday and Day Trading: A How to Guide
Or the VWAP commonly used in day trading and of course, a combo of both for more in-depth analysis but those never work trading the opening minutes. It would be really up for a community vote I guess since everyone uses these metrics in different ways.

2 Likes
12

love it, sounds like you need to write a proposal lol

13

Super interesting ideas here.

To me, dynamic fees should be more focused on price volatility, not necessarily volume. Dynamic fees are meant to offaet some of the IL/LVR experienced by LPs.

For example, we could set a fee range from 30 bps to 1.5%. If the price chsnge of the pool is < 5bps, the trader has the minimum fee. If the price chsnge is 0.05 to 1%, scale f4om 30 bps fees to 1.5%. If over 1%, trader pays the max 1.5% fee.

This is just a rough idea. But i think this helps LPers offset rhe IL, and we can be less dependent on Emissions APR to cover the IL experienced and be more dependent on fees covering IL.

But there is a balance here. Too much fees will cause traders to use other platforms. We need to balance the 2 concepts.

Since total cost experienxed by a trader is the fee plus slippage, we will want to compare Minswap TVL and expected slippage per trade size versus other DEXes before implementing dynamic fees. Snd we will want to do this differently per LP. Some csn be higher, some could even be lower

2 Likes
14

While I would not mind writing one and adding more details. wouldn’t it be just more efficient to add it to the current one we’re discussing right now?

1 Like
15

not necessarily, if everyone did that it would get very messy.

1 Like
16

I choose method 1 . because adding value to the dex is a top priority. other platforms don’t have products yet, so increasing tvl is too risky for liquidity providers

3 Likes
17

Option 1 now, extend to other farms by voting sounds good to me :+1:

4 Likes
18

The only risk i see with option 1 is that it becomes a disincentive for non min holders to stake their tokens in Minswap unless swapping volumes and farming rewards really outweigh the charge taken to the benefit of min lp holders.

19

Everyone is so quick to vote - but what outcome are we voting for?

that fee switch brings in less than 1,000ADA per day. that 9,000USD/mo is much better spent on a team developer/engineer.

The current liability of emissions rate w/ team assets included is close to 80,000ADA+ daily. it is too early in my opinion for a fee switch ( its like tapping oil reserves to bring gas down 0.03 when its at $6.00/gal ).

1 Like
20

if the belief is MIN stability will bring more investors, and in turn dev fund is more attractive - ie, more people willing to work for MIN vs USD and join the team as options incentive then yes… Option 1 is way to go, which will only accelerate momentum as transaction volume increases

1 Like