This proposal would grant increased authority to the Protocol Fee Controller subDAO to adjust Protocol Fees on pairings beyond their initial scope.
One proposed use of this will be to create a discrepancy in protocol fee between OSMO routed tokens and Stable routed tokens to encourage routing via Stable tokens to be more widely used. This proposal endorses a Protocol Fee of 0.2% on ATOM/OSMO as the current major OSMO liquidity pairing as an initial endorsement of this methodology.
This proposal also adds the Governance module address to the list of Admin addresses for the protocol fee settings so that fee changes may be done directly by governance if required in the future.
Protocol Fee Controller subDAO
The Protocol Fee Controller subDAO has elevated permissions to adjust the protocol fee between two denominations onchain which were granted in Proposal 629 and can be viewed here
Membership consists of a 4/7 multisig of Validators and Community members.
Current Scope
The Protocol Fee Controller subDAO’s initial scope was to adjust the protocol fees on specific asset pairings to ensure that they are reasonable compared to the typical spread factors used in their pools.
This scope is currently set to deciding on a protocol fee of the default set by governance, an alternative lower protocol fee of 20% of the default, or zero.
Typical settings have been to use:
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20% of the default (0.02%) for Like pairings (E.g, LST/Unstaked equivalent or Alternative Stable tokens pairings, which typically have 0.01% or 0.05% spread factors.
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0% for assets that are identical beyond bridging differentiation. E.g, USDT.axl/USDT.kava or WBTC/allBTC, which typically have 0% or 0.01% spread factors.
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Default for all other pairings.
Proposed Scope
This proposal expands the scope of the Protocol Fee Controller to approve the setting protocol fees on pairings at a greater selection of settings compared to the default protocol fee.
| Tier | Current Equivalent | Example Usage |
|---|---|---|
| 0% | 0% | Composable pairings/Fee promotions |
| 20% | 0.02% | Like pairings/Fee promotions |
| 50% | 0.05% | Fee promotions |
| 100% | 0.1% | Default |
| 200% | 0.2% | Routing Influence |
| 500% | 0.5% | Routing Influence/High volume/fee pairings |
This removes the reliance on the existing typical spread factor for a route as well as allowing more flexibility and variety in the protocol fee levels set on specific routes.
The Protocol Fee Controller must not use these abilities to effectively change the default protocol fee for trading on Osmosis but may change it to impact subsets of pools.
Osmosis Governance retains the right to remove the elevated permissions from the subDAO and/or manually overwrite fee levels on pairings.
Example Usages
This additional permission will allow several uses to be explored; this list is not exhaustive or mandatory for implementation, although the initial preferred routing trial is included in this signalling proposal.
Establishing new markets through fee promotions
For markets established elsewhere but not present on Osmosis, the protocol fee could be reduced or removed to make Osmosis a more profitable place for liquidity providers to provide liquidity for the pairing. This is a form of passive incentivization in that the protocol sacrifices income in the short term to establish a market in the longer term, which would be a future source of revenue. Unlike liquidity bootstrapping spending, this comes at no upfront cost to the protocol and so has no cost if liquidity is not attracted, but encourages more organic generation of previously unlisted markets.
Raising fees during periods of high volatility in established markets
During periods of high volatility such as during initial listings or sudden market movements, the protocol fee could be raised in order to benefit from high volatility on certain pairings.
This enables Osmosis to increase fees on markets for which it is the primary location, potentially decreasing volatility or increasing protocol fee yield share.
Encouraging the formation of preferred routing
The main mechanism for encouraging the routing of a wide range of assets through common pairings has been to incentivize the preferred routing. Changing the fees on a route can make this guidance more passive. By lowering or increasing protocol fees, the proportion of fees generated by volume that is held back for the protocol shifts as well as the lowest execution route that volume follows, making the lower protocol fee route more preferable to Liquidity Providers.
The first experiment proposed is to raise to OSMO/ATOM protocol fee from 0.1% to 0.2%.
This is intended to capitalize on the largest liquidity pairing present on Osmosis, the ATOM/OSMO liquidity that has been historically sticky even as incentives have been removed.
By raising the protocol fee on this routing, Osmosis will benefit more from this seemingly inactive liquidity as well as encouraging active liquidity providers to move to the more active ATOM/STABLE and OSMO/STABLE pairings, consolidating liquidity.
This experiment is one of two initiatives that aim to encourage the primary pairings of OSMO and other listed assets with Stable tokens, moving away from the previous methodology of OSMO as the main routing token for the chain, initially proposed in Proposal 187.
Target Onchain Date: 9th August 2024
