Based on the discussion started on Commonwealth way back and the upcoming implementation of the taker fee in v19 it is time to get this point of our list and take a decision.
Proposal 530 on chain obtained governance approval for the development and implementation of a taker fee for swaps performed on Osmosis. On top of the 0.2%-0.3% swap fee an additional taker fee of 0.15% is proposed.
This would result in a fee charged for traders between 0.35% and 0.45%.
This should give additional yield to OSMO delegators. This is a good narrative to provide additional value for OSMO as a coin, but it has the downside that traders will experience an additional fee.
I want to highlight 2 remarks; 1 from myself and another from @Johnny Wyles
I did a small comparison between other exchanges, to get an idea of our position versus these competitors:
Binance gives a 0.1% taker fee for everyone and lower for big traders / BNB holders (so 4x less than our intented effect)
UniSwap has in general a 0.3% swap fee (so also lower than we propose in this proposal)
PanCakeSwap in general has a 0.25% swap fee (so 0.1%-0.2% lower than this proposal)
And I want to highlight this tweet from @Johnny Wyles which gives insight in the possible routes where we benefit from the taker fee without hurting the traders:
This brings us to the point that it has to be clear when and how we will implement this taker fee to get the best of both world with respect to securing volume and trades on the exchange (since that is what matters for an exchange in the end) while also providing value to OSMO.
Litbit (Notional) suggested to create a board of experts to do (some) research and come up with a recommendation:
This thread is to gauge ideas and the temperature for this and to define the path forwards, before we are too late. Now we have time to secure a good implementation, so letās take that time.
Better to start lower and increase if no adverse volume effects are observed.
I would think starting at 0.1% and introducing higher costs after determining tiers/tranches would also be healthier than starting at the highest tranche and offering lower tiers as perks + privileges, second.
I would even be in favor of a fee as low as 0.02% but not higher than 0.15%.
Until perks + privileges can differentiate Market Makers & High Frequency Traders from other price insensitive less voluminous traders; a lower fee does not favor/disadvantage any group over another. With tranches/tiers designed then higher fees can be implemented in a way which incrementally taxes usage from low to high.
The protocol taker fee is a great feature to accrue some value for OSMO holders. However as you mentioned above, it should not come at the expense of the traders and a worsening of the UX.
Adding an additional fee on trades will definitely come with some negative repercussions for the protocol. Even though Osmosis is by far the nr.1 DEX in Cosmos, competition is not sleeping (Duality Dex, Astroport ect) and upcoming chains like Sei or dYdX are likely to take away some of its market share. Despite the better UI and UX, traders will eventually move to places where they face lowest swap fees and best price execution. Should traders have to pay up to 0.45% on a swap on Osmosis, it wonāt take much time and folks will migrate to alternative DEXes.
Thus, I think no swap on Osmosis should ever exceed a taker fee of 0.3%.
A 0.15% protocol taker fee might be a compelling tokenomics narrative, nonetheless we should back up this number with some research and propose some alternatives like 0.05% or 0.1%.
One important thing to note is that the UI/UX of Osmosis might not even matter in the end when people use DEX Aggregators where that specific protocol searches for the most optimal trade anyways and where the user itself doesnāt experience on which DEX she/he is even trading.
Worth nothing that it should be expected that most liquidity will shift to lower spread factor pools post Supercharged Liquidity launch.
That being said, Iām very much in favor of mechanisms of decreasing taker fees based on things like trading volume, staked OSMO, and referral mechanisms.
Could have sworn I transferred this one here already!
General thoughts are the following:
The implementation has the ability for an address to manually set taker fees for each pairing. Ideally this gets set to be a group of people who can do this analysis at some point, but for the moment will just be a group to set the obvious reductions such as stable/stable and like/like pairings.
What is their incentive to optimise? We need a baseline to measure performance and either reward as part of the optimised collection similar to how Skipās Protorev share works or provide a grant to provide a more optimised solution. I.e. Volatility/volume sensitive LP/Taker fees.
I was hoping that we would have had more migration to lower spread factor pools by the time taker fee came in but since it is live very shortly perhaps we should enable at 0.1% to make the typical total swap fee 0.3% and so more competitive with alternative sources. Not that I think 0.35% would have a huge impact on usage.
0.1% would be a typical LP:Protocol reward ratio of 2:1.
As migration occurs the LP:Protocol ratio would rise to 1:2, and then 1:3 (the original 0.15%) would occur with a potential rewards program for stakers.
Fees generated are pretty much independent of swap fee once trading occurs at low fee levels so thinking about it in ratios between LP and Protocol share would be sensible.
With respect to 3. You mean that the spread factor of 0.05% vs the taker fee of 0.15% is the 1:3 ratio?
With respect to 2; I might even imagine that this will be similar to the incentives model. Where higher fees can be applied if volume/liquidity/fees ratio is above a certain level and lower fees are applied where trading can be boosted. That way you might even be able to get rid of the need for incentives in general, because you make trading cheaper for lower fee pools and thus maybe more attractive (to a certain extent).
Personally think we should go very low, at lets say 0.05% instead of starting higher and then reversing after we lose liquidity to cheaper DEXes. Letās be conservative with this considering all the changes the DEX has been going through and move cautiously with features that hurt the users of the DEX. Quoting Sunny LP/Stakers arenāt the target of Osmosis, we should focus on traders.
Taker fees are a net negative for traders, unless we implement a mechanism where the top traders/users get a % of their trading fees back in OSMO for instance. This is something that dYdX does and your top users become Holders as well. Holding/staking OSMO should also lower your trading fees, since this isnāt implemented yet I would propose that we set the fee at a very low amount.
I agree that 0.1% is adequetely low. Most pools have been lowered to 0.2% anyway. This is shifting a very smalll amount of money from going out the door from arb trades and into hands of sticky holders (stakers) which is a behavior that we should want to encourage and therefore I think 0.1% is very healthy for the platform and adequetely low. For example $1,000 trade with 0.1% taker fee + 0.2% spread factor = $3 fee which is very low. If trading responds well we can shift to the 0.15% target number but I am fine with the slow approach by starting at 0.1%
0.05% or 0.10% taker fee till a taker fee discount programs for stakers and or OSMO holders are implemented.
In terms of a taker fee discount program, while the industry trend is
to provide a discount to high volume traders, I would really like to
see a discount provided to OSMO stakers. A tiered taker fee
discount program where for example staking 250 OSMO would
result in a 0.14% taker fee being charged (I think the median staker
at the moment has a little more than 200 OSMO staked), 1,000
OSMO results in a 0.13% taker fee being charged, 2,500 OSMO results
in a 0.12% taker fee being charged, and so on (e.g. 5,000=0.12%,
10,000=0.11%, 20,000+=0.10%) I imagine would provide an additional
economic incentive for both small and medium sized liquidity
providers and stakers in particular to stake and restake their OSMO
liquidity incentives and staking rewards, reward those who are
securing the network by staking their OSMO and incentivize them to
use Osmosis for their swapping needs. An alternative
discount program that I wouldnāt mind seeing put in place to
compliment a volume discount program would be providing a 10%
discount on taker fees if paid in OSMO like KuCoin does for those
that pay in KCS.
as a compromise for this temporary 0.10% taker being implemented till a discount program is implemented for OSMO stakers and or holders, I would suggest that 50% of ProtoRev OSMO revenue (not the OSMO that has been already generated) be distributed to stakers, and a temporary 70-30 split with the community pool rather than a 67-33 split be instituted. For a 0.05% taker I would suggest 75% of ProtoRev OSMO revenue and a 75-25 split be temporarily instituted.
In summary:
Arc - 0.1%, Prefers lower
Seppmos - 0.05% or 0.1%
Victor - 0.1%
Johnny - 0.1%
Luisqa - 0.05%
RedRabbit - 0.05% or 0.1%
Leonoor - Open to discussion
This feels like we havenāt got a clear consensus number, apart from that the 0.15% from the approved proposal is out of favor until methods to reduce this through owning stake etc. are in use.
Iām going to take this to Twitter for greater outreach unless we want a bridge-off situation with multiple proposals. Oh for the multiple choice governance option.
I recognize that Iām late to the discussion, but I strongly believe we should go with 0.1%.
No one wants to see the taker fee raised several times. That may frighten traders - no one likes to see fees increase! So to avoid having to increase the fee ever, we should start with 0.1%. Once this fee is in place, keep in mind that the idea is to then decrease it based on usersā trading volume, etc.
If we start with 0.05% then either A) weāll have very little revenue coming in once we start offering a trading fee discount, or B) weāll have to increase it at some point.
And like I said, itās a very bad look to increase fees - creates bad sentiment. So we should just start with 0.1% and then never have to increase again. (By the same logic, Iād even be willing to start with 0.15%.)
Regarding competition - Osmosis has no competition. I have a very hard time believing that going with 0.1% as opposed to 0.05% would cause traders to trade elsewhere, mainly because there is nowhere else to go. CEXes and Ethereum DEXes are already cheaper than Osmosis right now. But for the users who choose to trade on Osmosis in spite of that, I donāt think increasing the fee to 0.1% will make a real difference.
I actually made an account to comment on this because it seems extremely bad for trading volume. Currently, most people swap between a stablecoin and crypto, requiring them to swap from USDC->OSMO->BTC for example. Currently, if using incentivized pools, this is a 0.2% swap fee due to the multi-hop discount.
A quote from proposal 530 āFor multi-hop swaps, this would remove the āosmo multi-hop discountā, and charge the taker fee for every pool.ā
So, this would mean that the same swap from USDC->BTC in this case would be 0.2%+0.15%+0.2%+0.15%, for a total of 0.7%, or a 0.5% increase. Am I missing something here? If weāre suggesting that liquidity is going to migrate to stable/crypto pools, that really does not seem to be the case with the current liquidity distributionsā¦also, it seems extremely odd that we would go from USDC->OSMO->BTC 0.2% swap fee, to increasing that to a 0.7% swap fee, then making USDC/BTC 0.05% pools and adding on a 0.15% swap fee for a total of 0.2% swap fee again. But my main concern is the removal of the multihop fee. If you scroll through the trades on the current USDC pair (Osmosis Info) nearly every trade is a double-hop taking advantage of that fee. 0.7%, or 0.5% (0.1+0.2+0.1+0.2 for the proposed 0.1%) seems like an insane jump.
If there is still some sort of multihop discount applied, I guess the fee can be reasonable but I am still against it ā look at larger dexes with their models of concentrated liquidity ā practically any pool with good volume has 0.05% overall fees, but I digress.
I want to touch on another point - if the fee is added per-pool then people are going to be incentivized to swap through crypto/stable pools (e.g. ATOM/USDT) rather than the double hop ATOM->OSMO->USDT ā even without the removal of the multihop fee since the taker fee will be applied twice and effectively add 0.x% additional fees. Iām not sure if this is the goal here?
In any case, the change is mostly conceptually confusing to me: currently swaps are ATOM->OSMO->USDT 0.2% fees. With the addition of taker fees, we seem to be pushing people to do a single-pool swap of ATOM->USDT with 0.15% proposed fees, which ends up being 0.2% fees again (assuming 0.05% fee pool - a few of these exist or are being proposed to exist). So Iām not really sure what this changes except routes trades away from pools where people are providing liquidity using crypto/osmo.
Based on comments in this thread and feedback on Twitter I tend to agree with you.
In this poll by Johnny Wyles 43% of people chose fees of 0.1% or higher and 39% chose 0.05%
Further, the community has already signaled their approval to pass 0.15% Taker Fees (prop 530) even knowing that Future Fee reductions would not be immediately available but would be considered. As such, 0.1% Taker Fee appears to be an appropriate median value here that is both easing into the change in fee structure while also respecting previous governance decisions.
Also it is worth noting that with a lot of migration to concentrated liquidity pools the Spread Factor was reduced from 0.3% to 0.2% and this 0.1% taker fee will return Osmosis to baseline. While I expect minimal change in Volume, I would encourage the entire Osmosis community to closely monitor volume and report findings if there are undesirable trends. While the entire community is encouraged to speak out if they notice undesirable trends, there is also a subdao group consisting of a couple Osmosis dev team members and Validators that will informally track progress and recommend any reductions or increases to the fee in future param change proposals if the data warrants it.
The Osmosis Community has taken the appropriate considerations with the Taker Fee and I think at this point we need to turn the fee on and monitor the results.
If there are no objections, I plan to post the param-change proposal within 24 hours of this post to turn on the Taker fee, using this entire thread as the discussion for this proposal.