MIP-01: MagicSwap Launch fees

Summary

With the approval of TIP-15 one of the outstanding aspects of the MagicSwap AMM launch was the “fee” component which was initially proposed as 4%; 3% for LPs, and the remaining 1% divided evenly between a community fund for gamified mechanisms and a community fund for ecosystem growth respectively.

In response to community feedback we would like to revisit the fee structure with something that the community can align on. This TIP proposes:

  • Various options for fee structures for community members to vote on
  • Fee structures to balance the needs of liquidity providers and users and promote a functional market for ecosystem game coins that can sustain itself long-term without requiring ongoing yield farming subsidies.

Context

In AMMs liquidity providers (LP) deposit pairs of coins (e.g. GAME/MAGIC) for traders to trade against, and receive a percentage fee of every swap conducted on that pair.

Higher fees favours LPs and encourages them to add liquidity. When there is insufficient liquidity, “slippage” may occur and traders may:

  1. end up with fewer coins than expected,
  2. have transactions fail as the price moves before the transaction is mined.
  3. burn gas on multiple failed transactions before succeeding.

Prospective LPs must balance the risk of:

  • Providing liquidity for play-to-earn (P2E) farmers who are net sellers of game coins
  • The LP may be left with a large amount of less valuable game coins.
  • This problem is particularly severe for inflationary game coins
  • Earning fees over time from legitimate players looking to acquire coins to use in-game.

If the fees are insufficient (i.e low volume, or low fee rates) to offset risks, no liquidity materialises for risky game coin pairs.

Why must a GAME/MAGIC LP pair have higher fees than a pair like USDC/ETH?

MagicSwap LPs will be subject to higher risk than traditional pairings like USDC/ETH for the following reasons:

  • Game coins tend to experience higher volatility than other sectors and many lack value accrual (they use pure utility coins)
  • Many “play to earn” coins are highly inflationary and reward distribution to users can result in continuous selling pressure

To ensure deep liquidity and functioning token pairs, liquidity providers need to be sufficiently compensated for these risks via fees. In absence of sufficient fees, we risk facing scenarios where users looking to acquire $400 worth of GAME coin are buying from a pool with $60k TVL, resulting in 10% slippage and transactions failing half the time (illustrative example).

Rationale
There is a core tradeoff in setting a fee that balances the needs and interests of the liquidity provider, and the trader (which comprises P2E farmers who are net sellers, and legitimate players who trade back and forth). Setting too low of a fee makes it unattractive for anyone to provide liquidity and no market exists. On the other hand, setting too high a fee ensures that no user trades. Neither of these extreme outcomes are desirable, a middle ground must be found.

Pros of lower fees:

  • Cheaper for players to buy and sell coins, thereby increasing trading volume
  • Increased volume of trades may itself result in greater trading fees over time for liquidity providers, thereby attracting LPs.

Pros of higher fees:

  • Incentivizes LPs to add liquidity.
  • Protects LPs from being exit liquidity to some extent (in the same way market makers set larger bid-ask spreads for riskier assets to earn larger fees to offset risks of being counter traded by informed sellers).
  • Larger liquidity reduces unexpected slippage, and occurrence of transaction failures for traders (at the expense of larger, but predictable fees).

In later versions the AMM may introduce additional features that allow particular projects to set the fee structure on their particular liquidity pair. This requires additional development and corresponding audits and thus will not appear in the initial iteration of the AMM.

Proposal

It is proposed to launch MagicSwap as a decentralised, open source and community run product with one of the following fee structures below, which applies to all liquidity pairs on the MagicSwap AMM.

All fee structure options divide the total AMM fee as follows:

  • 75% to liquidity providers proportional to the liquidity they provide to that pool
  • 12.5% to a community fund held in a multisig wallet managed by an AMM council for the benefit of members to be distributed via gamified mechanics that incentivise participation and adding value back to the Treasure ecosystem.
  • 12.5% to a separate community fund held in a multisig wallet managed by an AMM council for the benefit of members to support the growth of the Treasure ecosystem. This may include conversion of LP pairs received as fees as required.

The following options are proposed: A) 3% total fee • 2.25% to LPs • 0.375% to Community Gamification Fund • 0.375% to Community Ecosystem Fund

B) 2% total fee • 1.5% to LPs • 0.25% to Community Gamification Fund • 0.25% to Community Ecosystem Fund

C) 1.5% total fee • 1.125% to LPs • 0.1875% to Community Gamification Fund • 0.1875% to Community Ecosystem Fund

D) 1% total fee • 0.75% to LPs • 0.125% to Community Gamification Fund • 0.125% to Community Ecosystem Fund

Further adjustments may be made via another MIP or via AMM council members. In accordance with what is best for the community, we have sought to structure this proposal in a way that strikes the right balance among key stakeholders, primarily LPs and players.

Polling Period

The polling process begins now and will end at 12:00 UTC on 24 July, 2022. If quorum is reached, a Snapshot vote will be put up shortly thereafter.

Indicative Poll

  • Option A: 3% total fee
  • Option B: 2% total fee
  • Option C: 1.5% total fee
  • Option D: 1% total fee
  • Option E: Another option