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Dynamic Fees
This is an ongoing case study on TWAMMs where fees can be adjusted based on future orders that are queued to be executed. Below is a problem and related parameters we're researching.
What is the optimal swap fee discount for dedicated arbitrageurs (toxic, atomic swaps, short term) to maximize price updates for traders (non-toxic, non-atomic swaps, long term) and MEV kickback to LPs?
- LPs: maximize swap fees & MEV remittance to compensate for IL and toxic flow from arbitrageurs
- Traders: maximize price updates of assets to keep parity with external venues and get a smoother order fill
- Arbitrageurs: maximize MEV opportunity and minimize swap fee for a profitable arbitrage opportunity
- Pool parameters:
- ETH/USDC
- Partner Fee: Dedicated Arbitrageur (0.025%)
- Short Term Fee: Mempool Users (0.05%)
- Long Term Fee: Traders (0.15%)
- Gas (transaction) fees can vary on number of virtual orders that need to be executed
- For the purpose of this problem, assume a fixed amount
- Trades last multiple blocks and can be cancelled at any time
- Mempool arbitrageurs will always exploit opportunity if dedicated arbitrage don’t act in time
- Dedicated arbitrageurs get a fee discount to get a first right arbitrage opportunity
- TWAMMs have two swap interfaces: non-atomic swap (traders), atomic swap (arbitrageurs)
- TWAMM pools are 2 asset, 50/50 Uni V2 style pools that follow
X*Y=Kinvariant - Dedicated arbitrageur fees can be changed in-flight and are customizable per pool
- Long term trades create back running opportunities as prices move on the bonding curve
- Traders are primarily uninformed flow (non-toxic), benefit from arbitrageurs keeping prices fresh
- Dedicated arbitrageurs remit share of MEV extracted to LPs for the swap fee discount
- Arbitrageurs are informed flow (toxic), profit from correcting prices and pay gas to write traders virtual orders on-chain
- LPs get swap fees from long term traders, and MEV + discounted short term swap fees from arbitrageurs
- MEV remitted to pools are automatically invested and distributed pro-rata to LPs similar to swap fees, but on a weekly basis
- Private relays: ineffective because
first right advantageis negated after the first block - Rook auctions: group of arbitrageurs bid on the arbitrage opportunity, 90% of bid is remitted back to LPs. Note
bid != potential MEV opportunity - SLAs: require off-chain agreements and trust with 3rd parties to behave ethically
Last modified 8mo ago