I like how the proposal is geared towards making the costs of sourcing liquidity easier. So the idea is to only charge fee switch on pools that involve a governance token which can be incentivized by the protocol in exchange for 10% of the LP fees to help defray the costs of liquidity to the protocol.
I think that can be beneficial for certain high-volume tokens as well as liquid staked token pairs which could be incentivized by their respective project tokens (LDO, RPL, SD, etc.). I.e. wstETH-ETH 0.05% could be incentivized with LDO by Lido.
A few points came to mind:
- The numbers might not be too appealing
Let’s say wstETH-ETH 0.05% does $1M in volume per day. That would equate to $500 in total LP fees, of which $50 goes to Lido and $450 goes to the LPs. We would need to compare that benefit with how much they’re getting on Balancer in terms of veBAL rewards per bribe. I’ve heard that it’s often a 1:1.5 matching there or even more. For example if you incentivize $1 of LDO, you can get up to $1.5 of veBAL incentives.
Either way, the fees earned are a small fraction of what they could be receiving in incentives on other AMMs and platforms. However, offering anything should be better than offering none which is the case now, but perhaps there could be a more optimal solution?
- Can this be gamed?
Also, another consideration to take into account is how this can be gamed by the protocols. For example, their respective pool can just naturally generate a lot of volume without incentives. Take $HEX for example. If there were no minimums on the incentives, the protocols can just say, “ok, I’ll incentivize with $1 of my token per year” and then proceed to acquire 10% of the swap fees on that pool. I think we should be mindful of this potential outcome. A cap on the what can be received as fees would be important. Maybe no more than 50% of total incentives paid can be offset from fee switch revenue or something like that.
- Can we just zero out the fee switch revenue with 100% allocated to liquidity mining costs so there’s never any profit on the books?
With regards to legality, wouldn’t it also make sense to just zero out all incoming fee switch revenue via LM costs? So however much revenue comes in from fee switch, expend all of it via liquidity mining on pools to allow profits to equal 0.
That way the fee switch profit will always be $0, but you can still use the fees to incentivize high-volume trade routes. I think this still achieves the same outcome as this proposal, but Uniswap has more discretion over which pools to allocate the fee switch revenue to, while never profiting. And so long as 100% of the fee switch revenue is expended via liquidity mining costs, the profit will always be 0.