Osmosis: Introduce a Protocol Taker Fee for Osmosis swaps

Note: This is a signaling proposal for a future upgrade

This governance proposal proposes the creation of a protocol “taker fee” on all swaps on the Osmosis DEX. This protocol fee is charged on the input value of swaps, independent of and in addition to the LP swap fees charged by pools (including existing pools).

Context

Spot exchanges typically have two types of fees, taker and maker fees. Furthermore, the rates charged for both are subject to many conditions. Its very common to have fee reductions based on amount of volume per month, tokens staked, fee rebates, etc.

Taker fees are fees charged to the swapper, and act the same as increasing the swap fee on the dex today. Maker fees are fees charged to the liquidity provider. This would be giving an LP less fee profit, while charging the trader the same amount. (The concept is awkward in concentrated liquidity and CFMM’s, it’s more natural in order books)

This proposal introduces a taker fee and subsequent distribution of the proceeds. It suggests in a first version of protocol fees, keeping maker fees at 0, and no fee reduction system. (Leaving ideas for those to future work after an initial version)

Proposed Fees

The taker fee will always be a flat rate on the input value of a swap, independent of what the underlying pool’s LP swap fee (to be renamed to spread factor) may be. The proposed default is a flat rate of 0.15% for all pools.

This flat fee value is an on-chain parameter that can be adjusted by governance. The default fee will apply to all newly created pools, regardless of pool type – including classic pools, supercharged pools, and orderbooks.

However, Osmosis governance can also choose to set custom protocol taker fees for particular trading pairs based on liquidity requirements, market demand, and other user experience concerns. For example, for a stableswap pair like USDC <> USDT, governance may choose to reduce the protocol taker fee to make the swaps competitive with other trading venues. A proposed taker fee for such stablecoin pairs is 0.02%.

There is no proposal to charge maker fees at this time, however Osmosis governance reserves the right to incorporate maker fees in the future.

Implications for Existing Pools

For current pools, the introduction of a taker fee will effectively increase the total swap fee. For instance, if a current pool has a swap fee of 0.2%, and a user performs a swap against it, the total swap fee experienced by the user would be 0.35% (0.2% pool swap fee + 0.15% taker fee). This is independent of the price impact for the trade.

This change signifies an increase in fees across all pools. For this dynamic to work, expect that swap fees for most pools will trend to be lower than current rates with the introduction of concentrated liquidity and eventually, orderbooks.

The rationale for this claim, is that we can think of LP’s in CFMM’s as having a “fixed spread” via the swap-fee. However in Concentrated liquidity and orderbooks, LP’s can express their spread preferences more precisely, thus no longer needing such large minimum spreads.

For multi-hop swaps, this would remove the “osmo multi-hop discount”, and charge the taker fee for every pool.

Protorev

Since protorev profits already go to the protocol, protorev doesn’t pay this taker fee. Protorev captures all cyclic arbitrage on the chain, which helps traders get consistent prices throughout the system.

Future Fee Reduction Mechanisms

The Osmosis protocol in the future may create programs that allow user accounts to reduce the trading fees across their account. Examples include:

• VIP programs to reduce fees based on trading volume

• Fee reductions based on OSMO staked amounts

• Fee rebates for referral systems (a portion of protocol fees from a user’s trading activity is shared with their referrer)

Distribution

Because trading fees are paid in the input token of a swap, the collected fees will consist of a multitude of tokens. With this collected fee pool, we propose the following system:

• The distribution of fees collected in OSMO will be pending separate future proposal

• Of all fees paid in other assets, 67% are to be distributed to OSMO stakers (subject to validator commission rewards)

• The remaining 33% of non-OSMO fees are to be converted to one of Osmosis’s whitelisted quote assets and then deposited into the Osmosis community pool.

Commonwealth

https://gov.osmosis.zone/discussion/11577-introduce-a-protocol-taker-fee-for-osmosis-swaps