Governance Discussion: AMPL-wETH and USDC-SPOT Liquidity Pool Fees

Ampleforth Governance
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Summary: The AMPL community recently engaged in an engaged discussion about the appropriate fee structure for AMPL-wETH and USDC-SPOT liquidity pools. This thread aims to move the conversation to a governance forum to encourage constructive debate and collective discussion about the LP pool fees. Specifically, the focus is on evaluating the current 1% pool fee and whether a reduction to 0.3% might better support ecosystem growth, user adoption, now vs future, and fairness.

Background: Liquidity providers (LPs) play a crucial role in maintaining efficient trading markets. However, pool fees might influence trading volume, LP incentives, and user participation. Currently:

  • AMPL-wETH and USDC-SPOT pools operate with a 1% fee.
  • Advocates for reducing the fee to 0.3% argue that lower fees attract more users and increase overall volume.
  • Opponents argue that the 1% fee generates higher earnings for LPs, which could maintain liquidity depth and stability.

Key Arguments for 0.3% Fee:

  1. Increased Adoption: Lower fees make trading more accessible for smaller users, fostering inclusivity.
  2. Higher Volume: Reduced fees could encourage frequent trades, ultimately benefiting LPs through increased activity.
  3. Community Building: A lower fee structure aligns with the ethos of fairness and encourages protocol adoption.

Key Arguments for Retaining 1% Fee:

  1. Sufficient Liquidity: Higher fees incentivize LPs by ensuring better returns, which could maintain deeper pools and reduce slippage.
  2. Market Standards: Many DeFi pools successfully operate with a 1% fee, proving its feasibility for protocols with established demand.
  3. The existing fee structure aligns with current liquidity incentives and strategies.

Additional Insights:

  • Gradual Transition: Some members suggested that moving to 0.3% fees might be more appropriate after AMPL achieves a larger market cap, ensuring the ecosystem is better prepared for such a change. What would be the cap? What would be the high fees exit criteria?
  • Liquidity Interconnectivity: Liquidity for SPOT against USDC indirectly supports AMPL due to the Vault’s ability to provide liquidity between SPOT and AMPL. This highlights the broader implications of fee adjustments.
  • Arbitrage Dynamics: As noted by some, the current fee structure affects the arbitrage range between SPOT and AMPL. Higher fees increase the delta required for profitable arbitrage, potentially slowing market efficiency. Lower fees could gradually reduce this delta and improve overall market functionality.

Considerations:

  • Incentives and Liquidity Migration: If the 1% fee pool continues receiving incentives, it is likely to dominate liquidity, regardless of competing fee structures, so it’s hard to evaluate which rate performs better.
  • Fee Volume Trade-off: Lower fees may lead to higher volume but at the cost of reduced per-transaction earnings for LPs.
  • Fairness vs. Profitability: Striking a balance between ecosystem growth and LP profitability is critical.
  • Long-Term Strategy: Any decision should consider how changes align with the protocol’s long-term goals, including adoption, utility, and market stability.

Questons to answer and get community input on topics:

  1. Should the fee for AMPL-wETH and USDC-SPOT pools be reduced to 0.3%?
  2. If yes, should incentives be reallocated to support the 0.3% pool to maintain liquidity?
  3. How should the protocol evaluate the trade-offs between fee structures and their impact on user adoption and LP participation?
  4. Should fee reductions be tied to specific milestones, such as achieving a target market cap for AMPL?
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I’ll give my perspective, which is just one perspective. Other devs might have different ones. For SPOT I’m open to a .3% pool, and I think it’s inevitable that it will get at least to that tier at some point. It’s mostly a matter of timing.

Even though SPOT is not a stablecoin, stablecoins are a useful framework to contrast against. Launching a new stablecoin is incredibly difficult–it’s an asset that by definition doesn’t go up, so how does it compete against other stables? In practice, we haven’t seen decentralization be a driving value proposition for users to migrate off of centralized stables like USDC, tether, and USDC-backed stables. So how does liquidity develop for these? It needs something else.

This is one competitive aspect that is inherent to SPOT. It’s low volatility enough to avoid much of the IL of volatile assets, but it’s volatile enough to be a valuable proposition for LPs. If we want to build a sustainable ecosystem for SPOT, that means developing a long-term healthy proposition for liquidity providers with organic market structures, irrespective of short term incentives.

In the early days of SPOT liquidity, much of the volume was driven by arbitrage. Here is one kind of arb, as an example. Arb volume is not necessarily price sensitive to trade fees the way that users are. They will happily execute transactions as long as they are profitable. And the volatility engine of AMPL was powerful enough to drive a lot of this. If you’re an LP, and there is trade volume that is price insensitive, and you’re not being outcompeted by other LPs, it makes perfect sense to offer your service at the price the market will bear! So, for a long time, I think 1% pools made a lot of economic sense for the actors involved.

During that time, you might have paid a 1% fee to enter the system, but it also means that you got access to the backend performance of being an LP in that environment.

But it doesn’t mean it needs to stay that way, necessarily. Project Bootstrap, the evergreen cycle, and Asymmetry, have the potential to bring in more classes of users with different usage habits. For these users, e.g. active traders, the difference between .3% and 1% does seem to be meaningful, and it seems much more likely that a decrease in fees would lead to an increase in volume. So perhaps now is a good time to consider a move to a different tier.

Some have argued that higher volume could lead to more integrations. That might be somewhat true. However, oracle providers like Chainlink are moving to new frameworks that are friendlier to DEX pools, that look at total liquidity TVL rather than the traditional volume requirements that make more sense on orderbook-based centralized exchanges. So, I might push back on that slightly. The real metric is liquidity efficiency for the class of users we want to recruit, and the durability of that liquidity so they can depend on it.

For WAMPL, since it is truly a volatile asset, I feel much less pressure to change its fee tier. There is also the .3% UniV2 pool and auto AMPL/WAMPL wrapping, not to mention all the other liquidity sources.

Hope that helps. Thanks @RomanPope for raising this!

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Now that Uniswap v4 is out, and charm will be supporting v4, I am thinking that we can just wait for that to happen, so we don’t have to migrate ten times. @aalavandhan1894 said it will happen roughly in a year. I think during 2025, it’s not a big deal to leave at 1% since we are in adoption territory and people will get incentives.

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