Reduce SPOT Flash Mint Fee from 2.5% to 1.0%

TL;DR

This thread is proposing to lower the SPOT flash mint fee from 2.5% to 1.0%.
Current 2.5% fees hinder timely arbitrage and unnecessarily expose vault participants (stAMPL holders) to negative rebase risks. Reducing the flash mint fee will bolster SPOT expansion (albeit marginally), mitigate negative rebases, and enhance the overall ecosystem’s growth potential, particularly during Operation Bootstrap making it more efficient.

Rationale

  1. Mitigating negative rebases for vault holders
  • Negative rebases disproportionately impact leveraged stAMPL holders.
  • Even a single moderate negative rebase can outweigh th fees collected under the current 2.5% rate by a significant margin.
  • Lowering the fee encourages faster arbitrage, keeping AMPL’s price closer to the neutral zone and reducing the chance of negative rebases.
  1. Healthier, more responsive arbitrage
  • With flash mint fees at 2.5%, many arbitrage opportunities remain unprofitable.
  • Dropping the fee to 1.0% brings the effective cost of arbitrage below the typical price deviation that triggers negative rebases.
  • This actively supports a more stable AMPL price and fosters smooth SPOT issuance.
  1. Low impact on protocol revenues
  • Higher flash mint fees do not significantly benefit stAMPL holders in expansions, as shown by community analysis.
  • The vault collects minimal fees during normal market conditions - losing far more when negative rebases strike.
  • Lowering fees temporarily can be reversed if it proves ineffective.
  1. Supports operation bootstrap
  • A more fluid flow of SPOT minting helps scales SPOT supply.
  • Increases confidence among new participants, who see fewer negative rebases and more efficient rewards distributions.

Annex
DaniloFC analysis:

There is mistake in the above screenshot: ‘To mint 200,632.54 Spots, 400k AMPLs were used.’ The correct amount is actually 239k AMPLs.

However, all the calculations are correct - it was just a typo while typing.

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From further discussions, it sounds like the community and the development team is not opposed to setting the mint fees to 0% for the bootstrapping period or/and until the next update which introduces a DR based fee function for flash swaps.

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I would like to confirm my support for this, or variations of this proposal that help ensure the arbitrage loop is profitable, and enabling more trading that can mitigate length or depth of negative rebase cycles.

Specifically, I’m in favour of proposals (like this) that ensure stAMPL holders are advantaged for their long term support and critical role that they play in the ecosystem.

The economic pendulum in the ecosystem design must reward those holders, ensuring long term profitability of stAMPL is protected and it’s an attractive place to stay, to ensure a healthy ecosystem.

I’d be in favour of 0% fees while OB is in place and we are trying to scale the whole ecosystem.

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I’ve moved to a signal vote:
https://signal.ampleforth.org/#/proposal/0x8d2d614f784e646ec888543801c12750fad785a9522b3024669502751e714631

After pondering this a bit more I think reducing flash mint liquidity is best for the AMPL ecosystem at this time.

  1. With charm centered around fmv it allows arbs to access more of that liquidity
  2. While minting won’t give direct revenue to stAMPL holders with this change, if more SPOT is being minted it also means more SPOT will be redeemed when SPOT / AMPL price ratio inverts
  3. More minting during SPOT supply expansion keeps vault multiplier high.

However, the risk is if there is a prolonged downturn in AMPL price, then vault holders will not be compensated for flash mint leverage increase during negative rebases. I think it would be good try this during bootstrap, but I don’t think it’s sustainable long term.

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Agreed, I have high hopes for the DR based fees that are in the works by @aalavandhan1894

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I’ve been thinking about this more, and while we are looking at this through the lens of bootstrap, sustainability wise I’m not sure reducing the flash mint fee actually helps vault holders.

As an example, during dump days, like when ETH tanks and therefore AMPL as well, this triggers lots of flash minting to try and sustain SPOT price. Thats going to lever up the vault for the negative rebase. The balance is flash mint fees, which should increase as DR gets lower, but setting it to none exposes the vault to more negative rebase risk over time because vault holders are not getting compensated at all for providing that liquidity.

@Brandon @aalavandhan1894 would the foundation be able to start the vote? Or someone else could? I don’t have enough FORTH to do so.

During the dump day, we just didn’t have enough liquify flash mint, plus people were going to mint anyway. Yeah, as I mentioned before, I agree that 0% is doesn’t make sense, and this is only for bootstrap.

I’ve flipped flopped yet again after further discussions. Making sure SPOT is maximally liquid during bootstrap and removing resistance to expand the supply is very important. While we may sacrifice some sustainability in the short term, the current objective is growth for the launch of USDaf and we should use the tools we have to facilitate that expansion.

Launching another signal vote to see current temperature on this: https://signal.ampleforth.org/#/proposal/0xfa1dbffc27363317532cc536b3d92708ff2b254341e7ad32743d10d422457a17

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Thanks for moving this forward Roman, as well as for the thoughtful consideration from kbambridge, gemini, and others. I’m also in favor of reducing the flash swap fees to decrease the friction between converting between SPOT and AMPL. This can potentially make it easier for the Spot supply to react to demand, and the concentrated liquidity can also have great positive effects for AMPL as well.

The biggest risk I see with reducing this is simply the increased pro-cyclicality that can potentially dilute vault stakers asymmetrically between growth phases and contractions phases. However, with the intentions of Bootstrap in play, supporting growth is the highest priority, and this is also what can benefit those same stakers the most. So for at least this phase, I think it’s the right move, and it seems like the major stakers I know of also agree.

This potentially leads into another thread–it’s worth looking at the entire stack so that we arrive at a configuration that is complete and works in harmony with itself. The main inputs of this would be:

  • Size of the equilibrium zone of the AMPL rebase curve
  • Flash mint and redemption fees
  • SPOT DEX fee tier
  • AMPL DEX fee tier
  • Uniswap vault active zone (to ensure that flash arb is active here)
  • Uniswap vault ratio between concentrated band liquidity and infinite band liquidity

This dovetails with an update to the enrichment curve from @aalavandhan1894 (which has yet to be formally proposed, but can be found in /232)

The general idea being that these fees would decrease to reduce overall friction, maximize liquidity depth, and keep the right balance between risk and reward for each participant of the system.

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Yeah I agree with all of the above. I think reducing as much friction as possible while being on the lower level or maybe slightly below the sticky/sustainable threshold may be worth the risk while optimizing for growth. It’s very common for DeFi protocols for example while bootstrapping liquidity to not take fees for the gov token holders until after a base of liquidity has been acquired.

Re: vault risk exposure

I’ve said this a couple times in discord as well I think one of the major reasons the vault was so painful was because two main issues:

  1. slow rebase curve took longer to contract meaning vaulters that had withdrawn didn’t absorb enough of the volatility in their Z tranches
  2. naturally bad market conditions due to FTX selloff (although this can happen again, with evergreen cycle in play with deeper liquidity I think this won’t be as bad)
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Experience has shown that during prolonged -ve rebases, DR drops below 0.9, triggering a halt in flash mints anyway.

I am in favor of this proposal, and would go so far as to say it should be 0%.

Reducing friction in arbitrage will stimulate buying pressure for AMPL in the open market, which could stave off a negative rebase.

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I voted for 0.5%. Overall, I would love to see 0%, but I think a 2% drop is significant enough to reduce friction without completely eliminating the flash mint fee. Plus, it would still be higher than the anticipated future 0.3% liquidity pool fee.

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I would be in favor of 0.5% if our liquidity pool configuration drops down to 0.3%

Also I think we should look at tightening AMPL rebase more around target as @Brandon mentioned as well, make it easier for the supply to adjust as SPOT demand changes. All these layers of spread add slippage that could likely be smoothed out with smaller fees / parameters.