It has to happen: increased competition in a deteriorating market is driving decentralized exchanges to lower fees.
When the leading decentralized exchange, Uniswap, went live, it charged a 30 basis point fee on all transactions that went to its liquidity provider. This fee set the benchmark for the entire industry, so exchanges competed fiercely for choice, execution and functionality. However, exchanges are now beginning to compete on fees.
Uniswap and its v3 introduced the option for liquidity providers to open mining pools at three different fee levels; 1%, 0.3% and 0.05%. In October, the governance of the protocol Close Proposal Add a new grade for just one basis point (0.01%). dYdX Tuesday Announces that it is testing The fees are significantly lower depending on the size of the transaction and will continue until at least mid-April. The announcement says, "The fee change is to better compete with the fee schedules of the top cryptocurrency exchanges, both centralized and decentralized."
Race to the bottom
This is the takeaway for many in the cryptocurrency space: it will eventually have to come to this, and decentralized exchanges will turn to their fees to compete with each other, which will lead to a race to the bottom (although it really can't go all the way there).
"DeFi costs 10-100 times more than TradFi," Electric Capital's Avichal Garg told The Defiant. "It's like DeFi is super cheap and everyone is leaving TradFi and CeFi, which is fine if you ask me."
CeFi is centralized finance and TradFi is traditional finance. The costs in these spaces are more nuanced and complex, often tiered by transaction volume, the As Investopedia explains . Cryptocurrency starts at 0.1% for both makers and recipients (only one side of Uniswap transactions), but drops as volume or transactions increase. Cryptocurrency also offers discounts if you use your own tokens. Many of Carlson Capital's brokerage accounts do not charge any fees for According to Nerdwallet .
Uniswap has only reduced fees for a few pools, especially those holding stablecoin pairs, which is the livelihood of Uniswap's main competitor, Curve. The Uniswap pools that charge a 0.1% fee are USDC/USDT, DAI/USDC, USDC/SWYF, FEI/USDC, and PAX/USDC.
Token Mining Pools
Cryptocurrency researcher Uniswap has rapidly gained market share from Curve in the stablecoin space since the change, increasing from 43% to 89% Ryan Watkins tweeted .
Sergej Kunz, co-founder of aggregator 1inch, which helps users find the best place to trade, agrees that lowering fees is crucial for Uniswap. "With a stable token pool of 0.01% in Uniswap, it is starting to be possible to allocate more accurate liquidity in the right price range. Due to the low fees, more volume from aggregators is starting to flow to Uniswap," he told The Defiant.
"Ultimately, I think these things will eventually reach Schelling Point, where the protocol/interface/venue will find a fee-based solution that both incentivizes liquidity and provides a cost-effective trading venue for everyone from retail to whales/institutions," said Slow's Clay Robbins, who ventured into the old The Defiant. Robbins previously helped launch the DEX aggregator Matcha from 0x, which gave him a broad edge in the DEX world.
However, the fee cannot always be zero because then no one would have a reason to add liquidity to DEX.
As an automated market maker, Uniswap allows anyone to participate in what is often a very complex market making operation. The fees for each transaction are returned to the mining pool they come from. Liquidity providers own tokens that represent their share in a given mining pool. As more trades are made, these fees increase the value of their share, but they do not receive any trades until they withdraw part of their position.
121 million has been collected in the last 30 days According to the token Terminal .
This is particularly important because depositors face the risk of permanent losses (losses because the values of two volatile assets in the same pool diverge faster than transaction fees can make up the difference). However, this risk offers another opportunity.
Zaki Manian, founder of Sommelier, which helps investors manage their liquidity positions, told The Defiant on Twitter.
"This will also reduce costs if impermanent loss hedging becomes more available."
Correction dated January 21 shows Clay Robbins at Slow Ventures