Proposal: Change the fee in the OCEAN pool from 0.2% to 0.5%

This proposal is expected to appear on Snapshot for voting on 2022-01-16T00:00:00Z. Make sure to stake your vBNT for voting before this date and time to participate in the DAO decision.

For this proposal to pass, it requires a 20% quorum and 66.7% supermajority.

TLDR

  • This proposal seeks to increase the pool fees on the OCEAN pool from 0.2% to 0.5%.
  • The OCEAN pool on Bancor has the deepest liquidity in a DEX, 4.22x the liquidity of the second largest pool.
  • An increased pool fee will help siphon more profits from arbitrageurs to the protocol and most likely not affect volume therefore increasing APYs for the LPs in the pool.

Abstract

Deepest OCEAN pools on Ethereum are:

The OCEAN/BNT 0.2% Bancor pool with $10,942,593 liquidity [1].

The OCEAN/ETH 0.3% Uniswap v3 pool with $684.91k liquidity [2].

The OCEAN/ETH 0.3% Uniswap v2 pool with $2,590,169 liquidity [3].

The OCEAN/ETH 0.3% Sushiswap pool with $747,777.16 liquidity [4].

Motivation

The OCEAN/BNT pool is 4.22x larger than the second-largest pool for OCEAN is on Sushiswap at 0.3% fee.

This pool shares some similarities to the TRAC pool in which we have the largest amount of liquidity for a specific token.

An analysis on the effect of the pool fees on pool volume conducted on the USDT/BNT pool showed that there is not enough evidence to support a linear relationship between them (Figure 1).

Figure 1 - USDT pool fee changes with market share before and after the Fee change. The 1000 and 2000 x axis values represent a 0.1% and 0.2% fee, respectively.

Mark’s comment on the TRAC pool fee experiment sheds some light into the topic.

In conclusion, increasing the pool fee will help siphon more profits from arbitrageur to the protocol, most likely not affect volume and therefore increase APYs for the LPs in the pool and protocol-earned fees.

For

  1. Increase the pool fee in the OCEAN pool from 0.2% to 0.5%.

Against

  1. Keep the pool fee in the OCEAN pool at 0.2%.

[1] Bancor: Converter 554 | 0x5a7BB6aDF00A1d6284773887fCAdce079c636567
[2] Uniswap Info
[3] Uniswap Info
[4] OCEAN-WETH | SushiSwap Analytics

2 Likes

I’m seeing the Sushi pool at ~$700 K, so Uni v2 is second and about 23% of the Bancor pool.

If you look at trade depth, then the 0.3% Univ3 pool is ~ equivalent to v2 pool.

Note, a 0.5% price impact trade in the BNT pool would be ~$27,000 so we have double the depth of all the other DEX pools combined and x4 any single pool.


My understanding is that

  • $6,600 trade on Uni v2 would have 0.3% fee and 0.5% price impact (/ slippage ??? ) = 0.8% cost.
  • $6,600 trade on Bancor would have 0.2% fee and 0.15% price impact = 0.35% cost (so Bancor is superior for single hop trades)
  • $6,600 trade with new fee would cost 0.5% %+ 0.12% price impact (0.62% total and still superior)

At larger trade sizes the price impact becomes a bigger effect than the fee.

  • $13,200 on Uni would cost 0.3% + 1% = 1.3%
  • $13,200 on Bancor would cost 0.2% + 0.25% = 0.45% (current Bancor)

Obviously, this ignores the gas costs and more likely occurrence of two hops on Bancor.

As trades get smaller, the lower (0.3%) fees get more attractive than the 0.5% fee and so counters our greater depth. I think this would break even at ~$3 K.


Note, This post isn’t a vote against the proposal. I think it’s good to be experimenting, and my understanding of liquidity makes me think that Bacnor will continue to capture the majority of DEX volume. In addition, the 2.5% fees is very tasty.

3 Likes

Interesting point @OverAnalyser

@tfns - if we change this fee and the results are not good is the plan to put it back with a new proposal?

2 Likes

Corrected the proposal, thank you for pointing it out!

Great overview, will most likely copy this and include max trade size at 0.5%/1% price impact values in future fee change proposals if that’s okay!

Agree with changing the fee for the sake of experimentation, and will have a look at all the fee changes that are being proposed and propose changes in the future if justified!

Yes, in my opinion, it should at least be placed at 0.3% as all other DEXes are applying 0.3% fee and we have the deepest liquidity by far on any DEX. If the results aren’t good still, we could propose a 0.2% fee again.

2 Likes

I don’t see any issues with raising the fees for the OCEAN pool as we have the most liquidity for this token pair and the chart produced by @overanalyser suggest that it is well in line for a trade that has a .5% price impact on the next largest pool (Uni V2). This is roughly a trade size of $6600 which produces .8% cost on Uniswap V2 and on Bancor amounts to .62% cost with the new fee.

This doesn’t take into account double hop which adds an extra .1% fee (assuming ETH pool) and even then this would bump this number up to .72% (price impact on ETH-BNT pool with a trade size of $6600 is negligible so not worth taking into account). With that said, my understanding is that we are observing fee changes on pools and seeing what the effects are on our volume relative to other DEXes for that specific token. Even if our volume gets impacted negatively but our LPs are making more in fees than before then this is still a huge win for us (since the protocol invest together then this means that it makes more from fees and also the vortex burner becomes more effective).

With the TRAC study coming to conclusion soon, I am hoping that we can share the methodology, results, etc… with the community so that we can make informed fee decisions going forward.

2 Likes