Reduce the swap fees to 0.125% for STBL2 lending pools.
Motivation
The swap fee reduction to 0.125% down from 0.25% would make trading using STBL2 more attractive and increase STBL2 adoption which is an essential part of the Algofi protocol.
Deflex (DEX aggregator protocol) integrated Algofi lending pools and the swap fee reduction would lead to more swaps being routed through Algofi lending pools since swapping first to STBL2 and then to the desired asset would result in only 0.125%+0.125%=0.25% swap fees. DEX aggregators would lead to more volume and in that way off-set the reduction of the fees. Furthermore, all STBL2 lending pool LP tokens can be farmed on Algofi.
It might increase automated throughput some, but it would decimate fees and thereby the incentive to provide liquidity, likely resulting in bigger price impact.
The idea that a combo swap would yield the same amount of fees doesn’t hold for the liquidity providers. They would have to provide liquidity in both pools, totaling twice as much liquidity to earn the same fees.
It’s definitely a risk bit also remember that lending pools earn lending APR. So you have lending APR + possibly higher volume + farms to incentivize providing liquidity
The USDC pool is immediately better if this is done. Why would I want to stay with the STBL2 pool then?
Besides, the volume would literally need to double just to remain on the same level as we have now. Is there any reason at all to believe it will have anywhere close to that big of an impact?
Hi lobo. Thanks for the proposal. I also see that it has been raised in the governance page.
May I ask what do you think are the potential downsides of your proposal?
Thank you.
Personally I would not switch to USDC liquidity pools because of the fee decrease, largely because I model LP fees as a bonus to lending fees due to their volatility. I’m personally very pro @lobo 's idea here but I can entertain that there might be consequences due to market dynamics. I think there is room for a compromise here. Why don’t we test this on just STBL2-ALGO and STBL2-BANK pairs for a small period of time. The goal would be to measure
Does liquidity linearly decrease with fees?
Does volume increase?
Does STBL2 in circulation change?
Rather than argue about the above we can measure it and then make an informed decision based on real world data.
This proposal sounds a little bit like the Algofi platform saying "Use my token! Here are incentives (like a subsidy given by a government)! What about free market principles? What if Algorand is actually the better vehicle to conduct swaps (maybe because it is the unit token of the this blockchain)? If the tenet here is decentralized finance, what does the idea of decentralized finance gain by trying to centralize the use of a specific token/coin? It sounds to me, at least on the surface, against the whole point.
Now, I’m not an opponent of STBL or anything, but if we recall the lifetime of STBL1 before it got transitioned into STBL2, some users can be irked when the STBL3 comes out and they feel pressured to transfer liquidity quickly, and lose some percentage in the arbitrage that follows. It wasn’t until months after STBL1 got decommissioned that a no fee conversion to STBL2 came about. To an innocent mind, that’s just an honest mistake, growing pains. To a suspicious mind, it’s manufactured to reap funds as a middleman.
Some additional forward thinking and transparency needs to come out of this, or decentralized finance just turns into traditional finance all over again.
The USDC pool is also a lending pool, the difference in supply interest right now is 1.0% vs 1.75% in favor of STBL2. While this proposal will take the STBL2-Algo LP from 14% to 9% APR.
Experimenting is fine, but one usually starts with a hypothesis about what might happen. In this case we’re just making an arbitrary change to see what happens, despite the outcome most likely being the opposite of what we want.
Making something less attractive doesn’t make more people want to do it. STBL2 pools are about to become less attractive.
The hypothesis is that volume would increase to compensate for the decrease in fee percentage. The volume we could not only come from USDC swap volume on Algorand, but also attract users away from other DEXs if the fees are more attractive. Your assertion that lower fees will chase away more liquidity than demand can compensate for is simply an argument that the supply market is more elastic than the demand side. We don’t have a good understanding of these indifference curves because we haven’t tested how volume changes with fees. There really isn’t a good way to measure that without testing it. Testing it on BANK/USDC and BANK/STBL2 pools seems like a good way to do this since all the LP providers are BANK holders. So we’d be doing an experiment where we would be the primary beneficiaries/losers of the change.
To offset it, it would literally need to double the volume. There is simply no reason to expect that, given that fees are not prohibitive right now.
The bank pairs are a bit special, since bank is basically just being sold by farmers every day. Again it’s hard to imagine the fees making any significant impact for the swappers, but it will make an impact for the LP providers.
I guess we’ll see, I expect that with each swap being 0.125% less, we might see a 0.125% increase in volume, that would be proportional. It may or may not be offset by a decrease in liquidity
Fees being prohibitive implies that you expect the volume wouldn’t double because new demand wouldn’t be unlocked by a higher fee. But its also possible that swaps that would have happened across USDC LP pairs would occur on the STBL2 pool or that volume from other DEXs would move due to more competitive pricing. “There is no reason to expect” is not an argument grounded in data. I’m proposing we test it and get the data to make an informed decision. If you have an idea of something that would operate better as a proxy, I’m all ears. But “we shouldn’t do it because I feel like it won’t work” is not a good argument.
Conducting say 2-week test at the 50% reduced fee level is a good idea, to see if volume nearly doubles as a result. If not, the incentive to provide liquidity goes down and thus likely so will liquidity – which can be more detrimental than a 1% fee change.
Fair enough, my argument is against the proposal, not against a short term experiment to evaluate the effects of altering the fees.
As it stands, this proposal says “let’s change this because I feel it will increase volume”. If falls on the proposal to provide a good reason for the change, and there have been none grounded in data. You are proposing we test, but that is not what this proposal is.
If this is in fact an experiment, that should be clearly stated in the proposal. And the proposal should in such a scenario also include conditions of reversal, should the outcome be adverse or inconclusive.
As it stands, this proposal says “let’s change this because I feel it will increase volume”. If falls on the proposal to provide a good reason for the change, and there have been none grounded in data . You are proposing we test, but that is not what this proposal is.
You are right and that is a fiar point. I should have clarified I didn’t actually vote yes on the proposal for that reason. I’m most likely to abstain or vote against as it stands (still thinking through it). Momentum seems to be pushing toward a yes at the moment regardless. So if it goes through, I’d like us to look at it as an experiment, see how the market reacts and be ready to quickly pivot and undo it if there are negative outcomes. I would have preferred a smaller initial pilot but here we are.
Yes I’m also interested in this as well. I don’t fully understand what’s behind the obsession with USDC. Putting the whole defi eco-system in the fate of a fully-centralized stablecoin is a real risk, especially with what’s happening with BUSD these days.
Howdy @nlh and @pescennius I provided some thoughts on USDC over here
Obviously a fan of decentralization, but I that Jeremy Allaire and his team at Circle are doing a great job promoting their products and the crypto industry.
