Note: While this snapshot originally passed, we misconfigured the time for 3 days instead of 5 days, which is the requirement according to https://gov.uniswap.org/t/community-governance-process-update-jan-2023/19976. We have fixed this mistake and are re-running the snapshot.
Original Text: Just like the 1 bp fee tier originally proposed 3 years ago by Getty Hill, we propose to additionally add a 2, 3, 4 bps fee tier to Uniswap v3 on Base.
You may question why we are proposing the creation of three new fee tiers when our analysis only focused on 4 bps. There are two reasons for this. For one, Aerodrome is able to adjust fees automatically on Base. We anticipate they may respond by lowering fees below 4 bps and want Uniswap Protocol to allow LPs to move without governance intervention if this happens.
Second, we believe this analysis may be a single case study into a larger finding that the required fee for LPs on L2s may be lower than 5 bps. While Aerodrome highlights the success of a 4 bp fee tier, it’s unclear whether that’s the right market rate. It may be lower.
Lastly, we note that this change should not be blindly repeated on other chains. The community should do further research on the success or failures of this program before executing it on another chain.
Note: While this snapshot originally passed, we misconfigured the time for 3 days instead of 5 days, which is the requirement according to https://gov.uniswap.org/t/community-governance-process-update-jan-2023/19976. We have fixed this mistake and are re-running the snapshot.
Original Text: Just like the 1 bp fee tier originally proposed 3 years ago by Getty Hill, we propose to additionally add a 2, 3, 4 bps fee tier to Uniswap v3 on Base.
You may question why we are proposing the creation of three new fee tiers when our analysis only focused on 4 bps. There are two reasons for this. For one, Aerodrome is able to adjust fees automatically on Base. We anticipate they may respond by lowering fees below 4 bps and want Uniswap Protocol to allow LPs to move without governance intervention if this happens.
Second, we believe this analysis may be a single case study into a larger finding that the required fee for LPs on L2s may be lower than 5 bps. While Aerodrome highlights the success of a 4 bp fee tier, it’s unclear whether that’s the right market rate. It may be lower.
Lastly, we note that this change should not be blindly repeated on other chains. The community should do further research on the success or failures of this program before executing it on another chain.
https://gov.uniswap.org/t/rfc-proposal-to-active-2-3-4-bps-fee-tiers-on-base/24346/22
At this time, we are neither for nor against the proposal. Please see the forum thread for our comment.
https://gov.uniswap.org/t/rfc-proposal-to-active-2-3-4-bps-fee-tiers-on-base/24346/22
At this time, we are neither for nor against the proposal. Please see the forum thread for our comment.
I'm a voter with Blockchain at Berkeley. All thoughts are my own and not representative of the organization as a whole.
Market share, revenue capture, and price stability are all important for this pool in particular. So how can Uniswap compete with Aerodrome? Aerodrome lowers fees and uses Aero tokens as additional incentive. In this proposal, the community discusses the ramifications of allowing more competitive fee tiers through fractionalization of the pool.
I'm a voter with Blockchain at Berkeley. All thoughts are my own and not representative of the organization as a whole.
Market share, revenue capture, and price stability are all important for this pool in particular. So how can Uniswap compete with Aerodrome? Aerodrome lowers fees and uses Aero tokens as additional incentive. In this proposal, the community discusses the ramifications of allowing more competitive fee tiers through fractionalization of the pool.
Since Base is itself still a relatively nascent market, I believe this experiment would provide valuable data to determine the viability of lowering fee tiers on other markets as well, as well as the stickiness of DeFi users on Base. As well, Base does not provide an oversized proportion of Uniswap's volume or revenue, so the risk of any price instability leading to decreased usage is palatable. However, the community should treat this as an experiment and just that; this is not the beginning of a race to the bottom against Aerodrome.
Through this proposal, the community has also discussed the differences in trade sizes between Aerodrome and Uni on Base, the greater number of stakeholders for Uni (like oracles which use Uni), and arbitrage loss. These are all important points to further discuss as this experiment goes on.
Blockchain at Berkeley voted yes on this proposal.
On your comment about the tick-spacings, I was going to stick with the 2x fee-tier that has traditionally been done. While I agree with you that smaller tick-spacings could make sense on cheaper chains, there is little hard empirical evidence of the tradeoffs of tick-spacings. I have no strong opinion however and would take feedback here.
Aerodrome is operating at a deficit. It was recently reported that Aerodrome has spent $2.65 on incentives for every dollar in revenue generated. Curious to see how their market share fares when rewards dry up.
Gm, gm :sparkles:
The results are in for the Proposal to active 2, 3, 4 bps fee-tiers on Base on-chain proposal.
See how the community voted and more Uniswap stats:
I'm a voter with Blockchain at Berkeley. All thoughts are my own and not representative of the organization as a whole.
Market share, revenue capture, and price stability are all important for this pool in particular. So how can Uniswap compete with Aerodrome? Aerodrome lowers fees and uses Aero tokens as additional incentive. In this proposal, the community discusses the ramifications of allowing more competitive fee tiers through fractionalization of the pool.
I'm a voter with Blockchain at Berkeley. All thoughts are my own and not representative of the organization as a whole.
Market share, revenue capture, and price stability are all important for this pool in particular. So how can Uniswap compete with Aerodrome? Aerodrome lowers fees and uses Aero tokens as additional incentive. In this proposal, the community discusses the ramifications of allowing more competitive fee tiers through fractionalization of the pool.
Since Base is itself still a relatively nascent market, I believe this experiment would provide valuable data to determine the viability of lowering fee tiers on other markets as well, as well as the stickiness of DeFi users on Base. As well, Base does not provide an oversized proportion of Uniswap's volume or revenue, so the risk of any price instability leading to decreased usage is palatable. However, the community should treat this as an experiment and just that; this is not the beginning of a race to the bottom against Aerodrome.
Through this proposal, the community has also discussed the differences in trade sizes between Aerodrome and Uni on Base, the greater number of stakeholders for Uni (like oracles which use Uni), and arbitrage loss. These are all important points to further discuss as this experiment goes on.
Blockchain at Berkeley voted yes on this proposal.
On your comment about the tick-spacings, I was going to stick with the 2x fee-tier that has traditionally been done. While I agree with you that smaller tick-spacings could make sense on cheaper chains, there is little hard empirical evidence of the tradeoffs of tick-spacings. I have no strong opinion however and would take feedback here.
Aerodrome is operating at a deficit. It was recently reported that Aerodrome has spent $2.65 on incentives for every dollar in revenue generated. Curious to see how their market share fares when rewards dry up.
Gm, gm :sparkles:
The results are in for the Proposal to active 2, 3, 4 bps fee-tiers on Base on-chain proposal.
See how the community voted and more Uniswap stats:
We generally believe that the fee-tier is one of the main reasons. There is certainly an impact from liquidity differences, but it should generally be negligible for the vast majority of retail traders.
Because retail flow generally has such small price impact, liquidity differences do not matter more than the difference in the fee. You can see this in Table 1 from our previous written papers on the costs of swapping on AMMs. While the data is from Ethereum Mainnet, it should be a decent data point.
We generally believe that the fee-tier is one of the main reasons. There is certainly an impact from liquidity differences, but it should generally be negligible for the vast majority of retail traders.
Because retail flow generally has such small price impact, liquidity differences do not matter more than the difference in the fee. You can see this in Table 1 from our previous written papers on the costs of swapping on AMMs. While the data is from Ethereum Mainnet, it should be a decent data point.
According to the paper, the average medium-sized ($1k - 100k) ETH/USDC retail trade has a price impact of .7 bps. Since the fee difference is greater than this amount, no amount of liquidity differences for the median trade will bring back flow.
To bring back flow without changing the fee, the difference in price impact would have to be larger than the differences in fee. The fee costs is fixed, while the price impact is based on the size of the trade, meaning that only larger trades would be eligible for routing back to the Uniswap Protocol with increased liquidity.
Happy to chat about some of these valid concerns.
First, we believe that fractionalization of liquidity on L2s is inherently less impactful due to lower gas costs on the chain. Splitting a trade between two pools on an L2 has less fixed costs from reading contract into state, which means that a price sensitive transaction is more likely to split. We have seen this empirically with routers more likely to split trades on L2s. This likely means that there will not be a large market impact from liquidity fragmentation.
Happy to chat about some of these valid concerns.
First, we believe that fractionalization of liquidity on L2s is inherently less impactful due to lower gas costs on the chain. Splitting a trade between two pools on an L2 has less fixed costs from reading contract into state, which means that a price sensitive transaction is more likely to split. We have seen this empirically with routers more likely to split trades on L2s. This likely means that there will not be a large market impact from liquidity fragmentation.
We believe that the below graphic is the best explanation of the current situation. Price sensitive retail flow is defined as flow that originated from an interface that is not associated with a DEX project. Some examples are Matcha, 1inch, Odos, etc.
We choose this metric as these users are purely looking for the best price for execution on the chain. As we can see, over the last 28 days, the majority of volume from these interfaces was directed to Aerodrome. This flow is key to capture.
Source: https://dune.com/queries/3991567/6717557
This tracks with our previous analysis on the size of trades on the two pools, which shows that larger (generally more price sensitive) but fewer traders are trading on Aerodrome.
Source: https://dune.com/queries/3969057
Retail flow and what impacts it is one of the current largest unsolved problems in AMM/finance literature. We cannot provide definitive impacts nor optimal rates, but see Aerodrome (which is a v3 fork with minimal changes) as a good natural experiment. Aerodrome can likely react quickly to any changes from Uniswap v3 LPs, which is why we suggested not liquidity mining at this time. We just believe that LPs should be given more choice.
This is an important point to make. I will say that there is a distinct market structure difference between short-tail ETH pairs and long-tail tokens.
For the ETH/USDC pair specifically, over the last 14 days, the Uniswap v3 pool does have significantly more unique traders - around 3x more (48k for v3 and 16k for Aerodrome). However, the median trade size is around 4x larger for Aerodrome ($4.7k vs 1.1k). Source: https://dune.com/queries/3969057
This is an important point to make. I will say that there is a distinct market structure difference between short-tail ETH pairs and long-tail tokens.
For the ETH/USDC pair specifically, over the last 14 days, the Uniswap v3 pool does have significantly more unique traders - around 3x more (48k for v3 and 16k for Aerodrome). However, the median trade size is around 4x larger for Aerodrome ($4.7k vs 1.1k). Source: https://dune.com/queries/3969057
Non-toxic large trades are very impactful, because they pay marginally more price impact than smaller trades. This ends up with LPs profiting marginally more money from these trade. They are also likely the most price sensitive/ use aggregatorsfrom previous analysis. All together it is notable that larger trades are seeing a switch over to Aerodrome, likely because of fee differences
There could be further attempts or ideas to bring liquidity over if the current approaches fail, but I believe that they should not be expected and would require more discussion. I personally do not believe that token emissions are a sustainable market structure, so would prefer to go with no token incentives and then utilize the generated data to evaluate if token incentives are worth the value.
Happy to mark this as an experiment, which I believe is a good framing of this approach. It should not be repeated blindly on more chains, unless there is further research and discussion on the output of the change.
Thanks for the great, detailed analysis!
You nicely demonstrate the motivation with the example of the 4bp Aerodrome pool. More generally, I understand the motivation as:
Add more fee tiers to give LPs more fine-grained choices to compete with other AMM pools. (Please correct me if I'm wrong.)
I'd like to add two points on this:
Thanks for the great, detailed analysis!
You nicely demonstrate the motivation with the example of the 4bp Aerodrome pool. More generally, I understand the motivation as:
Add more fee tiers to give LPs more fine-grained choices to compete with other AMM pools. (Please correct me if I'm wrong.)
I'd like to add two points on this:
If we believe adding more fine-grained fee-tiers is good, should this be done across the full range of fee tiers? The current fee tiers of 1, 5, 30, 100 are relatively evenly spaced out with ~4-6x increases between them. Just as you're suggesting to add new tiers between 1 and 5 bps, maybe the same should be done, for instance, between 5 and 30 bps with new 10 and 20 bp tiers. A possible set of fee tiers in the current fee tier range could be: 1, 2, 3, 4, 5, 10, 20, 30, 50, 100 bps. What are your thoughts on this?
Regarding the possible liquidity fragmentation, I wonder how much empirical evidence there is on this statement:
However, we believe that liquidity providers will respond quickly to updates of the fee. This will overcome the effects from liquidity fragmentation.
For instance, I believe liquidity has often consistently been split between 5bp and 30bp pools, even though they are a lot farther apart than 2,3,4 bp pools.
We generally believe that the fee-tier is one of the main reasons. There is certainly an impact from liquidity differences, but it should generally be negligible for the vast majority of retail traders.
Because retail flow generally has such small price impact, liquidity differences do not matter more than the difference in the fee. You can see this in Table 1 from our previous written papers on the costs of swapping on AMMs. While the data is from Ethereum Mainnet, it should be a decent data point.
We generally believe that the fee-tier is one of the main reasons. There is certainly an impact from liquidity differences, but it should generally be negligible for the vast majority of retail traders.
Because retail flow generally has such small price impact, liquidity differences do not matter more than the difference in the fee. You can see this in Table 1 from our previous written papers on the costs of swapping on AMMs. While the data is from Ethereum Mainnet, it should be a decent data point.
According to the paper, the average medium-sized ($1k - 100k) ETH/USDC retail trade has a price impact of .7 bps. Since the fee difference is greater than this amount, no amount of liquidity differences for the median trade will bring back flow.
To bring back flow without changing the fee, the difference in price impact would have to be larger than the differences in fee. The fee costs is fixed, while the price impact is based on the size of the trade, meaning that only larger trades would be eligible for routing back to the Uniswap Protocol with increased liquidity.
Happy to chat about some of these valid concerns.
First, we believe that fractionalization of liquidity on L2s is inherently less impactful due to lower gas costs on the chain. Splitting a trade between two pools on an L2 has less fixed costs from reading contract into state, which means that a price sensitive transaction is more likely to split. We have seen this empirically with routers more likely to split trades on L2s. This likely means that there will not be a large market impact from liquidity fragmentation.
Happy to chat about some of these valid concerns.
First, we believe that fractionalization of liquidity on L2s is inherently less impactful due to lower gas costs on the chain. Splitting a trade between two pools on an L2 has less fixed costs from reading contract into state, which means that a price sensitive transaction is more likely to split. We have seen this empirically with routers more likely to split trades on L2s. This likely means that there will not be a large market impact from liquidity fragmentation.
We believe that the below graphic is the best explanation of the current situation. Price sensitive retail flow is defined as flow that originated from an interface that is not associated with a DEX project. Some examples are Matcha, 1inch, Odos, etc.
We choose this metric as these users are purely looking for the best price for execution on the chain. As we can see, over the last 28 days, the majority of volume from these interfaces was directed to Aerodrome. This flow is key to capture.
Source: https://dune.com/queries/3991567/6717557
This tracks with our previous analysis on the size of trades on the two pools, which shows that larger (generally more price sensitive) but fewer traders are trading on Aerodrome.
Source: https://dune.com/queries/3969057
Retail flow and what impacts it is one of the current largest unsolved problems in AMM/finance literature. We cannot provide definitive impacts nor optimal rates, but see Aerodrome (which is a v3 fork with minimal changes) as a good natural experiment. Aerodrome can likely react quickly to any changes from Uniswap v3 LPs, which is why we suggested not liquidity mining at this time. We just believe that LPs should be given more choice.
This is an important point to make. I will say that there is a distinct market structure difference between short-tail ETH pairs and long-tail tokens.
For the ETH/USDC pair specifically, over the last 14 days, the Uniswap v3 pool does have significantly more unique traders - around 3x more (48k for v3 and 16k for Aerodrome). However, the median trade size is around 4x larger for Aerodrome ($4.7k vs 1.1k). Source: https://dune.com/queries/3969057
This is an important point to make. I will say that there is a distinct market structure difference between short-tail ETH pairs and long-tail tokens.
For the ETH/USDC pair specifically, over the last 14 days, the Uniswap v3 pool does have significantly more unique traders - around 3x more (48k for v3 and 16k for Aerodrome). However, the median trade size is around 4x larger for Aerodrome ($4.7k vs 1.1k). Source: https://dune.com/queries/3969057
Non-toxic large trades are very impactful, because they pay marginally more price impact than smaller trades. This ends up with LPs profiting marginally more money from these trade. They are also likely the most price sensitive/ use aggregatorsfrom previous analysis. All together it is notable that larger trades are seeing a switch over to Aerodrome, likely because of fee differences
There could be further attempts or ideas to bring liquidity over if the current approaches fail, but I believe that they should not be expected and would require more discussion. I personally do not believe that token emissions are a sustainable market structure, so would prefer to go with no token incentives and then utilize the generated data to evaluate if token incentives are worth the value.
Happy to mark this as an experiment, which I believe is a good framing of this approach. It should not be repeated blindly on more chains, unless there is further research and discussion on the output of the change.
Thanks for the great, detailed analysis!
You nicely demonstrate the motivation with the example of the 4bp Aerodrome pool. More generally, I understand the motivation as:
Add more fee tiers to give LPs more fine-grained choices to compete with other AMM pools. (Please correct me if I'm wrong.)
I'd like to add two points on this:
Thanks for the great, detailed analysis!
You nicely demonstrate the motivation with the example of the 4bp Aerodrome pool. More generally, I understand the motivation as:
Add more fee tiers to give LPs more fine-grained choices to compete with other AMM pools. (Please correct me if I'm wrong.)
I'd like to add two points on this:
If we believe adding more fine-grained fee-tiers is good, should this be done across the full range of fee tiers? The current fee tiers of 1, 5, 30, 100 are relatively evenly spaced out with ~4-6x increases between them. Just as you're suggesting to add new tiers between 1 and 5 bps, maybe the same should be done, for instance, between 5 and 30 bps with new 10 and 20 bp tiers. A possible set of fee tiers in the current fee tier range could be: 1, 2, 3, 4, 5, 10, 20, 30, 50, 100 bps. What are your thoughts on this?
Regarding the possible liquidity fragmentation, I wonder how much empirical evidence there is on this statement:
However, we believe that liquidity providers will respond quickly to updates of the fee. This will overcome the effects from liquidity fragmentation.
For instance, I believe liquidity has often consistently been split between 5bp and 30bp pools, even though they are a lot farther apart than 2,3,4 bp pools.
What further research is Gauntlet seeking?
If most volume is being routed through alternative frontends due to Aerodrome's lower fees, and more competition arises to match those fees, then Aerodrome’s bribe costs will lead to significantly lower trading fee accrual in the long term, even if they continue to undercut the true market fee dynamics.
An observation on potential conflicts of interest:
What further research is Gauntlet seeking?
If most volume is being routed through alternative frontends due to Aerodrome's lower fees, and more competition arises to match those fees, then Aerodrome’s bribe costs will lead to significantly lower trading fee accrual in the long term, even if they continue to undercut the true market fee dynamics.
An observation on potential conflicts of interest:
In DAO proposals involving competitive movements, it is essential to disclose potential conflicts of interest. Some paid delegates work with other DAOs and may hold tokens in those DAOs, which could influence their voting behavior. In such cases, declaring the conflict and abstaining from voting on those grounds is appropriate.
For example, Gauntlet "works closely" with Aerodrome on strategies related to "migration strategy."
Gm everyone
The results are in for the [REDO: Temp Check] Activate 2, 3, 4 bps fee tiers on Uniswap v3 on Base off-chain proposal.
See how the community voted and more Uniswap stats: https://dhive.io/proposal/1042/
One of my main grievances with the delegate reward initiative is that delegates are being paid simply to vote, rather than to provide insightful data on proposals. Gauntlet, as a recipient of monthly UNI rewards and a specialist in the type of data analytics required to address these questions, seems well-positioned to answer its own questions regarding the second- and third-order effects of this proposal. Is there a reason Gauntlet cannot provide these answers?
I assume this is due to the hypothetical nature of the questions, and that passing the proposal is the only way to find the true answers?
One of my main grievances with the delegate reward initiative is that delegates are being paid simply to vote, rather than to provide insightful data on proposals. Gauntlet, as a recipient of monthly UNI rewards and a specialist in the type of data analytics required to address these questions, seems well-positioned to answer its own questions regarding the second- and third-order effects of this proposal. Is there a reason Gauntlet cannot provide these answers?
I assume this is due to the hypothetical nature of the questions, and that passing the proposal is the only way to find the true answers?
As for conflicts of interest, this is my second major concern with the reward program. Many rewarded delegates are paid monthly by several different DAOs, creating conflicting interests regarding the competitiveness of those DAOs. Additionally, much of the voting power of these delegates is often delegated from one or two third-party organizations. It is important for all rewarded delegates to disclose potential conflicts of interest to eliminate scrutiny, ensure transparency and diligence, and address potential cross-pollination. Thank you for clarifying that Gauntlet has no financial vested interest in Aerodrome, despite past partnership.
Thorough research! It makes sense to lower the LP fees considering the volume being aggregated through alternative frontends:
$295,000,000 to Aerodrome
$65,000,000 to Uniswap
Thorough research! It makes sense to lower the LP fees considering the volume being aggregated through alternative frontends:
$295,000,000 to Aerodrome
$65,000,000 to Uniswap
Additionally, Aerodrome has high spending incentives via token emissions. Each Aerodrome epoch, which occurs every 7 days, disburses around 12,300,000 Aero. At the current Aero price of $0.64, this amounts to approximately $7,872,000 per week.
Scroll down to the Aero supply distribution section, this analyics page also includes data on bribes vs. fees, including Slipstream:
https://dune.com/0xkhmer/aerodrome
Potential Risk: Aerodrome has a highly aligned token with its users. Its evangelized users, who are also token holders, are likely to be sticky—remaining loyal to the protocol regardless of a competitor's decreased LP fees.
What further research is Gauntlet seeking?
If most volume is being routed through alternative frontends due to Aerodrome's lower fees, and more competition arises to match those fees, then Aerodrome’s bribe costs will lead to significantly lower trading fee accrual in the long term, even if they continue to undercut the true market fee dynamics.
An observation on potential conflicts of interest:
What further research is Gauntlet seeking?
If most volume is being routed through alternative frontends due to Aerodrome's lower fees, and more competition arises to match those fees, then Aerodrome’s bribe costs will lead to significantly lower trading fee accrual in the long term, even if they continue to undercut the true market fee dynamics.
An observation on potential conflicts of interest:
In DAO proposals involving competitive movements, it is essential to disclose potential conflicts of interest. Some paid delegates work with other DAOs and may hold tokens in those DAOs, which could influence their voting behavior. In such cases, declaring the conflict and abstaining from voting on those grounds is appropriate.
For example, Gauntlet "works closely" with Aerodrome on strategies related to "migration strategy."
Gm everyone
The results are in for the [REDO: Temp Check] Activate 2, 3, 4 bps fee tiers on Uniswap v3 on Base off-chain proposal.
See how the community voted and more Uniswap stats: https://dhive.io/proposal/1042/
One of my main grievances with the delegate reward initiative is that delegates are being paid simply to vote, rather than to provide insightful data on proposals. Gauntlet, as a recipient of monthly UNI rewards and a specialist in the type of data analytics required to address these questions, seems well-positioned to answer its own questions regarding the second- and third-order effects of this proposal. Is there a reason Gauntlet cannot provide these answers?
I assume this is due to the hypothetical nature of the questions, and that passing the proposal is the only way to find the true answers?
One of my main grievances with the delegate reward initiative is that delegates are being paid simply to vote, rather than to provide insightful data on proposals. Gauntlet, as a recipient of monthly UNI rewards and a specialist in the type of data analytics required to address these questions, seems well-positioned to answer its own questions regarding the second- and third-order effects of this proposal. Is there a reason Gauntlet cannot provide these answers?
I assume this is due to the hypothetical nature of the questions, and that passing the proposal is the only way to find the true answers?
As for conflicts of interest, this is my second major concern with the reward program. Many rewarded delegates are paid monthly by several different DAOs, creating conflicting interests regarding the competitiveness of those DAOs. Additionally, much of the voting power of these delegates is often delegated from one or two third-party organizations. It is important for all rewarded delegates to disclose potential conflicts of interest to eliminate scrutiny, ensure transparency and diligence, and address potential cross-pollination. Thank you for clarifying that Gauntlet has no financial vested interest in Aerodrome, despite past partnership.
Thorough research! It makes sense to lower the LP fees considering the volume being aggregated through alternative frontends:
$295,000,000 to Aerodrome
$65,000,000 to Uniswap
Thorough research! It makes sense to lower the LP fees considering the volume being aggregated through alternative frontends:
$295,000,000 to Aerodrome
$65,000,000 to Uniswap
Additionally, Aerodrome has high spending incentives via token emissions. Each Aerodrome epoch, which occurs every 7 days, disburses around 12,300,000 Aero. At the current Aero price of $0.64, this amounts to approximately $7,872,000 per week.
Scroll down to the Aero supply distribution section, this analyics page also includes data on bribes vs. fees, including Slipstream:
https://dune.com/0xkhmer/aerodrome
Potential Risk: Aerodrome has a highly aligned token with its users. Its evangelized users, who are also token holders, are likely to be sticky—remaining loyal to the protocol regardless of a competitor's decreased LP fees.
This is a highly relevant topic, thank you for bringing it up.
I think there are two aspects we should consider: volume and fee generation. Base is Uniswap's most profitable chain (excluding Ethereum), despite not being the one with the highest volumes. We need to carefully consider whether our primary goal is to maximise profitability through higher fees or to expand our market share by attracting more volume, potentially sacrificing profitability.
This is a highly relevant topic, thank you for bringing it up.
I think there are two aspects we should consider: volume and fee generation. Base is Uniswap's most profitable chain (excluding Ethereum), despite not being the one with the highest volumes. We need to carefully consider whether our primary goal is to maximise profitability through higher fees or to expand our market share by attracting more volume, potentially sacrificing profitability.
In terms of volumes, Aerodrome is continuously expanding its market share at the expense of Uniswap. However, what is interesting is that Uniswap has an order-of-magnitude larger amount of daily active users compared to Aerodrome, despite the latter having larger volumes. To me, this means Uniswap attracts a broad and active user base engaged in smaller-scale trading where Aerodrome has a concentration of high-value trades by fewer users.
The question is: would adding multiple fee tiers do the trick and attract some of these high-value trades? Or, would it just reduce profitability on the existing smaller trades?
I am in favor of this proposal, as it would be interesting to see the resulting data.
Risks:
I also have concerns about point #2 that @kfx raised: "2. ETH/USDC LPs on Uniswap@Base remain profitable according to metrics such as realized PnL, etc." One of the main narratives I've encountered around Uniswap is the impermanent loss that LPs face, which may not always be fully realized.
I am in favor of this proposal, as it would be interesting to see the resulting data.
Risks:
I also have concerns about point #2 that @kfx raised: "2. ETH/USDC LPs on Uniswap@Base remain profitable according to metrics such as realized PnL, etc." One of the main narratives I've encountered around Uniswap is the impermanent loss that LPs face, which may not always be fully realized.
This analysis focuses mainly on the 4% fee tier as the reason to introduce more tiers. Are other factors at play?
Are LPs profitable on Aerodrome, and is the Total Value Locked (TVL) attracted mainly through token distributions and voting via veAero?
Is there an incentive to engage in wash trading for token distribution or voting power?
I’m not familiar with how their model works and how it might skew the presented data. Is it a hybrid of Curve and Uniswap?
Final Thought:
It would be unfortunate to see Uniswap LPs presented with lowering fees and potentially incurring losses to compete with metrics influenced by token dilution. However, lowering the fee tiers may address many of the questions raised above. I believe the data will be useful, and LPs will eventually find an equilibrium around profitability in the long term.
This is a highly relevant topic, thank you for bringing it up.
I think there are two aspects we should consider: volume and fee generation. Base is Uniswap's most profitable chain (excluding Ethereum), despite not being the one with the highest volumes. We need to carefully consider whether our primary goal is to maximise profitability through higher fees or to expand our market share by attracting more volume, potentially sacrificing profitability.
This is a highly relevant topic, thank you for bringing it up.
I think there are two aspects we should consider: volume and fee generation. Base is Uniswap's most profitable chain (excluding Ethereum), despite not being the one with the highest volumes. We need to carefully consider whether our primary goal is to maximise profitability through higher fees or to expand our market share by attracting more volume, potentially sacrificing profitability.
In terms of volumes, Aerodrome is continuously expanding its market share at the expense of Uniswap. However, what is interesting is that Uniswap has an order-of-magnitude larger amount of daily active users compared to Aerodrome, despite the latter having larger volumes. To me, this means Uniswap attracts a broad and active user base engaged in smaller-scale trading where Aerodrome has a concentration of high-value trades by fewer users.
The question is: would adding multiple fee tiers do the trick and attract some of these high-value trades? Or, would it just reduce profitability on the existing smaller trades?
I am in favor of this proposal, as it would be interesting to see the resulting data.
Risks:
I also have concerns about point #2 that @kfx raised: "2. ETH/USDC LPs on Uniswap@Base remain profitable according to metrics such as realized PnL, etc." One of the main narratives I've encountered around Uniswap is the impermanent loss that LPs face, which may not always be fully realized.
I am in favor of this proposal, as it would be interesting to see the resulting data.
Risks:
I also have concerns about point #2 that @kfx raised: "2. ETH/USDC LPs on Uniswap@Base remain profitable according to metrics such as realized PnL, etc." One of the main narratives I've encountered around Uniswap is the impermanent loss that LPs face, which may not always be fully realized.
This analysis focuses mainly on the 4% fee tier as the reason to introduce more tiers. Are other factors at play?
Are LPs profitable on Aerodrome, and is the Total Value Locked (TVL) attracted mainly through token distributions and voting via veAero?
Is there an incentive to engage in wash trading for token distribution or voting power?
I’m not familiar with how their model works and how it might skew the presented data. Is it a hybrid of Curve and Uniswap?
Final Thought:
It would be unfortunate to see Uniswap LPs presented with lowering fees and potentially incurring losses to compete with metrics influenced by token dilution. However, lowering the fee tiers may address many of the questions raised above. I believe the data will be useful, and LPs will eventually find an equilibrium around profitability in the long term.
I agree with the view that doing the experiment itself is part of the research, so I voted for the proposal. The results will facilitate modeling the various "what if" scenarios in the future, for this and similar situations. We have a research question, we have some hypothesis, let's see how it plays out.
I agree with the view that doing the experiment itself is part of the research, so I voted for the proposal. The results will facilitate modeling the various "what if" scenarios in the future, for this and similar situations. We have a research question, we have some hypothesis, let's see how it plays out.
Regarding the second point, we agree that token incentives are not a solution. Our point was that this proposal might be premature since Aerodrome incentivizes liquidity. Our instinct is that AERO emissions are driving the migration in liquidity rather than LPs preferring lower fee tiers. For example, we deposited some test funds four days ago, and if we annualize the AERO rewards it comes out to 40% return. Of course, the range of the position and the volatility of the market play a role in receiving emissions, so that estimate might not be ideal, but at least it gives a sense of what is occurring. Perhaps more research could determine how many AERO tokens are going to the previous LPs on Uniswap.
This specific problem may be a short-term, but ultimately I believe this proposal is aimed at giving more flexibility to LPs.
Regarding the second point, we agree that token incentives are not a solution. Our point was that this proposal might be premature since Aerodrome incentivizes liquidity. Our instinct is that AERO emissions are driving the migration in liquidity rather than LPs preferring lower fee tiers. For example, we deposited some test funds four days ago, and if we annualize the AERO rewards it comes out to 40% return. Of course, the range of the position and the volatility of the market play a role in receiving emissions, so that estimate might not be ideal, but at least it gives a sense of what is occurring. Perhaps more research could determine how many AERO tokens are going to the previous LPs on Uniswap.
This specific problem may be a short-term, but ultimately I believe this proposal is aimed at giving more flexibility to LPs.
The following reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking, and ideation of the two.
We’re voting FOR this proposal.
We’re voting for the proposal for the same reasons we voted in its favor during the temp check.
Gauntlet communicated its position following the temperature check, highlighting outstanding questions regarding the proposal and requesting feedback around the second and third-order effects of introducing multiple lower fee-tier pools.
Gauntlet is not outright against the proposal. At this time, Gauntlet has opted not to actively vote for it, with outstanding questions around its effects on liquidity providers and evidence that this will result in a favorable market position for Uniswap.
Gauntlet communicated its position following the temperature check, highlighting outstanding questions regarding the proposal and requesting feedback around the second and third-order effects of introducing multiple lower fee-tier pools.
Gauntlet is not outright against the proposal. At this time, Gauntlet has opted not to actively vote for it, with outstanding questions around its effects on liquidity providers and evidence that this will result in a favorable market position for Uniswap.
The proposal focuses on vampiring volume from aggregators with a focus on lower trading fees. We're most interested in research on how liquidity is affected if Aerodrome cuts fees in response to Uniswap's lower fee-tier pools. For example, in a scenario where Aerodrome has undercut Uniswap’s most competitive fee-tier pool, Uniswap may find itself with a similar market share; only Uniswap LPs are making less revenue because they’re in a lower fee tier. Will Aerodrome pools become more attractive at lower fee-tiers than Uniswap because AERO incentives account for a larger percentage of LP revenue?
As for the Conflict of Interest claims Gauntlet has been working with a wide range of Base ecosystem projects, including Uniswap, to grow USDC TVL on Base. Gauntlet is not compensated by Aerodrome.
Gauntlet intends to Abstain from this vote per our previous feedback and similar comments from @Doo_StableLab and @GFXlabs. While we see potential benefits, there isn't a clear path toward success, and it doesn't appear that additional meaningful research has been conducted to support the thesis that there is a significant upside, as requested following the Snapshot vote.
While lowering fee tiers on Base may provide a short-term victory in attracting volume, a few factors, including the sustainability of the mercenary incentivization of ETH/USDC liquidity on Aerodrome, the potential fragmentation of liquidity across multiple Uniswap fee-tier pools, and Aerodrome's ability to undercut or match Uniswap fees to win-back volume quickly, limit this experiment's potential to generate meaningful revenue in both the short and long-term.
As in the Temp Check, we vote in favor of this online proposal in the understanding that this change will make Uniswap more competitive, hopefully capturing part of Aerodrome's market cap and adapting to new market conditions that may occur in the future, waiting for an expected reaction of this DEX to the move that Uniswap will make.
Here is our full rationale.
Thank you, Austin, for bringing this proposal to the DAO. Historically, the organization has been concerned about fragmenting liquidity; however, as you pointed out, those concerns aren't as applicable, with Base's gas costs being significantly lower than Ethereum's. Also, with v4 on the horizon, LPs will soon have total optionality to choose/program the fees to their desire. While the near-jerk reaction of some may be to postpone this initiative, this proposal will be a good opportunity to test how LPs will manage that flexibility with v4 in a low-risk manner.
We do have two concerns:
We are in support of running more experiments to find the optimal fee tier.
It's good to acknowledge that the optimal tier may be different due to the L2's lower blocktimes and gas fees.
But the higher volumes on Aerodrome is most likely coming from the token emissions being given to LP'ers.
"Acknowledge if the experiment fails"
Having analyzed the proposal and despite some concerns we have, we understand that it is worth trying to add new fee tiers in the ETH/USDC pair in Base, in order to make Uniswap more competitive, hopefully capturing part of Aerodrome’s market cap and adapting to new market conditions that may occur in the future, waiting for an expected reaction from that DEX to the move that Uniswap makes.
However, we do not want to overlook the potential disadvantages that the new implementation may bring:
Having analyzed the proposal and despite some concerns we have, we understand that it is worth trying to add new fee tiers in the ETH/USDC pair in Base, in order to make Uniswap more competitive, hopefully capturing part of Aerodrome’s market cap and adapting to new market conditions that may occur in the future, waiting for an expected reaction from that DEX to the move that Uniswap makes.
However, we do not want to overlook the potential disadvantages that the new implementation may bring:
If the proposal is approved, we expect the proponent to conduct a subsequent analysis and present conclusions on the impact of the changes introduced, to corroborate that the proposed hypothesis has been validated. We encourage the proponent will consider a commitment to this sense for the onchain vote.
This has been a very interesting proposal to dive deep into, as I'm a big fan of Aerodrome and the results of their incentive model.
I summarized this thread on Twitter to educate more people about what is happening here and the significance of it.
Hi. We would like to ask a question, do you have any metrics, data or projections on the potential impact of liquidity overfragmentation that would result from the introduction of new pools/fee tiers for the ETH/USDC pair? Thanks.
Hi @aadams, thank you for the proposal. We would like to voice concern around the theorized motivation for why aerodrome has overtaken Uni on Base. While the fee tier could be the reason, it very well could be the token incentives driving deeper liquidity which subsequently would lead to Aerodrome being the preferred outlet for larger traders.
If the current assumptions presented around the fee tier do not end up being the real cause for the decline in market share, then we risk collateral damage by hurting lp margins who then may take their capital to aerodrome where they are already offering a competitive, albeit subsidized, rate.
Regarding the second point, we agree that token incentives are not a solution. Our point was that this proposal might be premature since Aerodrome incentivizes liquidity. Our instinct is that AERO emissions are driving the migration in liquidity rather than LPs preferring lower fee tiers. For example, we deposited some test funds four days ago, and if we annualize the AERO rewards it comes out to 40% return. Of course, the range of the position and the volatility of the market play a role in receiving emissions, so that estimate might not be ideal, but at least it gives a sense of what is occurring. Perhaps more research could determine how many AERO tokens are going to the previous LPs on Uniswap.
This specific problem may be a short-term, but ultimately I believe this proposal is aimed at giving more flexibility to LPs.
Regarding the second point, we agree that token incentives are not a solution. Our point was that this proposal might be premature since Aerodrome incentivizes liquidity. Our instinct is that AERO emissions are driving the migration in liquidity rather than LPs preferring lower fee tiers. For example, we deposited some test funds four days ago, and if we annualize the AERO rewards it comes out to 40% return. Of course, the range of the position and the volatility of the market play a role in receiving emissions, so that estimate might not be ideal, but at least it gives a sense of what is occurring. Perhaps more research could determine how many AERO tokens are going to the previous LPs on Uniswap.
This specific problem may be a short-term, but ultimately I believe this proposal is aimed at giving more flexibility to LPs.
The following reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking, and ideation of the two.
We’re voting FOR this proposal.
We’re voting for the proposal for the same reasons we voted in its favor during the temp check.
Gauntlet communicated its position following the temperature check, highlighting outstanding questions regarding the proposal and requesting feedback around the second and third-order effects of introducing multiple lower fee-tier pools.
Gauntlet is not outright against the proposal. At this time, Gauntlet has opted not to actively vote for it, with outstanding questions around its effects on liquidity providers and evidence that this will result in a favorable market position for Uniswap.
Gauntlet communicated its position following the temperature check, highlighting outstanding questions regarding the proposal and requesting feedback around the second and third-order effects of introducing multiple lower fee-tier pools.
Gauntlet is not outright against the proposal. At this time, Gauntlet has opted not to actively vote for it, with outstanding questions around its effects on liquidity providers and evidence that this will result in a favorable market position for Uniswap.
The proposal focuses on vampiring volume from aggregators with a focus on lower trading fees. We're most interested in research on how liquidity is affected if Aerodrome cuts fees in response to Uniswap's lower fee-tier pools. For example, in a scenario where Aerodrome has undercut Uniswap’s most competitive fee-tier pool, Uniswap may find itself with a similar market share; only Uniswap LPs are making less revenue because they’re in a lower fee tier. Will Aerodrome pools become more attractive at lower fee-tiers than Uniswap because AERO incentives account for a larger percentage of LP revenue?
As for the Conflict of Interest claims Gauntlet has been working with a wide range of Base ecosystem projects, including Uniswap, to grow USDC TVL on Base. Gauntlet is not compensated by Aerodrome.
Gauntlet intends to Abstain from this vote per our previous feedback and similar comments from @Doo_StableLab and @GFXlabs. While we see potential benefits, there isn't a clear path toward success, and it doesn't appear that additional meaningful research has been conducted to support the thesis that there is a significant upside, as requested following the Snapshot vote.
While lowering fee tiers on Base may provide a short-term victory in attracting volume, a few factors, including the sustainability of the mercenary incentivization of ETH/USDC liquidity on Aerodrome, the potential fragmentation of liquidity across multiple Uniswap fee-tier pools, and Aerodrome's ability to undercut or match Uniswap fees to win-back volume quickly, limit this experiment's potential to generate meaningful revenue in both the short and long-term.
As in the Temp Check, we vote in favor of this online proposal in the understanding that this change will make Uniswap more competitive, hopefully capturing part of Aerodrome's market cap and adapting to new market conditions that may occur in the future, waiting for an expected reaction of this DEX to the move that Uniswap will make.
Here is our full rationale.
Thank you, Austin, for bringing this proposal to the DAO. Historically, the organization has been concerned about fragmenting liquidity; however, as you pointed out, those concerns aren't as applicable, with Base's gas costs being significantly lower than Ethereum's. Also, with v4 on the horizon, LPs will soon have total optionality to choose/program the fees to their desire. While the near-jerk reaction of some may be to postpone this initiative, this proposal will be a good opportunity to test how LPs will manage that flexibility with v4 in a low-risk manner.
We do have two concerns:
We are in support of running more experiments to find the optimal fee tier.
It's good to acknowledge that the optimal tier may be different due to the L2's lower blocktimes and gas fees.
But the higher volumes on Aerodrome is most likely coming from the token emissions being given to LP'ers.
"Acknowledge if the experiment fails"
Having analyzed the proposal and despite some concerns we have, we understand that it is worth trying to add new fee tiers in the ETH/USDC pair in Base, in order to make Uniswap more competitive, hopefully capturing part of Aerodrome’s market cap and adapting to new market conditions that may occur in the future, waiting for an expected reaction from that DEX to the move that Uniswap makes.
However, we do not want to overlook the potential disadvantages that the new implementation may bring:
Having analyzed the proposal and despite some concerns we have, we understand that it is worth trying to add new fee tiers in the ETH/USDC pair in Base, in order to make Uniswap more competitive, hopefully capturing part of Aerodrome’s market cap and adapting to new market conditions that may occur in the future, waiting for an expected reaction from that DEX to the move that Uniswap makes.
However, we do not want to overlook the potential disadvantages that the new implementation may bring:
If the proposal is approved, we expect the proponent to conduct a subsequent analysis and present conclusions on the impact of the changes introduced, to corroborate that the proposed hypothesis has been validated. We encourage the proponent will consider a commitment to this sense for the onchain vote.
This has been a very interesting proposal to dive deep into, as I'm a big fan of Aerodrome and the results of their incentive model.
I summarized this thread on Twitter to educate more people about what is happening here and the significance of it.
Hi. We would like to ask a question, do you have any metrics, data or projections on the potential impact of liquidity overfragmentation that would result from the introduction of new pools/fee tiers for the ETH/USDC pair? Thanks.
Hi @aadams, thank you for the proposal. We would like to voice concern around the theorized motivation for why aerodrome has overtaken Uni on Base. While the fee tier could be the reason, it very well could be the token incentives driving deeper liquidity which subsequently would lead to Aerodrome being the preferred outlet for larger traders.
If the current assumptions presented around the fee tier do not end up being the real cause for the decline in market share, then we risk collateral damage by hurting lp margins who then may take their capital to aerodrome where they are already offering a competitive, albeit subsidized, rate.
Gauntlet intends to Abstain from this vote per our previous feedback and similar comments from @Doo_StableLab and @GFXlabs. While we see potential benefits, there isn't a clear path toward success, and it doesn't appear that additional meaningful research has been conducted to support the thesis that there is a significant upside, as requested following the Snapshot vote.
While lowering fee tiers on Base may provide a short-term victory in attracting volume, a few factors, including the sustainability of the mercenary incentivization of ETH/USDC liquidity on Aerodrome, the potential fragmentation of liquidity across multiple Uniswap fee-tier pools, and Aerodrome's ability to undercut or match Uniswap fees to win-back volume quickly, limit this experiment's potential to generate meaningful revenue in both the short and long-term.
We are not outright against the concept, but as expressed in our Snapshot comments, the proposal lacks research to fully endorse the activation of 2/3/4 bps fee tiers for the ETH/USDC pool.
As in the Temp Check, we vote in favor of this online proposal in the understanding that this change will make Uniswap more competitive, hopefully capturing part of Aerodrome's market cap and adapting to new market conditions that may occur in the future, waiting for an expected reaction of this DEX to the move that Uniswap will make.
Here is our full rationale.
We expect the proponent to conduct a follow-up analysis and present conclusions on the impact of the changes introduced to confirm that the proposed hypothesis has been validated.
Thank you, Austin, for bringing this proposal to the DAO. Historically, the organization has been concerned about fragmenting liquidity; however, as you pointed out, those concerns aren't as applicable, with Base's gas costs being significantly lower than Ethereum's. Also, with v4 on the horizon, LPs will soon have total optionality to choose/program the fees to their desire. While the near-jerk reaction of some may be to postpone this initiative, this proposal will be a good opportunity to test how LPs will manage that flexibility with v4 in a low-risk manner.
We do have two concerns:
One question that would be good to address before an onchain vote would be selecting the tick spacing for each of these fee tiers. Are you planning on sticking with what is typically done or trying something new? Perhaps there is merit to doing something tighter on Base because of the low gas costs.
We are in support of running more experiments to find the optimal fee tier.
It's good to acknowledge that the optimal tier may be different due to the L2's lower blocktimes and gas fees.
But the higher volumes on Aerodrome is most likely coming from the token emissions being given to LP'ers.
"Acknowledge if the experiment fails"
Not clear, is this a genie out the bottle situation where the fee tiers can't be turned off if the experiment fails?
Also think @aadams should take charge on monitoring the results with the support of the community in providing research, graphs, and feedback.
This has been a very interesting proposal to dive deep into, as I'm a big fan of Aerodrome and the results of their incentive model.
I summarized this thread on Twitter to educate more people about what is happening here and the significance of it.
https://x.com/erickpinos/status/1826975299558392066
I think the experiment is worth running, so long as we analyze the results. L2s are different enough that the optimal fee tier could be a lower one, and the effects of fragmented liquidity don't seem to be as bad in an L2 environment.
Aerodrome's TVL is probably most likely the result of the incentive program though.
-Erick
Hi @aadams, thank you for the proposal. We would like to voice concern around the theorized motivation for why aerodrome has overtaken Uni on Base. While the fee tier could be the reason, it very well could be the token incentives driving deeper liquidity which subsequently would lead to Aerodrome being the preferred outlet for larger traders.
If the current assumptions presented around the fee tier do not end up being the real cause for the decline in market share, then we risk collateral damage by hurting lp margins who then may take their capital to aerodrome where they are already offering a competitive, albeit subsidized, rate.
Undercutting fees because we are losing market share is a knee-jerk reaction and does not take into account the full situation.
To be clear, we are not categorically against this proposal but there needs to be more research before any decisions are made.
Based on our own findings about Aerodrome’s recent success, we also would like to support this proposal and recommend an experimental period with a new fee rate for the ETH/USDC pool. In case the results from this experiment are unsavory, would there be some additional attempts we can take to try to regain volume in ETH/USDC? If liquidity mining and fee rate changes do not work, what’s next? There also might be some incentives at play with the AERO token that may be worth exploring. When volume/pool fees increase, the incentive to unlock and sell the AERO rewards decreases, and vice versa. Could this also have an effect in some way?
This is a clearly written and motivated proposal. Still, it presents some fairly significant risks. I would support it if it was clearly marked as an experiment, especially considering that v3 is expected to be obsoleted by v4 in the mid-term future, which reduces the impact of any potential negative outcomes.
A successful outcome of this experiment, as I understand it, would mean that all of the following expectations are met:
This is a clearly written and motivated proposal. Still, it presents some fairly significant risks. I would support it if it was clearly marked as an experiment, especially considering that v3 is expected to be obsoleted by v4 in the mid-term future, which reduces the impact of any potential negative outcomes.
A successful outcome of this experiment, as I understand it, would mean that all of the following expectations are met:
Conversely, bad outcomes would include any of the following:
As rfritsch mentioned, split liquidity is a common situation, so I think the third positive outcome is particularly unlikely if all of the 2, 3, and 4 bps fee tiers are enabled.
Additionally, even if the outcomes on Base are negative, there is a risk of blindly copying and deploying the proposal on other chains, where the environment is less favorable for AMM LPs than Base, or LPs are less experienced and more likely to misallocate liquidity.
Overall, my point is that if this is deployed as an experiment (as it should be), the DAO should be prepared to monitor the outcomes and acknowledge if the experiment fails.
The following reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking, and ideation of the two.
We’re voting FOR this proposal.
The following reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking, and ideation of the two.
We’re voting FOR this proposal.
Although we are not experts in the realm this proposal lies in and do not have strong opinions about the potential impact of activating smaller fee tiers, we’ve read the proposal and the discussion surrounding it, and we believe it’s worth experimenting with.
One thing we’d like to note is that the DAO should monitor the market share difference over the next few months for any unforeseen adverse effects and take action if needed.
We have voted in favor of the Snapshot proposal to activate 2, 3, and 4 bps fee-tiers on Base. That said, this is an area for greater research and discussion around the potential risks associated with this experiment, especially since the ETH/USDC Pool on Base represents one of the most strategic pairs on one of the most strategic L2s.
Considerations we think are worth exploring from the existing conversation:
We have voted in favor of the Snapshot proposal to activate 2, 3, and 4 bps fee-tiers on Base. That said, this is an area for greater research and discussion around the potential risks associated with this experiment, especially since the ETH/USDC Pool on Base represents one of the most strategic pairs on one of the most strategic L2s.
Considerations we think are worth exploring from the existing conversation:
We look forward to greater community research and discussion around the topic prior to an onchain vote. It's an interesting idea and certainly worth exploring more.
Can we go more into the details here, and agree if not on the expected results, then at least on the metrics to use? Also who will be doing the monitoring of the results, do Labs take on this task, or you see that more as a community effort?
Just to confirm the price impact with quick back-on-the-envelop math for Base, where liquidity in Uniswap's pools remains lower than on the mainnet.
The USDC/WETH pool on Base has approximately $200M of virtual USD liquidity active at the moment, as computed from basescan's liquidity and sqrtPriceX96 fields on basescan.
Just to confirm the price impact with quick back-on-the-envelop math for Base, where liquidity in Uniswap's pools remains lower than on the mainnet.
The USDC/WETH pool on Base has approximately $200M of virtual USD liquidity active at the moment, as computed from basescan's liquidity and sqrtPriceX96 fields on basescan.
Using the approximation I ~= swap_size / (L * sqrt(P)) where L is the liquidity (L = value_usd / 2 / sqrt(P)) and P is the price, we get:
In short, each additional $10k of swap size creates additional ~1 bps of price impact. If currently a user pays x bps for a swap of size s (in total, for impact + swap fee) , then after reducing the pool's fee tier by 1 bps the user would have the same total cost for a s + $10k swap. (This is from a single sample at the current state of the pool, so take with a grain of salt!)
Thanks for the proposal. However, for now, we will vote against it as proposal for research should come before activation.
Gauntlet intends to Abstain from this vote per our previous feedback and similar comments from @Doo_StableLab and @GFXlabs. While we see potential benefits, there isn't a clear path toward success, and it doesn't appear that additional meaningful research has been conducted to support the thesis that there is a significant upside, as requested following the Snapshot vote.
While lowering fee tiers on Base may provide a short-term victory in attracting volume, a few factors, including the sustainability of the mercenary incentivization of ETH/USDC liquidity on Aerodrome, the potential fragmentation of liquidity across multiple Uniswap fee-tier pools, and Aerodrome's ability to undercut or match Uniswap fees to win-back volume quickly, limit this experiment's potential to generate meaningful revenue in both the short and long-term.
We are not outright against the concept, but as expressed in our Snapshot comments, the proposal lacks research to fully endorse the activation of 2/3/4 bps fee tiers for the ETH/USDC pool.
As in the Temp Check, we vote in favor of this online proposal in the understanding that this change will make Uniswap more competitive, hopefully capturing part of Aerodrome's market cap and adapting to new market conditions that may occur in the future, waiting for an expected reaction of this DEX to the move that Uniswap will make.
Here is our full rationale.
We expect the proponent to conduct a follow-up analysis and present conclusions on the impact of the changes introduced to confirm that the proposed hypothesis has been validated.
Thank you, Austin, for bringing this proposal to the DAO. Historically, the organization has been concerned about fragmenting liquidity; however, as you pointed out, those concerns aren't as applicable, with Base's gas costs being significantly lower than Ethereum's. Also, with v4 on the horizon, LPs will soon have total optionality to choose/program the fees to their desire. While the near-jerk reaction of some may be to postpone this initiative, this proposal will be a good opportunity to test how LPs will manage that flexibility with v4 in a low-risk manner.
We do have two concerns:
One question that would be good to address before an onchain vote would be selecting the tick spacing for each of these fee tiers. Are you planning on sticking with what is typically done or trying something new? Perhaps there is merit to doing something tighter on Base because of the low gas costs.
We are in support of running more experiments to find the optimal fee tier.
It's good to acknowledge that the optimal tier may be different due to the L2's lower blocktimes and gas fees.
But the higher volumes on Aerodrome is most likely coming from the token emissions being given to LP'ers.
"Acknowledge if the experiment fails"
Not clear, is this a genie out the bottle situation where the fee tiers can't be turned off if the experiment fails?
Also think @aadams should take charge on monitoring the results with the support of the community in providing research, graphs, and feedback.
This has been a very interesting proposal to dive deep into, as I'm a big fan of Aerodrome and the results of their incentive model.
I summarized this thread on Twitter to educate more people about what is happening here and the significance of it.
https://x.com/erickpinos/status/1826975299558392066
I think the experiment is worth running, so long as we analyze the results. L2s are different enough that the optimal fee tier could be a lower one, and the effects of fragmented liquidity don't seem to be as bad in an L2 environment.
Aerodrome's TVL is probably most likely the result of the incentive program though.
-Erick
Hi @aadams, thank you for the proposal. We would like to voice concern around the theorized motivation for why aerodrome has overtaken Uni on Base. While the fee tier could be the reason, it very well could be the token incentives driving deeper liquidity which subsequently would lead to Aerodrome being the preferred outlet for larger traders.
If the current assumptions presented around the fee tier do not end up being the real cause for the decline in market share, then we risk collateral damage by hurting lp margins who then may take their capital to aerodrome where they are already offering a competitive, albeit subsidized, rate.
Undercutting fees because we are losing market share is a knee-jerk reaction and does not take into account the full situation.
To be clear, we are not categorically against this proposal but there needs to be more research before any decisions are made.
Based on our own findings about Aerodrome’s recent success, we also would like to support this proposal and recommend an experimental period with a new fee rate for the ETH/USDC pool. In case the results from this experiment are unsavory, would there be some additional attempts we can take to try to regain volume in ETH/USDC? If liquidity mining and fee rate changes do not work, what’s next? There also might be some incentives at play with the AERO token that may be worth exploring. When volume/pool fees increase, the incentive to unlock and sell the AERO rewards decreases, and vice versa. Could this also have an effect in some way?
This is a clearly written and motivated proposal. Still, it presents some fairly significant risks. I would support it if it was clearly marked as an experiment, especially considering that v3 is expected to be obsoleted by v4 in the mid-term future, which reduces the impact of any potential negative outcomes.
A successful outcome of this experiment, as I understand it, would mean that all of the following expectations are met:
This is a clearly written and motivated proposal. Still, it presents some fairly significant risks. I would support it if it was clearly marked as an experiment, especially considering that v3 is expected to be obsoleted by v4 in the mid-term future, which reduces the impact of any potential negative outcomes.
A successful outcome of this experiment, as I understand it, would mean that all of the following expectations are met:
Conversely, bad outcomes would include any of the following:
As rfritsch mentioned, split liquidity is a common situation, so I think the third positive outcome is particularly unlikely if all of the 2, 3, and 4 bps fee tiers are enabled.
Additionally, even if the outcomes on Base are negative, there is a risk of blindly copying and deploying the proposal on other chains, where the environment is less favorable for AMM LPs than Base, or LPs are less experienced and more likely to misallocate liquidity.
Overall, my point is that if this is deployed as an experiment (as it should be), the DAO should be prepared to monitor the outcomes and acknowledge if the experiment fails.
The following reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking, and ideation of the two.
We’re voting FOR this proposal.
The following reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking, and ideation of the two.
We’re voting FOR this proposal.
Although we are not experts in the realm this proposal lies in and do not have strong opinions about the potential impact of activating smaller fee tiers, we’ve read the proposal and the discussion surrounding it, and we believe it’s worth experimenting with.
One thing we’d like to note is that the DAO should monitor the market share difference over the next few months for any unforeseen adverse effects and take action if needed.
We have voted in favor of the Snapshot proposal to activate 2, 3, and 4 bps fee-tiers on Base. That said, this is an area for greater research and discussion around the potential risks associated with this experiment, especially since the ETH/USDC Pool on Base represents one of the most strategic pairs on one of the most strategic L2s.
Considerations we think are worth exploring from the existing conversation:
We have voted in favor of the Snapshot proposal to activate 2, 3, and 4 bps fee-tiers on Base. That said, this is an area for greater research and discussion around the potential risks associated with this experiment, especially since the ETH/USDC Pool on Base represents one of the most strategic pairs on one of the most strategic L2s.
Considerations we think are worth exploring from the existing conversation:
We look forward to greater community research and discussion around the topic prior to an onchain vote. It's an interesting idea and certainly worth exploring more.
Can we go more into the details here, and agree if not on the expected results, then at least on the metrics to use? Also who will be doing the monitoring of the results, do Labs take on this task, or you see that more as a community effort?
Just to confirm the price impact with quick back-on-the-envelop math for Base, where liquidity in Uniswap's pools remains lower than on the mainnet.
The USDC/WETH pool on Base has approximately $200M of virtual USD liquidity active at the moment, as computed from basescan's liquidity and sqrtPriceX96 fields on basescan.
Just to confirm the price impact with quick back-on-the-envelop math for Base, where liquidity in Uniswap's pools remains lower than on the mainnet.
The USDC/WETH pool on Base has approximately $200M of virtual USD liquidity active at the moment, as computed from basescan's liquidity and sqrtPriceX96 fields on basescan.
Using the approximation I ~= swap_size / (L * sqrt(P)) where L is the liquidity (L = value_usd / 2 / sqrt(P)) and P is the price, we get:
In short, each additional $10k of swap size creates additional ~1 bps of price impact. If currently a user pays x bps for a swap of size s (in total, for impact + swap fee) , then after reducing the pool's fee tier by 1 bps the user would have the same total cost for a s + $10k swap. (This is from a single sample at the current state of the pool, so take with a grain of salt!)
Thanks for the proposal. However, for now, we will vote against it as proposal for research should come before activation.
