It had to happen: Rising competition amid a souring market is pushing decentralized exchanges to lower their fees.
When Uniswap, the leading DEX, went live, it had a 30 basis point fee for all trades, which went to its liquidity providers. This fee set the benchmark across the industry, so that exchanges largely competed on selection, execution and features. However, exchanges are now starting to compete on fees.
Uniswap, with its v3, introduced the option for liquidity providers to open pools at three different fee tiers; 1%, 0.3% and 0.05%. In October, the protocol’s governance closed a proposal to add a new tier, of just one basis point (0.01%). dYdX on Tuesday announced it was experimenting with vastly lower fees depending on the size of trade, which will persist until at least mid-April. “The fee changes were made to better compete with the fee schedule of top crypto exchanges, both centralized and decentralized,” the announcement stated.
Race to the Bottom
This is the takeaway of many in the crypto space: it had to come to this eventually, that decentralized exchanges would turn to their fees to compete with each other, which will lead to a race to the bottom (though it really can’t go all the way there).
“Fees are like 10-100x higher in DeFi than TradFi,” Avichal Garg of Electric Capital told The Defiant. “Like if fees are super low in DeFi, everyone will leave TradFi and CeFi which is great if you ask me.”
CeFi is centralized finance and TradFi is traditional finance. Fees in those spaces are much more nuanced and complicated, usually tiered by trading volume, as Investopedia explains. Binance starts at 0.1% for both makers and takers (there’s only one side on a Uniswap trade), but goes down with larger trades or volume. Binance also offers a discount if its own token is used. Charles Schwab has no fees on many of its brokerage accounts, according to Nerdwallet.
Uniswap has only lowered fees on a few pools, specifically pools that hold stablecoin pairs, the bread and butter of a major Uniswap competitor, Curve. The Uniswap pools with the 0.1% fee are USDC/USDT, DAI/USDC, USDC/SWYF, FEI/USDC, and PAX/USDC.
Uniswap has been rapidly gaining market share from Curve in the stablecoin arena since the change, increasing to 89% from 43%, crypto researcher Ryan Watkins tweeted.
Sergej Kunz, co-founder of 1inch, an aggregator that helps users find the best place to make a trade, agreed that the lowered fee had been crucial for Uniswap. “Through 0.01% stable token pools in Uniswap, it’s started to be possible to allocate more exactly liquidity in the right price range. More volume from aggregators started to flow through Uniswap because of low fees,” he told The Defiant.
“Ultimately, I think these things will eventually reach a Schelling point where protocols / interfaces / venues will find a fee scheme that incentivizes liquidity but also provides a cost effective venue for trading for everyone from retail to whales/institutions,” Clay Robbins of Slow Ventures old The Defiant. Robbins previously helped roll out the DEX aggregator from 0x, Matcha, giving him a broad vantage point across the world of DEXes.
Fees can’t go all the way to zero though because then no one would have a reason to add liquidity to DEXes.
As an automated market maker, Uniswap allows anyone to take part in the normally very complex business of market making. Each trades fees are returned to the pool they came from. Liquidity providers have tokens that represent their share of a given pool. As more trades are made, those fees increase the value of their share, but they don’t receive any of them until they withdraw part of their position.
There has been $121M in fees collected over the last 30 days according to TokenTerminal.
This is particularly important because depositors face the risk of impermanent loss (losing money because two volatile assets in the same pool diverge in value faster than transaction fees can make up the difference). That risk presents another opportunity, however.
Zaki Manian, founder of Sommelier, which helps investors manage liquidity positions, told The Defiant over Twitter.
“If impermanent loss hedging gets more available, this will also lower fees.”
Corrected on Jan. 21 to show Clay Robbins is at Slow Ventures