Creation / Redemption Fees Against Exchange-Issue & Redeem-Exchange

This post draws heavily from @Etienne’s Redemption Fee proposal, with a slight–but important–twist.

Summary :

Add a 0.1% issuance and 0.2% redemption fee to DPI units minted and redeemed via the exchange-issue/redeem-exchange feature.

  • Grow revenues and revenue sources
  • Capture some of value created by exchange-issue
  • Adds more friction to the selling/redemption process (which we are significantly lubricating via redemption-exchange)
  • Charge exiters more than entrants

Abstract :

The upcoming implementation and launch of exchange-issue represents an improvement for the prospects of larger purchasers gaining exposure to DPI.

Because they can now inherit the far deeper liquidity pools of the DPI constituents, users of exchange-issue will receive far less slippage than if they were to attempt a similarly sized trade of DPI on a secondary exchange.

Although they inherit higher gas costs via more transactions, in larger amounts, users are far more sensitive to slippage. Because the value proposition of making a buy (or sell) of DPI by utilizing the liquidity of components is so high, it is natural that the Coop would seek to capitalize on some of the value created.

For example, we can imagine that, if a buy of $1,000,000 would net the exchange-issuer 0.5-1% of ($5,000-10,000) savings vs a secondary liquidity pool, they would think nothing of paying $500 to $1000 for that service.

The key consideration against implementing creation and redemption fees were the costs it imparted on a key ecosystem participant, arbitraugers. Given the expected behavior of these individuals would be to continue using issue/redemption in their classic form, applying this fee to the exchange-issue users bypasses the need to tax arbers.

Spec :

When exchange-issue (0.1%) or redeem-exchange (0.2%) is used, the system automatically takes a cut of minted or redeemed DPI units and directs them to the Index Coop treasury.

This model describes the annualized revenue potential at various DPI exchange-issue/redeem-exchange volumes

Fees on Exchange-Issue, Issue-Redeem
  • For
  • Against

0 voters

I think I understand the reasoning for charging a redemption fee, but not so much the minting fee. I don’t have data to support this, but I would imagine most of minting comes from arbing the market price of DPI, and charging a fee would make the DPI price less accurate?

Arbers won’t be using this feature, we don’t think

I am against this for two reasons. First, I think it causes a bit more friction when onboarding. We already gain a 0.1% fee from the streaming fee after just a month of holding, so why are we asking for even more? Secondly, there is nothing stopping users from forking the contract and removing the fee. Unlike the DPI contract itself, exchange issuance requires no scale or liquidity in order to properly work. Anyone willing to take a quick look at the code could redeploy it with no fee by only removing a couple of lines of code. They could even go further to throw together a quick UI to allow others to use this feature free of charge themselves. Why penalize the few people who don’t know how to code or who are uninformed about there being a third party option?

My thoughts on this are based on the following assumptions:

  1. As I understand it, mint and redeem options are mainly used by whales. Correct me if this assumption is wrong.

  2. This functionality will create value and save them money.

  3. It will be largely irrelevant to an average Joe. (btw, at what size of the DPI purchase, would it be beneficial to mint or redeem? and then, using the survey data, how many transactions of that size actually happen?)

Under those assumptions, I’m not against creation and redemption fees, in principle. However, given we haven’t done any market research or testing (correct me if I’m wrong), I would prefer to start small and evaluate. Like 0.05% issue and 0.1% redeem.

EDIT: forgot to mention - if we do this, the fees should be channeled into the Smart Treasury.


More friction relative to the ideal state for users or more friction relative to the current state?

I think clearly, between both exchange-issue and a fee (vs where it is now), there is less friction. This only charges a 0.1% fee against whales ($100k-200k+ purchases) and 0.2% against redemptions. Before exchange-issue, whales had a far worse UX for making big purchases.

If we had a philosophy towards creating an ideal state of free use of the value-add products we create, I think this holds. But as is, we charge a streaming fee which could be further reduced to create an ideal state for the consumer. We could say, under this framework, that we are penalizing those who don’t want to track a portfolio of 10 rebalancing projects, but I think you could frame it as we simply charge a fee on top of the value we create.

The risk of fork is one I’m willing to take. Very little downside if that were to happen. But, for one, would it really happen? And would people use it over the Set-sanctioned feature? Who is motivated to build that?

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I’m okay with starting smaller on the fee scale but my pushback would be that its easier to lower than raise prices.

It’s tough to have data around this. We have assumptions that exchange-issue will be preferred by $200k+ entries or exits because the gas fees will be small relative to the slippage incurred through DPI pool.

Not sure that I’ve seen any projects attempt something similar.

Agree, fee would go to treasury as with streaming.

Could this be connected with governance mining? Say that consistent voters have reduced fees for issuance and redemption.

That would be a pretty cool privilege, staking X Index allows for fee-less minting. Not sure how technically feasible that would be.

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i don’t think we’ll be lowering prices unless something is broken i.e the fees are too high and whales get upset. at that point, it’s arguably too late to lower fees. so i’d still prefer to go slow, especially as we don’t have any data, no sentiment polls, etc.

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I like this idea but can’t comment on technical effort

This is actually kind of cool. I like adding fees here more than when we were just consider adding fees on mint and redeem. In this case, we are adding fees on a function that adds more value for the end user that is unrelated to the DPI product.

I would imagine adding fees here wouldn’t be very difficult. Let’s make sure to follow up on this after exchange issuance gets up and running @LemonadeAlpha.

Worth considering if it makes sense given the UX of exchange issuance will be an automatic selection between Uniswap pool and exchange issuance flow. Not sure if it would be deceptive to bake in a fee there.

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two questions popping up in my mind are:

  • How would this affect current Index methodologists?
  • How would future methodologists view this?

Maybe this ^ is obvious to other folks :man_shrugging:

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It’s not a mandatory feature for those buying, selling, minting or redeeming DPI, so it’s probably outside of the scope of methodologists, but I would be curious to understand if Defi Pulse had strong feelings.

Imo the exchange issue feature + fees package is net beneficial to DPI. We should expect that we are able to earn revenue on top of value-add products that we build.

Ideally, future methodologists would see this as we are taking active steps to grow their products and–ourselves, building towards a sustainable business model.

@gdocter just my two cents:

For the future methodologists, one thought I have is that exchange-issue somewhat puts the responsibility on us, if someone decides to execute exchange issue (on purpose or by mistake) and one of the underlying tokens has limited liquidity which results in high slippage. This is certainly not a problem for DPI, but for future indices where it could be a problem, we can figure out a solution.

Definitely a good point, and we should make sure the feature works as intended, but that has less to do with the fee itself.

yup, agreed, was just responding to Greg :+1:

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