CIP-3: Trading Fee Discounts for COW holders

Find the Forum post and discussion here: “CIP-3: Trading Fee discount for COW holders”

Summary - Trading Fee discount for COW holders

The purpose of this CIP is to gather support within the community to pass a vote to allow a reduction in trading fees for COW holders. A token based fee discount will improve the tokens’ utility and foster a healthy ecosystem for users of the protocol, COW holders and the DAO.

Motivation

By rewarding COW token holders with a trading fee discount on the CowSwap platform, demand for COW tokens will grow and help make CowSwap a hub of activity for DeFi.

Goals:

• Improve utility for the COW token and increase demand for it;
• Reward DAO members for holding COW;
• Higher demand for the token will encourage further interactions with the Cow Protocol and facilitate its growth.

Proposal

While it is envisioned to implement a more elaborate fee discount system long term, this CIP proposes to launch with a simple fee discount mechanism to accommodate “CIP-Enable Swapping of vCOW to COW” and be implemented on time in case the token becomes transferable. It will allow CowDAO to reward and incentivize long term holding of the token.

A simple tier system is proposed that would allow to reward different user groups adequately:

Tiers: Having multiple tiers will ensure that discounts can be offered to almost everyone, but at the same time large token holders also feel appreciated. It will also help to create utility and value for the token: in theory, the more tiers (or even a dynamic fee model) would have the largest impact. The closer a user is to the lower bound of their tier, the less likely they are to sell any tokens. As a dynamic model or too many tiers are not practical for implementation, it is proposed to initially launch with 4 tiers:

• Tier 1 1,000 COW Discount: 5%
• Tier 2 10,000 COW Discount: 10%
• Tier 3 100,000 COW Discount: 20%
• Tier 4 1,000,000 COW Discount: 40%

Scope: Note that this proposal is within the scope of what’s technically feasible to be implemented until vCOW might become swappable for COW. Eligibility criteria:

• Simple hodling of the token in the trading wallet makes traders eligible
• Combined balance of vCOW and COW is accounted for per network
• Time scope of proposal: the token related fee discounts will end when any of the conditions are met: the funds dedicated for this purpose run out, or after 6 months, or when CowDAO decides to end the program. It is expected that CowDAO will evaluate the success of the fee discounts and make appropriate adjustments if needed.

Costs: As Cow Protocol is currently only imposing a fee that’s large enough to cover users’ gas costs, any subsidies provided are directly taken from CowDAO’s treasury. To limit the expenses of this program, especially in an environment where gas costs are little predictable, it is proposed to allocate a certain amount of funding for this fee subsidy program. Specifically, it is proposed to send 60 ETH to the same Safe that is already handling the Solver reimbursements and rewards (as defined in CIP-2). It is proposed to use CowDAO’s ETH to finance the subsidies, rather than leveraging COW Tokens, as this program aims to increase demand for COW and subsequently reduce its sell pressure.

Rough estimation of gas costs for this program:

• Based on the airdrop distribution, there are currently ~7K accounts who fall in tier 1 (out of which 5.5K are power* CowSwap traders); ~1K accounts that fall in tier 2 (out of which 500 are power* CowSwap traders); ~40 accounts who fall in tier 3 (out of which 3 are power CowSwap traders); and ~11 accounts in tier 4 (out of which 1 is a CowSwap power trader). [*Power traders defined by accounts that were granted user options as part of the airdrop allocations.] Find the full airdrop distribution list here.
• Over the last 30 days, solvers spent 338ETH in gas costs.
• Assuming that 90% of Cow Protocol’s trading activity is generated via it’s power users, proportionally distributed amongst the different tiers (92% of trades at 5% discount; 8% trades at 10% discount; 0.05% trades at 20% discount; and 0.02% trades at 40% discount), the subsidy cost for a 30-days-period would equal ~20 ETH. Note that this is a very rough calculation, as many factors defining gas costs are not considered here and a proportional distribution does not fully reflect reality.
• The subsidy needed for GnosisChain is significantly lower as gas costs are marginal. The monthly funding needed would be <2 xDAI and is not worth the tx cost for reimbursing solvers. Therefore, it is proposed that solvers are covering the cost for the fee subsidy on GnosisChain. This can be retrospectively considered when a strategy for reimbursements and rewards of solvers on other networks is being discussed.
• As the proposed fee discount is a new program that should be re-evaluated, it is proposed to only provide funding for an estimated 3 months period: 60ETH.

This program will end if:

• The allotted funds are fully used.
• 6 months have passed, or
• If CowDAO votes to modify the program.

In the latter two cases the remaining funds are to be sent back to the CowDAO’s treasury. It will lie within the responsibility of Cow Service LDA to create public tracking (likely in the form of a Dune Dashboard) of the discount related spending, to send a timely signal to the DAO when the funds are close to run out, and to stop the program if any one of the conditions to stop the fee discount are met. It is CowDAO’s responsibility to assess the impact of this program and re-evaluate any additional subsidies and adjustments to this program in the future.

Preventing users from gaming the system

When discussing fee discounts, there needs to be a common understanding of the fees that are being charged by CowDAO today. CowDAO did not yet invoke any volume based fee, instead it is simply charging users the expected gas costs for their transaction. Hence, any gaming of the fee discount tiers that would cost > x% of the gas cost of one transaction [where x is depending on the tier], is not economically viable. Therefore, it seems not yet a requirement to enforce locking of COW for eligibility to the discounts. Though, it is recommended to discuss token locks for future fee discount proposals, as any locking of COW also comes with additional economic benefits for its ecosystem. Once CowDAO decides on taking a volume based fee, the fee discount mechanism likely has to be revised, to avoid exploits by users who are not long term holders of COW.

As mentioned, a preferable scenario for the future would be that fee discounts are facilitated only to users who are locking their COW for a certain time period. It could then also be considered to allow for fee discounts across networks, basically allowing users to hold a balance on any network(s) but be eligible for the discount on other networks as well; this is however not practical as long as tokens aren’t locked up, as users could buy&sell COW on networks with low gas costs such as Gnosis Chain to benefit from large discounts on more expensive networks. As mentioned, lock contracts are out of scope for this proposal. This proposal aims to facilitate a first, simplified fee discount mechanism to test its impact on users.

Prior to the end of this program, a NEW Trading Fee Discount proposal should be tabled by this community using data from the previous period to assess the program and inform its next phase. Also, in case CowDAO decides to invoke a volume based fee, the fee discount tiers should likewise receive another review to ensure that incentives to exploit the fee discount have not increased.

Execution

This proposal is dependent on the successful execution of “CIP-draft: Enable Swapping of vCOW to COW 8”. It is proposed to execute both proposals together in order to have discounts available once COW becomes transferable.

Safe Transaction Hash

0x84ecca5b5e2d4a6c7ecf5a2bb8c9cf73ec7546e8c8e3185e22454c5b328c817a

Safe Transaction Data

to: 0xA03be496e67Ec29bC62F01a428683D7F9c204930 value: 60000000000000000000 data: 0x operation: 0 safeTxGas: 0 baseGas: 0 gasPrice: 0 gasToken: 0x0000000000000000000000000000000000000000 refundReceiver: 0x0000000000000000000000000000000000000000 nonce: 1

Transaction Simulation

https://dashboard.tenderly.co/annageorge/project/simulator/a1b839c6-a6bb-4de4-b8e8-64a837c3caa1