CIP-34: Testing Fee Models for CoW Protocol

CIP: 34
Title: Support MEV Blocker with 30K monthly funding over 6 months 
Author: @marshy
Status: Active
Created: 2024-01-09

Summary

This proposal asks whether CoW DAO should embark on a 6-month period to test promising fee models for the purpose of generating revenue from CoW Protocol.

Motivation

One of CoW DAO’s long-held objectives for CoW Protocol is to make sure that it is financially self-sustainable, so it does not rely on external funding for growth or development. To achieve sustainability in the long term, CoW Protocol must start experimenting with generating revenue in the short term.

The fees that CoW Protocol charges today are estimated to cover gas costs alone; they are collected by the protocol and remitted to solvers. Most revenue kept by CoW DAO to-date is from over-collecting gas fees. This is neither intentional nor desirable (as users occasionally overpay for transaction costs), and it is likely to be addressed by updates to the rules of the solver competition.

Rather than rely on unintentional and unpredictable revenue, CoW Protocol should develop revenue streams that are reliable and sustainable.

Fortunately, CoW Protocol is in a unique position to implement fee models that are incentive-aligned with its users. CoW Protocol leverages intents and uses batch auctions as its price finding mechanism. This allows the protocol to generate surplus and improve prices for its users – in other words, to give them more than they asked for. Taking a fee from this price improvement is one example of a model that is incentive-aligned with users and uniquely achievable by CoW Protocol.

Charging fees can, of course, be controversial. And it is possible that implementing new fees will have a negative impact on user behavior. It is therefore a good idea to focus attention on fee models based on added value (i.e. where CoW Protocol takes fees from the savings it creates for users) and to test and monitor the impact of various fee models before settling on a long-term solution.

Specification

The core team proposes that CoW DAO embarks on a 6-month testing period to collect data that will inform CoW Protocol’s long-term fee model.

In that time, CoW Protocol may test the following fee models:

• Quote improvement fees: charging a fee on the “extra” amount received by a trader, thanks to the performance of CoW Protocol
• Surplus fees: charging a fee on surplus (surplus = amount received - quoted amount - slippage) for order types that competing platforms cannot generate a surplus from (e.g. dutch-auction-based models cannot generate surplus for out-of-market limit orders)
• Volume-based fees: charging a small % (such as one basis point) on the total trade amount of certain token pairs (i.e. not stable-to-stable trades) can be rather lucrative, though less incentive-aligned
• Fixed fees: charging a fixed amount for every trade
• Any new idea for a fee model that presents itself during the testing period

Within the scope of this proposal, the core team should test a range of options regarding fee percentages, caps, and volume-based tiers, while closely monitoring market share, retention rate, and other relevant user metrics. They should start by testing the models expected to have the least negative impact on user behavior.

Consistent with CoW DAOs structure and values, fees should always accumulate to CoW DAO and be applied in the ecosystem to the benefit of the DAO through future CIPs. Implementation and communication of the fee mechanics will be performed by the core team, who will also maintain a public notice of current fees on cow.fi 7. The core team will also provide updates, periodically, on the results of the fee model testing.

Rationale

Additional revenue can be used for multiple purposes: to accelerate the development of CoW Protocol, to acquire new users, to fund token utility, and more. Ultimately, the goal is to make CoW Protocol self-sustainable.

Taking a test-and-learn approach is essential to maximizing the positive impact of new fee models. Passing one CIP to cover 6 months of testing allows the team to move fast and nimbly. Needing to pass a new CIP for each new test would be unnecessarily restrictive.

Execution

If this CIP passes, the core team will begin testing fee models immediately and keep COW token holders updated on learnings periodically.

Fees will accrue to a new Safe that is created for the purpose of revenue model testing. The Safe will belong to CoW DAO be operated by the treasury team with a threshold of 1/2.

Thank you.