Fee Sharing Economics Research

Username

ProofOfCake

Grant Description

We will conduct thorough background research and propose model(s) for Synthetix governance to use as a framework to aid integrator fee rebate decisions. This will be provided in the form of a detailed report, including all research and relevant variables, that models various scenarios of fee distribution and includes recommendations based on our findings.

Overview

In order to better understand what this proposal hopes to achieve, it’s critical to understand the economics for the primary stakeholders in this scenario:

1. Liquidity Providers (LPs): LPs are users providing the capital for trades. LPs take the risk for the trades, so they should be compensated accordingly. The objective should be to strive for something similar where enough fees are shared with LPs to target a specific minimum risk-adjusted return. This also creates more incentive alignment between LPs and the protocol, since the protocol can earn a higher share of fees by improving the protocol/parameterization to help LPs attain higher risk-adjusted returns. Part of our research will be to look at Perps V2 historical data and produce an estimated risk-adjusted return figure for LPs and project what that will be for V3 LPs.

2. Integrators/Trading Frontends: Kwenta, Polynomial, Infinex, etc. are all trading applications – they are spending money on building, marketing, upgrading, designing, researching, and more to bring people in to use their applications. They have fixed and variable costs and require revenue sources to offset those expenses plus profit to sufficiently incentivize future growth.

3. SNX Protocol: Lastly, of course, the Synthetix Protocol itself owns the actual infrastructure, and the owners of the protocol (stakers) demand a royalty for funding the development of those contracts. To adequately model fee distribution for the Synthetix protocol, part of our research efforts will be a survey of other protocols’ fees. Some examples include Curve, Yearn, Aave, Compound, GMX, and Gains.

The 3 stakeholders (Liquidity Providers, Integrators/Frontends, and the Synthetix Protocol) are associated with three different challenges that need to be addressed. As mentioned, these will be areas of our research: reviewing similar models and risk profiles, assessing effectiveness of other protocol’s fee distribution systems, speaking with integrators to evaluate their budgets, etc. The results of our research will be used to inform our proposed models for the Synthetix ecosystem.

Value to Synthetix

This proposal is being submitted in response to an RFP from the Spartan Council, as integrators have come forward with proposed fee structures of their own. In this new discussion of adequate compensation for non-SNX LPs in the Andromeda/Base deployment, the Spartan Council requires a proposal that is commissioned with the wellbeing of the Synthetix protocol in mind. This proposal seeks to provide that data through exhaustive market research that will culminate in an economic model that serves as a guide for the Spartan Council in their crucial upcoming tokenomics decisions.

Project Implementation Plan

The Overview section covered some of what the implementation will look like, but to summarize our plan as it pertains to the 3 stakeholders:

1: Liquidity Providers

Fees in Synthetix are charged as a single payment, but only part of it should go to LPs a. Competitive analysis -Target market for LPs -Competing sources of yield for LP capital -Expected returns and other incentives being offered

b. Risk analysis -Evaluate current risk management strategy -Assess LP compensation and compare with other yield opportunities of similar risk profile -Using Perps V2 as a guide initially, but also proposing how to incorporate V3 metrics into the model in the future

In traditional market-making, LPs (market makers) earn yield from spreads as well as rebates from exchanges (which are funded with fees paid by traders) -How are spreads set? -How does this change with market conditions? -How does this create the conditions for profitability? -How does this compare with the way Synthetix Perps set spreads? -What role does automation play in this process and how does it mitigate risk?

In developing model(s) to optimize incentives for LPs, we will: -Evaluate similar models: competitive analysis of other offerings -Conduct market research to compare models from other protocols -Evaluate risk management: Adequate compensation for risk (risk-adjusted return), automation and other safeguards in place to minimize LP risk, impact of major market events, review data from previous “black swans” -Create case studies based on established offerings and available data: For example, Perps V2, which has been running for almost a year now, can be used to look at SNX stakers and assess risk that LPs take on (i.e. in a given day, what would be the range of how much you can gain or lose as a LP).

2: Integrators/Trading Frontends

To create model(s) for integrators/trading frontends, we will need to meet 1-on-1 with representatives from each protocol to discuss their budgeting plans. Examples: new features, marketing campaigns, trading competitions, auditors, UX/UI, engineers, designers, etc. This information should allow us to better understand each trading frontend and their business. In doing so, we will also research and provide different cost breakdowns for marketing and budget allocation (e.g. long-term retention vs. initial acquisition). Using the information gathered, we will formulate a comprehensive integrator economics model to help better inform Synthetix governance.

3: SNX Protocol

From the protocol’s perspective, the ultimate goal is to pay LPs the minimum amount to have an attractive risk-adjusted return and pay integrators the minimum amount to grow sustainably. We’ll conduct market research to compare models from other protocols (as detailed in examples in Overview) and use this (together with research on LP and integrator economics) to propose a cohesive model.

Project Implementation timeline: Total estimated completion time for proposal: ~1 month from approval

Timeline: Week 1: Market research Week 2: Meet with integrators Week 3: Prepare the model Week 4: Prepare report

Additional Information

Funding Request

$10,000: $2,500 paid upfront and $7,500 upon completion