SIP-15: Set protocol fee to 5% in Streamr 1.0

Background

A protocol fee is a form of value capture that allows web3 project communities to divert a share of the tokens flowing through a protocol’s economics to the related project treasury. Token holders then determine via project governance how the tokens are spent—usually to further improve the protocol and ecosystem.

With the incentive layer fully implemented in Streamr 1.0, it will now be possible to set a protocol fee for Streamr as well.

Protocol fees are common in web3, and are implemented in popular protocols and dApps of many kinds, such as The Graph, Aave, and OpenSea. Typically the vast majority of tokens paid by protocol users goes to the providers (miners, node operators, liquidity providers, authors etc.), while a single-digit percentage goes to the project treasury as a protocol fee. This is in stark contrast to web2 products, where companies like Apple, Youtube, Uber, etc. take 30-55% of the revenue earned by authors and operators, creating a competitive advantage for community-run web3 protocols.

Depending on the protocol, there are many actions that could be subject to a protocol fee. For example, fees can be collected from the value flow passing through the protocol, or from each staking or delegation operation, or both. To provide an example of a protocol where many different actions are ‘taxed’, The Graph collects a protocol fee from tokens earned by node operators, and additionally delegators and curators pay a fee on every transaction.

Proposal

• Collect a 5% protocol fee from the value flowing through the protocol from sponsors to operators.
• Store collected protocol fees in a project treasury.

Note that future governance proposals can modify the rate, add other fees, remove fees, as well as decide what to do with the already collected fees.

Also note that the protocol fee is collected from all tokens going through the token economics, including both organic sponsoring as well as inflationary operator incentives that apply from time to time.

Reasoning

It’s important for a protocol to have a value capture mechanism which connects protocol adoption and value flow with project treasury, as this creates a sustainability flywheel where collected fees can fund further growth. This lays out a fundamental mechanism for long-term sustainability; however, it should be noted that all of web3 has quite limited adoption at the moment, and we can expect the Streamr protocol value flows and resulting fees to be quite small in the beginning (even popular web3 protocols have limited value flows, see The Web3 Index).

Setting the appropriate level for the protocol fee is difficult, as every protocol is different. DEXes and other DeFi protocols collect fees from the volume going through, and financial protocols typically attract heavy volume and users expect protocol fees in the 0.0x% range (Aave 0.09% for flash loans, SushiSwap 0.05%). On the other hand, infrastructure protocols and speciality dApps have lower volumes and users are less sensitive to fees, as they are expecting the software to provide a service that they need (OpenSea charges 10% on mints and 2.5% on secondary sales).

The protocol fee level should be high enough to create a potentially useful value capture to benefit the community, but low enough to not deter prospective customers or node operators.

All things considered, a 5% fee seems appropriate for an infrastructure protocol like Streamr. The fee is deducted from tokens paid by sponsors, and it has a sufficiently small effect on node operators’ earnings: In an example scenario where node operators are earning 20% annual rewards on stake for the work being done, introducing a 5% fee would drop the net earnings rate to 19%.