TIP 09: Update Exit Load Fee Structure for Leveraged Tokens

Summary This proposal suggests updating the exit load fee structure for leveraged tokens by reducing the time decay period from 15 minutes to 5 minutes while maintaining the max fee at 1%.

Abstract The TLX protocol recently introduced an exit load fee to disincentivize arbitrage (arb) activity related to leveraged tokens. After analyzing the arb trades, this proposal suggests updating the fee structure by shortening the decay time to 5 minutes. This update is expected to deter around 90% of arb trades while easing the burden on TLX users engaged in short-term trading.

Motivation The initial implementation of the exit load fee successfully reduced arbitrage trading but has also affected legitimate short-term traders due to its 15-minute decay period. By reducing the time of decay, the TLX protocol can continue to discourage the majority of arb activities while making the system more user-friendly for those involved in short-term trading.

Specification Decay Period:

• Reduce from 15 minutes to 5 minutes Fee Decay Structure:
• Starts at 1% immediately after minting
• Decreases linearly to 0.40% after 3 minutes
• Reaches 0% after 5 minutes

Rationale An analysis was conducted on the trades of identified bot addresses engaged in arbitrage activities. These trades were categorized based on the duration for which positions were held (e.g., 30 seconds, 1 minute etc.), and the average profit relative to the notional value was calculated.

The findings from this analysis are as follows:

• 54% of profitable arbitrage trades occurred within 1 minute
• 81.5% within 2 minutes
• 92.1% within 3 minutes

Additionally, it was observed that the average profit over notional for these trades was 0.39%.

Based on these insights, a 5-minute period (0.40% exit load after 3 minutes) would continue to deter a significant portion of arbitrage trades, while offering TLX users greater flexibility in their trading activities.