Update on Protocol Fee Experiment

⌨️ Technical Development Core Protocol
1

Hey, everyone. Posting an update here on the status of the fee experiment.

Background

Starting in the summer, we noticed a sharp decrease in protocol fees collected, which led to a community-approved initiative to temporarily reduce the protocol fee to $0 so we could assess the impact on total volume with the hypothesis that this could have a positive impact, i.e., that volume would increase. The stated goal was to “conduct an experiment that measures the impact on volume in a zero-fee environment to inform decision-making around 0x network economics.” (see ZEIP 91 and snapshot vote)

@0xff8d58f85a4f7199c4 created a dashboard so the community could track some relevant metrics as the experiment proceeded. The experiment started on 29 September and was slated to run for at least 6 weeks to provide a reasonable time period for comparison and evaluation, and as of yesterday has been in effect for 11 weeks.

Learnings

Going in, we knew that due to there being many variables in play, including heavy correlation to overall market sentiment and the negative impact of high gas costs in open orderbook markets, that it might be difficult to draw clear conclusions that could help to inform future decisions. And that is, in fact, where we find ourselves now. By our ongoing assessment, the experiment has proven inconclusive, as no statistically significant changes in volume or user behavior are evident.

Recommendation

0xEVE, as the proposer of the experiment, has coordinated closely with the 0x Labs team throughout. After collectively reviewing the experiment results and evaluating alternative courses of action, we concur with their recommendation to keep the protocol fee at $0 to collect additional data points and see if the fee-free dynamic incentivizes additional integration opportunities or other positive externalities.

Furthermore, we are encouraged that the 0x Labs team has been actively thinking through evolving 0x network economics. They’ve communicated that they aim to share initial thoughts on the topic in early 2022. The additional data points will be extremely helpful in their efforts on this front.

We welcome community input on both subjects, especially where there may be productive expertise and insights to share.

7 Likes
2

Thank you for summarizing the fee experiment and next steps Nikita. It’s encouraging to see community leaders analyzing 0x usage data, forming hypotheses, and independently proposing economic experiments to help us better understand 0x protocol usage. Regardless of the findings from this particular experiment, fostering a data-oriented culture is critical for community governance to be successful long-term.

They’ve communicated that they aim to share initial thoughts on the topic in early 2022.

Yes, we must nail the economics if we want 0x protocol to serve as global exchange infrastructure for decades to come. We’ve held off on releasing a formal proposal for new economics in 2021 largely because the space is evolving so rapidly (transition to multi-chain, EIP1559, MEV and flashbots), but I’m confident that we see where the DEX space is heading and how protocol economics can create and capture value [1,2,3].

6 Likes
3

Hi guys any update here. I’m anxious to turn fees back on.

2 Likes
4

How is the network even secured without fees?

Are staking rewards ever going to be turned on again?

It’s been around a year already, so if anyone was working on this at all, there should have been some updates.

1 Like
5

does anyone know how i can withdraw my 0x tokens from the staking pools and transfer it over to my metamask

1 Like
6

I agree with Josephj11. Where is the transparency here? It has been over a year with no communication on the topic. When will staking rewards be turned on? Feels like we are about to be exit scammed honestly.

1 Like
7

hey @hchoy you can go to 0x: Powering the decentralized exchange of tokens on Ethereum and from there withdraw your ZRX tokens

8

Hi Mintcloud - When i go to (0x: Powering the decentralized exchange of tokens on Ethereum) and remove my 0x tokens it say “This will take into effect in the next epoch (-).”
But due to there is no epoch happening? how do i withdraw this? as my balance says 0 but my staking balance is showing over 9k worth of 0x.

9

So, 0x isn’t an L1 chain. The staking system is entirely different than the PoS system you’re thinking of. Staking on 0x involves incentivizing market makers to provide open order book (OOB) liquidity into the network. Liquidity rewards paid out were from protocol fees collected on OOB trades.

The primary reason the community voted to turn off protocol fees, and thus the staking system, was to drive more adoption by reducing the friction of having any attached fees. Also, OOB liquidity was steadily declining as more trades were coming from aggregated AMM sources that didn’t carry a protocol fee.

It’s important to point out that, similar to Uniswap’s fee switch, the community of ZRX token holders own the decision to start/stop the staking system, not 0x Labs. And the reality is that even if staking were turned back on today, there would be very few staking rewards to go around as most of the liquidity comes from aggregated AMM sources, as well as 0x Lab’s more recent RFQ system, neither of which carry a protocol usage fee.

TL;DR - The answer to ‘wen staking?’ is when the community decides.

10

Thanks.

I want to understand this a bit better.

If I understand you correctly, there’s little reason to expect fees will ever come back. Adding fees back in would just drive users away.

The part I still don’t understand is why would anyone provide liquidity, tying up resources and risking things like impermanent loss if they’re not getting some financial incentive for doing so?

Are you saying that the 0x OOB is not really used (at least directly) any more and that all that functionality is provided by external sources with 0x just serving as the (very fancy) plumbing between them?

If they are getting rewards elsewhere from pools of paired assets (presumably not including ZRX in most cases), then why are pools of ZRX needed at all? Seems like it’s just a utility token now for paying network fees.

Why doesn’t this whole feature just go away as opposed to being indefinitely paused?

11

Thanks.

I want to understand this a bit better.

Yw! It’s encouraging to hear this. Most folks I encounter who ask ‘wen staking?’ don’t seem to want to take the time to do what you’re doing.

If I understand you correctly, there’s little reason to expect fees will ever come back. Adding fees back in would just drive users away.

Generally, adding a protocol fee to a swap makes it less competitive and works against adoption. However, the previous system was elegant as the fees were not additive to the trade but rather generated via MEV-capture (see ‘Impact to bid-ask spread’ on this old blog post for a more detailed explanation). With the MEV landscape having changed so much since the staking system was introduced (flashbots, alt-EMV chains, ETH merge, etc.), I imagine you’d need to re-think the entire system mechanics to make a fee-based structure viable for OOB volume.

The part I still don’t understand is why would anyone provide liquidity, tying up resources and risking things like impermanent loss if they’re not getting some financial incentive for doing so?

They make money off the spread which is the price difference between what a market maker offers to buy a token versus sell it. Learn more here. Also, note that IL happens when you supply liquidity to an AMM. It doesn’t apply to market making on an OOB system.

Are you saying that the 0x OOB is not really used (at least directly) any more and that all that functionality is provided by external sources with 0x just serving as the (very fancy) plumbing between them?

It is still being used but doesn’t supply as much as other liquidity sources. OOB functionality (i.e. limit orders) is still very useful, but figuring out how to attach a non-rent-seeking fee system that keeps trades competitive is tricky. Just as HTTP is the standard that allows information to flow between websites, 0x Protocol is the standard that allows tokenized value to flow between those who use it - very fancy plumbing indeed!

If they are getting rewards elsewhere from pools of paired assets (presumably not including ZRX in most cases), then why are pools of ZRX needed at all? Seems like it’s just a utility token now for paying network fees.

At its core, ZRX has always been a governance token. ZRX is not used to pay network fees. It’s used to vote on changes to the protocol, which is increasingly more important and valuable as the network grows. Learn more here.

Why doesn’t this whole feature just go away as opposed to being indefinitely paused?

If you’re referring to the staking feature, it could be removed if there was a proposal to do so. That’s for the community to decide.

1 Like
12

@brentoshiro Thanks for the great answers!

1 Like