[Discussion] Reduce Swap Fees to Bootstrap Users

Summary

As many mStable community members and external stakeholders have recently suggested, I’m opening up a discussion around reducing mStable’s swap fees. Since the new AMM no longer offers zero slippage, our key competitive advantages lie in (1) reflexivity and (2) composability.

Reducing swap fees to bootstrap users allows mStable to unlock and leverage these two competitive advantages.

Motivation

User acquisition cost is a key component of the modern network-driven economy. The common pathway many successful DeFi/broader tech platforms have followed is:

  1. Develop an innovative product.
  2. Lower barriers to entry & subsidize users → bootstrap the network & generate a network effect.
  3. Focus on capturing value from the network.

While mStable has an innovative, capital-efficient product, having a swap fee higher than Curve inhibits network growth and creates a barrier to entry for users. The focus should not be on value capture from the network at this stage of the project, which is what a high swap fee implies.

mStable should lower swap fees to 0.01% or 0.02%, such that we undercut Curve by a material margin (Curve is 0.04%).

Since mStable is not the incumbent leader in the stablecoin swap space, we need to make it worth it for users to switch. Dropping swap fees below competition creates a marketable attribute that will help attract users and drive swap volume. Significantly greater swap volume, even at a lower swap fee, will generate more fees in aggregate. More fees will drive higher Save APY, reflexively leading to the minting of more mUSD and imUSD (same goes for mBTC and imBTC).

As more mUSD and imUSD (mBTC and imBTC) are minted, mStable is positioned to achieve integrations with leading liquidity platforms and CEXs because it can prove demand and the scale of the addressable userbase to these platforms. Then, imAssets can truly leverage their composability as interest-bearing collateral, reflexively leading to more minting of imAssets as now the assets have greater utility. With this utility, comes network effect. From there, mStable can shift focus toward value accrual once the network effect has been established.

Again, this all starts with building the user base to prove to liquidity platforms/CEXs that there is demand for integration. And building the user base boils down to lowering barriers to entry by reducing swap fees, effectively an upfront spend on user acquisition to kick off this virtuous cycle.

I welcome the community’s thoughts before potentially moving to a formal proposal.

TL,DR: Users @ any price. Users drive swap volume. Swap volume drives Save. User + Save growth = opportunity for integrations → composability/money lego meme. Composability → network effect. Network effect → value accrual.

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I agree that mStable should focus on the “more users” side of the flywheel first. On the swap side I think lowering fees is a good experiment to try (let’s see if/how it affects swap volumes). And on the Save side I think mStable should then compliment hopefully higher swap fees with a streamlined Save interface and a marketing push to drive more users there.

Swap fees are ultimately a race to the bottom, but a world where mStable has ~all the stablecoin swap volumes even at razor-thin fees seems like it’s probably still a good world for mStable(?). It’s hard to be completely sure; the dynamics here are pretty complex. :slight_smile: But seems worth experimenting with.

Before pulling the trigger, I’d love to also see some numbers re: (say) how much stablecoin swap volume Curve is currently doing today, how much mStable is doing today, what % of those swaps are being routed by a rate-aggregator like 1inch, etc. Basically check assumptions about how much volume is out there to be tapped, which channels mStable needs to be in to ensure it taps that volume, and what “success” might look like (even just qualitatively) for an experiment of this kind.

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3pool, sPool, gPool, and bPool are doing a combined 137.4 mil in volume over the last 24 hrs which amounts to nearly $55k in fees for the day. Average day of swap volume for mUSD (which consists of the assets mentioned in those pools above) is somewhere around 2 mil. It varies a lot but that’s a reasonable average. At 0.06% fees, that’s about $1200 in fees per day.

If dropping to 0.02% swap fee would hypothetically get us 5% of Curve’s market share, that puts us at a daily swap volume of almost 8.9 mil and would generate over $1,770 in fees per day, or nearly a 50% increase from current levels.

I think modest success for this would be growing the user base and retaining the same average fee revenue, as we would still be growing the network effect without decreasing cashflow. Ultimate success/goal would be to grow the user base and grow the fee revenue, as described in that situation above.

Given that mStable captures fee revenue and tokenizes it in the form of imUSD, effectively returning fees to users, mStable is in a unique position given its design to compete in a low fee environment. We just need to allow ourselves to compete.

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Great post, and definitely captures all the points raised in the Discord very well. I am curious as to hear some tech/engineer opinion about the short to medium term future of StableSwap in general compared to the recent launch of Uniswap v3, as it seems a serious (and potentially dangerous) competitor in terms of stablecoin swaps, and might shortly overtake us & Curve in this regard, once everything is deployed accordingly.

I feel that we should immediately start some technical research on the long-term feasibility of StableSwap compared to a Uniswap V3 position, as to not fall behind the ball game, which we all know can be super quick in this space.

Fully aware we only deployed this solution very recently, but this discussion feels to align well with this proposal to include at this point, as even a 0.01% fee will hardly be a reason to use our swap if any UniV3 LP position will rake in a multiple of this and allow for magnitudes of sized trades simply by concentrating the liquidity to a very small margin.

Other than that, in full support of this proposal moving forward :))

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Thanks @Cold_Summer for making a really interesting thread.

Personally, I am for this. I know the team has previously said they don’t see Meta as a competitor to Curve, however to generate a good user base I think we are going to have to embrace some competition with curve for the time being.

If the market sees us taking some of Curve’s share, it should positively interact with the buy back and make mechanism already in place by generating more swap fees which should also help stimulate more growth.

Really nice to see good initiative from the community and hope the team takes some of these ideas on board!

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100%. I think while mStable is quite distinct from Curve we are in some ways competing for stablecoin liquidity with them, and also others like Ellipsis on BSC in this space.

I feel that we have several options that we could lean towards

  • compete for swap volume?
  • compete for liquidity?
  • compete for yields?
  • compete for users?
  • compete for composability/utility?

Some are expensive - like liquidity - which will definitely cost a lot in MTA incentives but still price many out due to expensive gas costs on Ethereum + vesting.

And I see we are currently in a chicken and egg issue. Without liquidity we can’t attract swaps. Without swaps we can generate fees. Without fees we cant attract users/liquidity.

So considering all options maybe a good first step is to start reducing swap fees as proposed to attract swaps is a good idea. And if it runs well I would like to propose making some amount of MTA available for claim to addresses who have swapped through mStable. Either that or a marketing campaign to advertise our lowest fees.

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Appreciate the feedback. I agree on the market intelligence re: Uni v3. What I will say is that (1) Uni v3 will not have liquidity mining rewards (2) I doubt Uni will be lower than 0.04% on fees since that’s not really their brand/niche (3) mStable tokenizes those fees and prevents value leakage to provide benefit for users so we have a unique competitive advantage there.

We don’t need to necessarily become the leader in the stablecoin swap space as that’s not the whole product, but definitely allowing ourselves to compete better and grow the user base will enable us to take advantage of the reflexivity offered by Save and the network effect of using imUSD as collateral.

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Thank you! Yes, definitely not a direct competitor to Curve because swapping is only a component of the product, which is what makes mStable so innovative and capital efficient, but gaining a larger share of the stable swap space will definitely kickstart a positive feedback loop across all aspects of the platform and open up new doors for integrations.

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I think you’re spot on with your characterization of the market landscape. mStable outcompetes on composability/utility/capital efficiency, but to unlock that potential we need a larger user base + swap volume, which materially lower swap fees open the door for, especially if we launch a marketing campaign around it as you suggested. Definitely a big selling point and we can use the limelight being brought on stableswaps by Uni v3 to amplify our message. Also support your idea of vested MTA incentives for swappers similar to Aave’s recent “pay you to borrow” liquidity mining. That could be a component of this proposal or a separate one, whichever you think is best. Growing the user base and showing how convenient imUSD is as a collateral token to users by using low fees/MTA rewards to drive swaps → Save will establish mStable’s network effect such that incentives won’t be needed down the line. Just need them now to bootstrap.

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Firstly, thank you @Cold_Summer for presenting your point in such a considered and comprehensive way. It touches on something I’ve been thinking about for a while, and I’ve personally always felt that we should still feel open as a protocol to experimentation across everything we do. The more experimentation, the more opportunities to hit on something that sticks, and swap fees fits squarely in that domain. Therefore, I support this proposal.

Zooming out a bit at the lay of the land, I am curious to see what Uniswap v3 does to the competitive landscape for swaps. It is indeed a race to the bottom, and one would expect swap fees to find a longterm equilibrium price that matches the perceived risk between asset types (still a way off). Maybe we just cant compete with v3, which is fine. We can experiment with how we approach that fact too.

Looking forward to seeing this happen should others feel like me!

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Thank you! Experimentation is how we figure out the formula to unlock the power of the innovation behind mStable, so agreed there.

Regarding Uni v3, their stablecoin swaps are 0.05%, so we would offer a nice discount at a 0.02% fee. I don’t think we necessarily need to outcompete them at what they do, since their brand is “swap-first” and we’re “composability-first” (in my opinion, anyways). What I do see, however, is that imUSD is effectively a composable, capital-efficient (similar to Balancer) LP token with a simpler/cleaner UX that accrues 90% of platform fees back to the Save depositor (effectively an LP), whereas others like Curve take 50%. With that perspective, I think we shouldn’t have an issue attracting liquidity if we can get more volume via lower fees & an accompanying marketing campaign around that change.

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