Shinkansen SLP - A Dex trader's Dream

Summary
Hi Sushiswap community, I am a long term lurker and just wanted to have a go at trying to contribute some ideas that may help push the project forward, maybe I’m way out of my depth here to suggest anything useful. Here is my first attempt anyways :smiley:

The current Dex standard is an LP fee of 0.3%. The idea is to incentivize people to provide liquidity and reduce slippage for the end users. This also encouraged Dex users to make less frequent transactions to avoid Gas fees.

Sushiswap’s deployment on Polygon has shown, by removing the cost of transactions the end user tends to make more transactions. Even with smaller TVL, Sushi’s volume on polygon has now overtaken Sushi’s volume on Ethereum.

With Ethereum Gas fees now being as low as 5 Gwei and Sushiswap deployed on other low fee chains. I would like to propose a new experimental SLP for all Sushiswap users – The Shinkansen SLP.

Motivation
Advantages of Shinkansen pools:

  • Take advantage of lower fee chains like polygon and the current Eth low gas environment to incentivize increase end user activity and exchange volume.
  • Provide a more competitive pricing compared to other decentralised exchanges as well as centralised exchanges.
  • If the liquidity is not big, it can still be attractive to smaller users. Defi should be for everyone, not just arbitrage whales.
  • Provide better pricing for yield aggregators such as 1inch to route to these pools.
  • It could also be used as advertisement material to onboard newer users to Defi and Sushiswap.

Specification
The Shinkansen SLP only charges 10bps (0.10% per trade) to LPs instead of the standard 30bps (0.30% per trade).
Sushi stakers still receive 1/6th of the fees collected in these pools. The remaining 5/6th goes to SLP providers.

For
Advantages of Shinkansen pools:

  • Take advantage of lower fee chains like polygon and the current Eth low gas environment to incentivize increase end user activity and exchange volume.
  • Provide a more competitive pricing compared to other decentralised exchanges as well as centralised exchanges.
  • If the liquidity is not big, it can still be attractive to smaller users. Defi should be for everyone, not just arbitrage whales.
  • Provide better pricing for yield aggregators such as 1inch to route to these pools.
  • It could also be used as advertisement material to onboard newer users to Defi and Sushiswap

Against
Disadvantages to address:
The clearest argument is, why would people provide LP to a pool that only gives 0.1%, they could just provide to the standard 0.3% pools.

  • If the volume per TVL for the Shinkansen pools is > 3x that of the standard pools, then more people will be incentivized to provide LP to the Shinkansen pools. This will eventually find an equilibrium point.
  • Sushi could allocate Sushi rewards to Shinkansen pools to kickstart the experiment.

Execution
The Shinkansen pool could be tested with two categories:

  1. A separate Shinkansen SLP for common pairs such as Sushi/Eth, Eth/Usdc, Eth/Btc to the standard SLPs.

This could be launched along side the standard pools – initially the pool may dilute liquidity from the standard pool, but by reducing the fee cost, it could potentially bring more users to try the lower fee pool.

It could run for a certain period, if it is successful, Sushi could help migrate liquidity from the standard pool over to the shinkansen Pools. If unsuccessful, these pools can be discontinued.

  1. Shinkansen SLP for newly launched MISO pools, or Double reward pools.

I believe the Shinkansen pool would be hugely beneficial for projects to launch on Sushiswap over other Dexes.

With the dual rewards pool now available on Sushi, newly launch projects can launch their LP mining incentives along with Sushi rewards. The overall token subsidy will be sufficient for people to want to provide liquidity.

Having lower fees can increases trading volume. This is great for new projects to gain recognition and help its community provide the best pricing with a much lower margin per trade.

The Shinkansen pool will not be compulsory, it would be an opt in function for projects to launch. They can still choose to use the standard SLP set ups if they want to.

Ending thoughts
I do believe the Shinkansen pool may end up more successful on Polygon and future Eth L2s like Arbitrum, than Eth L1. Since these pools will essentially increase activity on the network and may increase gas prices again. The end goal is to reduce costs for the end user, encourage more activity and make defi more accessible, even to the smaller players (especially if the pools have lower liquidity and trading smaller size will not be impacted by slippage as much).

Poll

  1. Deploy on ETH Only
  2. Deploy on Eth and Polygon (potentially other Eth L2s and other L1s in the future)
  3. This is a terrible idea, leave things as is.

I can’t create Polls could someone set this up. Thanks.
SushiSis

5 Likes

Thank you for detailed proposal!

Once upon a time, I was interested in dynamically adjusted fees as a function of underlying volatility as a way to migrate arbitrage profits towards LPs. But it proved to be quite a challenging undertaking.

Point being, we need a good study, where lesser fees x increased volume > normal fees x lesser volume translated into higher APR for LPs.
I would argue that increased volume for polygon is because a new wave of ultra small users (~$1000 wallets and less) finally had been enabled to participate in yield farming with hope for profit. Next months should show how sustainable that increase was.

You might also look up Curve V2 and how they deal with LP incentivization for volatile assets.

1 Like

Thank you for the response. It is just a suggestion at bay. The 0.3% LP fees was a good balance between LP incentives and avoid bloating the blockchain with transactions.

Pancakeswap already had a smaller LP fee. With sidechains and L2s now entering the picture. Defi is ready for larger sustained activity.

Simply reducing the fee would put us in the competitive picture with centralised exchanges, without taxing the smaller users who have to pay for gas per transaction.

Cheaper fees and higher throughout means we should at least attempt to try make defi more user friendly especially towards the smaller users. We could simply use an Eth/usdc test pool to begin with to see how things go. Defi is scaling , lets prepare for prime time. BSC helped us get there.

I haven’t thought much about this, but my own experience is that the transaction fee is almost not important in comparison to the price you get when swapping coins. At least thats what I focus on when comparing places to swap. I’m mostly on polygon and I use sushi by default but will check quickswap if i’m unsure about the price.

So lowering the transaction fee might help, and I expect eventually that is going to have to happen, but for now I think a faster way to success is getting more liquidity.

Some CeFi go for as low as 0.05%. New entrants like Woo are going for 0 fee entirely.
It’s a race to the bottom that we will not win (unlike 0 fee exchanges that can monetize orderflow), as long as we source liqudity using fees as a reward.

Sure, we can set up new test pool with custom fee. But how will you differentiate if the volume produced was a function of lesser fees or something else?

But I’m all up for experiment. If Maki deploys new pool with 0.05% fee, the LPs should be free to park their capital in it, if they think they’ll make more money there.

For fees, do note that Gas rebates from Manifold’s YCabal are coming soon, along with Aritrum/Optomism. So decreasing the swap fees may end up being less profitable for LPs and xSushi holders in the end.

I believe the 0.3% LP fee on Ethereum was suitable and liquidity was more important especially for the bigger players because every transaction requires gas fees. Polygon and BSC proven lower gas fees leads to more activity (and Transactions per user). Providing a lower fee will cater and onboard smaller players, as their trades dont cause large slippage. Eventually you will have dex aggregators routing to the cheaper pool, as the 0.25% does make a difference in price.

That is, if the router’s logic is to seek cheapest paths. Not always the case.

I think I saw UNI v3 launch a usdc/eth pool with 0.05% fee. Would be nice if someone did some numers on volume/fee generated on it vs the standard 0.3% pool.