💲Fees

It is possible for a user to earn arbitrage profit risk-free by manipulating the liquidity ratio using consecutive deposit/withdrawal and swaps. To prevent such misuse of the protocol, and to sustain the protocol over the long run, it is imperative that a deposit/withdrawal fee is charged to cancel such profit, and a small swap fee charged to sustain it.

Net Liquidity Ratio (NLR)

All fees calculations revolve around a central parameter, Net Liquidity Ratio (NLR).

$$Net\ Liquidity\ Ratio\ (NLR)\ =\ \frac{Total\ asset\ in\ all\ pools}{Total\ deposits\ made\ by\ LPs}$$

​Where does this fees go?

Depending on the NLR, a part of fees goes into the treasury, a part of it stays in the protocol to cover the NLR while the remaining goes to LPs for providing liquidity. LPs will earn a fixed swap fee, while the fees between treasury and protocol will depend on NLR. Initially, the distribution between treasury and protocol will be given as:

$$Treasury\ Ratio = \begin{cases} 0\% & \text{$NLR < 1$}\\ 40\% & \text{$1 <= NLR < 1.05$}\\ 80\% & \text{$NLR >= 1.05$} \end{cases}$$

​The remaining % remains in the system to increase the NLR.