Update on Protocol Fee Experiment

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.

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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].

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