The Gnosis Dutch Exchange #4
Having introduced the Gnosis Dutch Exchange (DutchX) and explained its mechanism design, we’d like to provide you with more details about the exchange in a series of bi-weekly posts. We hope this series will shed light on the exchange’s features and leave you not only well prepared for the DutchX launch (planned for start of Q2), but also ready to participate.
In our previous post, you learned about how to trade, list, and initiate tokens in the Gnosis DutchX. This week’s post presents the fee mechanism and describes how Tulip tokens will lower your fees.🌷
Tulip tokens are intrinsic to the DutchX and solely used to lower the participant’s platform fees (buyers and sellers): One Tulip is generated for trading one ETH worth of any token and is automatically credited to users.
Tulips are inflationary as their creation is based on the volume traded on the DutchX — there is no mechanism in place to reduce their volume.
Tulips are credited to the user by the time funds are claimed, and are locked by default. Only locked Tulips count towards the fee reduction. You may unlock Tulips at any point in time — after 24 hours have passed, you may trade them freely. They can be re-locked at any point in time.
As for GNO and OWL, you do not need Tulips to participate as a seller or buyer in the exchange.
Fees in the DutchX
Fees paid in the Dutch Exchange stay in the Dutch Exchange! Fees remain and are redistributed within the ecosystem, and do not go to Gnosis or any other specified party. Participants holding Tulip tokens will pay lower fees. All participants benefit from being credited part of the total fees thanks to a redistribution model.
Consequently, frequent and high-volume users will become the main beneficiaries of the exchange: They can gain ownership of the exchange by generating Tulip tokens and hence reducing fees, and even benefit on a large scale from the fees paid by others.
Both sellers and buyers pay the same amount of fees. Without holding any Tulips, the fee is 0.5% of their trading volume. However, participants will automatically pay a lower fee if they already hold more than 0.001% of the entire Tulip market volume.
The amount by which the fee will be lowered depends on the percentage of the total amount of Tulip tokens held, in relation to the entire Tulip market volume.
Hence, the more Tulips you hold as a percentage of the total Tulip market volume, the lower your fee:
The fee reduction function is implemented as a step function with the reduction steps shown in the graph. This way, there is an incentive for participants to get to the next level of fee reduction. Additionally, Tulips that are not needed (at that point in time) could also be sold — note that the Tulip market volume will only increase, so you may need those Tulips in the future! Users are of course also able to buy Tulips in order to jump to the next level of fee reduction.
A fee reduction is already possible with more than 0.001% of the total Tulip market volume. That is, with less than one hundred thousand users holding the same amount of Tulips, each one can already reduce their fee percentage to 0.4%! Benefiting from a reduced fee should, therefore, be feasible for both sellers and buyers. Hence, the fees a participant ends up paying (besides the gas costs on the Ethereum blockchain) may actually not only become trivial but may even become “positive” in the sense that more fees are earned than paid!
Sellers and buyers can either pay in the token they are participating with in the auction (seller uses sellTokens and buyer uses buyTokens), or pay up to half of the platform fees in OWL.
One OWL can be used to pay for the equivalent of one USD ($1) in fees. Check out how to generate OWL here.
To make the fee payment process as smooth and transparent as possible for both sellers and buyers, it is fully automated: In the wallet you have connected to the DutchX, the exchange will automatically deduct OWL only if you a) have previously set an allowance for the DutchX to do so and b) hold OWL tokens in your wallet.
The fee reduction will also be automatically calculated based on your locked Tulips. After calculating your fee level, this fee (after a possible OWL deduction) will simply be deducted from the token balance you are participating with before it is attributed to the auction.
As mentioned above, fees paid are kept in the ecosystem. But how does the DutchX achieve this? Fees paid in a token will go into the next running auction for the same token-pairing to be auctioned off (as an extra balance of sellTokens). Thus, they get credited to participants of the next auction. Tokens paid in OWL are consumed (i.e. “burned”).
To ensure for an optimal user experience, we highly encourage you to have the OWL you would like to use to pay up to half of the fees in the same wallet connected to the DutchX, and to make sure that your Tulips are locked.
We designed the fee model with the aim to incentivize a continuous use of the Gnosis DutchX on the one hand, and on the other hand in order to attribute ownership to those providing volume and liquidity to the platform. It pays off to participate in the DutchX from the very beginning.
Next up: What are the key benefits of our mechanism design? Stay tuned!
<div class="infobox"><span class="appendinfo">This article was originally published on: <a href="https://blog.gnosis.pm/" target="_blank">The Gnosis Blog</a> on </span></div>