Executive Summary: Tiered Fee Levels for Tinyman Pools
Tinyman currently uses a flat 0.3% fee for all pools. While simple, this one-size-fits-all approach doesn’t account for the unique needs of different token pairs. To address this, I propose introducing three fee tiers: 0.05%( or 0.1%?), 0.3%, and 1%.
This change will:
Attract More Liquidity: LPs will have more options to earn fees that reflect the risk and demand of specific pairs.
Support Exotic Pairs: Higher fee tiers can incentivize liquidity for exotic tokens.
Lower Costs for Stable Pairs: A 0.05%(or 0.1%?) fee tier will make swaps for stable pairs like USDC/USDT cheaper, attracting more trading volume from aggregators, arbitrage bots, and regular users.
Increase Competitiveness: Fee tiers will allow Tinyman to cater to different types of users and stay competitive in the evolving DeFi landscape.
With this system, Tinyman can create more opportunities for both LPs and traders, boosting the ecosystem’s growth and flexibility.
Problem Statement: Why Flat Fees Are Holding Tinyman Back
Tinyman’s current flat fee of 0.3% for all pools is simple but limited. Different token pairs have unique liquidity and trading dynamics, and a one-size-fits-all approach doesn’t account for this diversity.
Here are the key issues:
**Missed Yield Opportunities for Liquidity Providers (LPs):**
Other DEXes, like Pact Finance on Algorand, and PancakeSwap on Binance Smart Chain, have already introduced tiered fee structures. These higher-tier pools often generate better yields for LPs on certain pairs, making them more attractive. Even as a dedicated Tinyman supporter, I’ve moved a significant portion of my liquidity to Pact Finance because it simply earns more there. This shows Tinyman is losing liquidity to competitors due to the lack of fee flexibility.
**High Costs for Stable Pairs:**
For stablecoin pairs like USDC/USDT, a 0.3% fee is excessive. These pairs thrive on low trading fees because they experience high trading volume with minimal volatility. Without a lower fee tier, Tinyman risks losing trading volume for these pairs to competitors that offer lower fees, reducing protocol revenue.
**Low Incentives for Exotic or Illiquid Pairs:**
Exotic or less popular pairs need higher fees to incentivize liquidity provision. LPs are unlikely to provide liquidity for these pairs if they don’t see enough rewards to offset the risks, resulting in poor liquidity and low trading activity for such pools.
**Competitiveness in the Broader DeFi Market:**
DEXes like Uniswap, PancakeSwap, and Curve on other blockchains have long used tiered fee structures to balance user needs, and the results speak for themselves. These DEXes attract both traders and LPs by catering to their diverse preferences, creating vibrant ecosystems. Tinyman, by sticking to a flat fee, risks being left behind as competitors continue to innovate.
By addressing these problems with a tiered fee structure, Tinyman can compete more effectively, retain LPs, and attract a broader base of users and liquidity.
Markets Outperform Centralized Planning: Historically, markets have shown that natural selection processes lead to optimal distribution of liquidity. When given multiple fee tiers to choose from, LPs will gravitate toward the pools that best match their risk-reward preferences. This dynamic ensures liquidity is distributed efficiently across the ecosystem, rather than being forced into a rigid structure.
Tinyman’s current flat fee of 0.3% for all pools is simple but limited. Different token pairs have unique liquidity and trading dynamics, and a one-size-fits-all approach doesn’t account for this diversity.
Here are the key issues:
Missed Yield Opportunities for Liquidity Providers (LPs):
Other DEXes, like Pact Finance on Algorand and PancakeSwap on Binance Smart Chain, have already introduced tiered fee structures. These higher-tier pools often generate better yields for LPs on certain pairs, making them more attractive. Even as a dedicated Tinyman supporter, I’ve moved a significant portion of my liquidity to Pact Finance because it simply earns more there. This shows Tinyman is losing liquidity to competitors due to the lack of fee flexibility.
Missed TVL and Trading Volume on Tinyman:
Because LPs follow the best yield opportunities, the current fee structure discourages capital from staying on Tinyman. If more liquidity is parked on competing DEXes, Tinyman not only loses TVL but also the trading volume that comes with it. Less volume means fewer fees collected by the protocol, which ultimately impacts sustainability and future growth.
High Costs for Stable Pairs:
For stablecoin pairs like USDC/USDT, a 0.3% fee is excessive. These pairs thrive on low trading fees because they experience high trading volume with minimal volatility. Without a lower fee tier, Tinyman risks losing trading volume for these pairs to competitors that offer lower fees, reducing protocol revenue.
Low Incentives for Exotic or Illiquid Pairs:
Exotic or less popular pairs need higher fees to incentivize liquidity provision. LPs are unlikely to provide liquidity for these pairs if they don’t see enough rewards to offset the risks, resulting in poor liquidity and low trading activity for such pools.
Unhealthy Market Conditions Affect Both LPs and Traders:
Liquidity providers operating under suboptimal conditions end up pulling out their liquidity, which leads to smaller pools. This reduces available liquidity for traders, causing higher slippage and a poor trading experience. When a fee structure fails to optimize for different token pairs, both LPs and traders suffer.
Competitiveness in the Broader DeFi Market:
DEXes like Uniswap, PancakeSwap, and Curve on other blockchains have long used tiered fee structures to balance user needs, and the results speak for themselves. These DEXes attract both traders and LPs by catering to their diverse preferences, creating vibrant ecosystems. Tinyman, by sticking to a flat fee, risks being left behind as competitors continue to innovate.
Markets Outperform Centralized Planning:
Historically, markets have shown that natural selection processes lead to optimal distribution of liquidity. When given multiple fee tiers to choose from, LPs will gravitate toward the pools that best match their risk-reward preferences. This dynamic ensures liquidity is distributed efficiently across the ecosystem, rather than being forced into a rigid structure. There is no “one size fits all” for different token needs.
Background & Personal Experience
To validate these points, I ran a long-term experiment using an experimental token (MAX Coin) designed to farm trading fees from arbitrage bots. Over the past year, I analyzed trading data and found that 1% fee pools on Pact Finance consistently generated significantly higher yields compared to Tinyman’s 0.3% pools. Because of this, I migrated my entire liquidity to Pact Finance.
The same logic applies to stablecoin pools with 0.1% fees, which consistently attract higher volume due to lower trading costs.
Proposed Solution
To enhance Tinyman’s competitiveness and optimize liquidity distribution, I propose implementing three different fee tiers:
• 0.1% – Designed for stablecoin pairs (e.g., USDC/USDT) to encourage high-volume, low-slippage trading.
• 0.3% – Maintains the current standard fee, serving as a balanced middle-ground for general trading pairs.
• 1.0% – Designed for exotic and low-liquidity pairs to incentivize LPs by offering higher fee rewards.
Protocol Fee Distribution
Currently, Tinyman takes 0.05% of the 0.3% trading fee as protocol revenue. To align with industry standards, I suggest the following fee splits:
This structure keeps protocol revenue sustainable while ensuring LPs are fairly compensated.
How it Works
• Liquidity providers (LPs) freely choose which fee tier to provide liquidity for when creating or joining a pool.
• If multiple fee-tiered pools exist for the same pair, market dynamics will determine which pools get the most volume and liquidity.
• Swappers can choose between different fee-tiered pools, and aggregators/arbitrage bots will optimize routing for best execution.
Benefits of Tiered Fee Structures
Implementing a tiered fee model offers clear advantages for all participants in the Tinyman ecosystem:
For Liquidity Providers (LPs):
• Attract a wider variety of LPs by allowing them to choose fee tiers based on their risk tolerance and trading pair dynamics.
• Improve capital efficiency—higher-fee pools offer better rewards for exotic pairs, while lower-fee pools encourage high-volume trading.
• Increase total earnings by ensuring LPs are not forced into suboptimal fee structures.
For Traders:
• Lower swap fees for stablecoin and low-risk asset pairs, making Tinyman more competitive with other DEXes.
• More liquidity in the right places, reducing slippage and improving execution quality.
• A natural balance between cost and depth—while some traders will prefer the lowest-fee pools, others may opt for deeper liquidity even if it means paying a slightly higher fee.
For the Tinyman Ecosystem:
• Increased trading volume—lower fees for stable pairs attract high-frequency trading and arbitrage activity.
• Higher protocol revenue—more trading activity leads to more total fees collected, even with lower per-swap costs.
• Enhanced competitiveness—Tinyman aligns with successful models from DEXes on other chains and stays attractive to liquidity providers.
• Stronger market-driven liquidity distribution, ensuring sustainable growth rather than imposing a rigid, one-size-fits-all fee structure.
Aligning Trader and Liquidity Provider Interests
It’s a common misconception that LP and trader interests are in direct conflict. While traders naturally seek lower fees, they also need stable liquidity—low fees mean nothing if price impact is too high. If the fee structure doesn’t match the token dynamics, LPs will pull their liquidity, leading to worse execution for traders.
With lower fees on stable pairs, both groups benefit:
• LPs earn a higher APR due to significantly increased trading volume.
• Traders pay lower swap fees, making Tinyman more attractive for arbitrage and large trades.
By allowing market dynamics to shape liquidity distribution, Tinyman ensures that the right fee structure emerges naturally, rather than being forced into an inefficient model.
Potential Risks and Mitigation Strategies
1. Risk of Liquidity Fragmentation
Introducing multiple fee tiers could potentially split liquidity across different pools, leading to less efficient trading and increased slippage.
Mitigation:
• Limited number of tiers: The proposal includes only three fee tiers (0.1%, 0.3%, 1%), while other platforms like Uniswap offer even more. This keeps fragmentation minimal while still allowing flexibility.
• Market-driven selection: Over time, LPs will concentrate liquidity in the most profitable pools, ensuring natural consolidation of liquidity.
• Ongoing monitoring: Tinyman governance can assess adoption and adjust if needed. If one fee tier sees minimal usage, it can be deprecated or adjusted.
2. Risk of Complexity for Users
Some users might find it confusing to choose between multiple fee-tiered pools for the same trading pair.
Mitigation:
• UI enhancements: Clearly display pool volumes, historical trading activity, and estimated swap costs to help traders make informed decisions.
• Default recommendations: The UI can highlight the most liquid pool for each pair, guiding users toward the best choice.
• Education and documentation: Provide simple explanations on why different fee tiers exist and how users can benefit from them.
Metrics for Success
Metrics for Success
To evaluate the impact of tiered fees, we can track the following key performance indicators (KPIs):
1. Increase in Total Value Locked (TVL)
• A rise in TVL indicates that more liquidity providers find Tinyman attractive compared to other DEXes.
• Compare pre- and post-implementation TVL across different fee tiers.
2. Higher APR for Liquidity Providers
• Measure the APR per fee tier and trading pair to ensure LPs are benefiting from better-aligned incentives.
• Compare returns from Tinyman’s tiered pools to similar pools on competing DEXes.
3. Growth in Trading Volume
• Increased trading volume across different pools means the new structure is attracting more users.
• Compare volume changes, especially in low-fee stablecoin pools and high-fee exotic pools.
4. Distribution of Liquidity Across Fee Tiers
• Analyze how liquidity is distributed among 0.1%, 0.3%, and 1% pools to ensure that the market is naturally optimizing fee-tier selection.
• Identify whether any tier is underutilized and adjust if needed.
5. Protocol Revenue Growth
• Assess the impact on total protocol fees collected—higher trading activity should offset lower fees on stable pairs.
• Compare protocol revenue before and after implementation.
These KPIs will help determine whether the new fee structure enhances competitiveness, improves LP incentives, and drives more trading activity.
Implementation Plan
The rollout of tiered fees will follow a structured approach to ensure smooth adoption and minimal disruption.
1. Community Feedback and Refinement
• Present the proposal to Tinyman’s governance forum for discussion.
• Gather feedback from LPs, traders, and other stakeholders to refine details (e.g., protocol fee distribution per tier).
• Adjust the final design based on insights from the community.
2. Governance Vote on Tiered Fee Implementation
• Submit the refined proposal for a governance vote.
• If approved, finalize the technical specifications and implementation roadmap.
3. Development and Deployment
• Smart Contract Updates: Modify existing contracts to support multiple fee tiers while maintaining security and efficiency.
• UI/UX Enhancements: Update Tinyman’s interface to clearly display different fee-tier pools, their liquidity depth, and trading costs.
• Testing & Audit: Conduct internal and community testing, followed by an external audit to ensure contract security and functionality.
• Deployment
4. Education and Outreach
• LP Education: Provide clear documentation and guides on how to choose fee tiers for liquidity provision.
• Trader Awareness: Highlight how fee-tiered pools impact swap costs and execution quality.
• Marketing & Adoption: Leverage social media, governance channels, and partnerships to drive awareness and adoption.
With this step-by-step implementation, Tinyman can ensure a smooth transition to a tiered fee model, benefiting both LPs and traders while enhancing the protocol’s competitiveness.
Call to Action
The introduction of tiered fees is a crucial step toward enhancing Tinyman’s competitiveness, improving liquidity incentives, and driving long-term growth. Now, it’s up to the community to make it happen.
How You Can Get Involved:
Share your feedback – Do you agree with the proposed fee tiers? Should any adjustments be considered?
Discuss the potential impact – How do you see this benefiting your own liquidity strategies or trading experience?
Vote on the proposal – Your participation in governance ensures that Tinyman evolves to meet the needs of LPs and traders alike.
By supporting this proposal, we create a more efficient, competitive, and sustainable Tinyman ecosystem—one where both traders and LPs thrive. Let’s shape the future of Tinyman together!
Also this is important part because we want to keep things easy to understand/navigate for new Algofams.