Centrifuge Protocol Fees

[ImdioR]

Good day Community!

Earlier this year, an RFC for additional token utility was created and there was a lot of input from the community.

The GCG group, after carefully reading and analyzing the comments and all suggestions provided by the Community here ( link ) and here (link), would like to separate the old RFC (with 2 token utilities) and re-open the discussion about Protocol Fees before starting an official governance process for the proposal. This is a short summary of the proposal and comments regarding this proposal.

Protocol Fees

In our opinion turning on protocol fees will increase the security of Protocol life and guarantee continuous development and add additional key token utility.

The CFG token currently has these utilities now:

• Transaction fees on the Centrifuge parachain
• Governance ( Snapshot voting, on-chain voting)

An additional key utility to implement with CFG for the Community to consider is to turn on protocol fees. These protocol fees can be implemented as servicing fees in CFG tokens for use of the protocol for locking an NFT, entering into a borrowing transaction, etc.

These fees would be paid in CFG into the on-chain treasury, and the token holders would govern the best way to deploy these funds to grow the protocol (ex. grants, or burning a percentage of the treasury each spend period, at a rate set through CFG-holder governance).

And what does this mean for token holders? Why now?

Well, for several reasons.

1. Centrifuge Pools and growth of Centrifuge Pools on Eth

Given the growth of Centrifuge pools on Ethereum to over $80M TVL (total value locked), and the upcoming launch of pools on the Centrifuge chain, the Community can consider that the protocol is both large and mature enough to support protocol fees.

Implementing such fees on Ethereum would have been too complex and expensive while borrowers were paying high gas fees, and come at a stage where Centrifuge was still proving its value as a protocol. With its current size and coming updates - protocol fees could start to have a real impact on the protocol’s future growth potential, and CFG holders’ participation in that growth by creating a link between CFG and the growing use of the protocol.

2. Stability and self-sustainability:

Looking at TVL on Tinlake and the development of Centrifuge Pools we think that now Centrifuge is ready to turn on Protocols Fees in order to guarantee the stability and self-sustainability of the protocol.

We believe that turning on Protocol Fees is strictly aligned with the Centrifuge Mission and will help the protocol become self-sustainable, stable, and independent from external conditions in the future.

In order to understand the best choice for the protocol and the direction of development, we would like to ask the opinion of the Community:

• What currency of the fee we should implement in your opinion?
• Structure of the initial fee implementation? Any ideas, or suggestions?
• Who is the fee charged to (Issuer, Investor or both)?
• What is the fee based on? Is it a fixed fee or variable?
• Fees are paid into the on-chain treasury?
• Should we have an insurance pool or some supply set aside to cover pool losses?

We would like to thank our Community for the input and ideas provided so far in previous discussions. In particular: @Sherman ( 1,2), @prankstr25 (1), @Frosties , @OgTheKingOfBashan (1), @karpenko416 (1), @Cedric (1) etc.

Looking forward to any feedback and any concerns that you might have, feel free to write them in the comments.

[Tjure07]

Pryvit Ivan!

Thanks for bringing this proposal up again. Indeed the increase in the token utility (besides voting and transaction fees) is an important aspect for the growth of the ecosystem and the long-term viability of the CFG-token and I fully support this proposal.

Here are my two Cents on the questions asked:

@ImdioR

What currency of the fee we should implement in your opinion?

If the protocol fees will be paid into the on-chain treasury, the most convenient way to to that would be in the native CFG-token.

@ImdioR

Structure of the initial fee implementation? Any ideas, or suggestions?

Without a burning mechanism, CFG-tokens will be moved around without reducing the total supply and therefore in my opinion, a portion of the protocol fees should be burned on a regular basis (monthly or quarterly) and a way to track the burning process could be done via a similar tool to makerburn.com

@ImdioR

Who is the fee charged to (Issuer, Investor or both)?

The fee should be charged to everyone who uses the protocol (thus both the issuer and the investor) with maybe a slightly higher fee for the issuer who locks an NFT

@ImdioR

What is the fee based on? Is it a fixed fee or variable?

I’d prefer a constant the protocol fees but this could change, once the usage of the protocol reaches a certain level with a gradual increase (the higher the usage, the more fees) and drop again when the protocol is used less.

@ImdioR

Fees are paid into the on-chain treasury?

As I mentioned above, the fees should be paid into the on-chain treasury but an experimental feature would be to distribute a portion of the protocol fees to token holders based on a percentage of their share of the total supply (the more tokens, the higher the rewards)

@ImdioR

Should we have an insurance pool or some supply set aside to cover pool losses?

Do you mean an insurance pool in case a pool defaults to cover the losses?

[roollie]

Thanks for this @ImdioR! As a core contributor who speaks often to the issuers, I feel like the low hanging fruit should be to charge for things that are already happening off-chain, i.e. many of our issuers take an origination fee or spread off-chain from the asset originators. If the asset originators can be charged on-chain by the issuers, this will allow more transparency into the flow of money.

We can also consider charging issuers a % of AUM like a technology provider, and investors on a per-trade (investment and/or redemption), much like how Fidelity charges per stock trade. The issuers can choose to pass on the costs to investors in the form of % of AUM or some sort of performance fee for the junior tranche (i.e. if junior returns more than x%, issuer gets y% of the delta). Perhaps we should also discuss what are standard fees that go back to the protocol to support its growth, and what are fees that issuers can turn on/off that go to the issuers, which should encourage healthy competition among issuers as well.

[ImdioR]

Good day Tjure07
Thank you for your feedback.

@Tjure07

If the protocol fees will be paid into the on-chain treasury, the most convenient way to to that would be in the native CFG-token.

From one side I agree that fees should be repaid in native CFG tokens ( but several users suggested using a stable token instead of CFG in order to avoid value lost during a “hard” time. I think they are right.)
But on another side, I realize that the protocol can not plan the development, future hiring, integrations and etc without a clear understanding of upcoming (or already paid) income. Most of all if this income could be volatile and not stable (If we are talking about native tokens).

@Tjure07

Without a burning mechanism, CFG-tokens will be moved around without reducing the total supply and therefore in my opinion, a portion of the protocol fees should be burned on a regular basis (monthly or quarterly) and a way to track the burning process could be done via a similar tool to makerburn.com

My personal opinion is that it is not necessary to create what needs to be burned.
If we already know in advance that something will be burned in the future, then we are doing something wrong or doing one action more than necessary. Maybe I’m wrong.

@Tjure07

The fee should be charged to everyone who uses the protocol (thus both the issuer and the investor) with maybe a slightly higher fee for the issuer who locks an NFT

This could be an option. I think we should hear both parts: investors and issuers.

@Tjure07

I’d prefer a constant the protocol fees but this could change, once the usage of the protocol reaches a certain level with a gradual increase (the higher the usage, the more fees) and drop again when the protocol is used less.

I think that this parameter will be definitely not fixed and could be changed.
I’m not a big fan of fixed parameters, because exist definitely a minimum % and max %.
In order to attract more liquidity from big institutional investors this parameter should be revised (in my opinion couldn’t be fixed and equal for all).

I think our community could share their knowledge, thoughts and wisdom!
I definitely would like to hear what think @ctcunning @lucasvo about this

[ImdioR]

Good day Roollie
Thank you for your feedback and comment

@roollie

Perhaps we should also discuss what are standard fees that go back to the protocol to support its growth,

Yes, agree with you.

[prankstr25]

I agree, I think the protocol needs to have sustainable revenues and treasury to support long term growth, perhaps initiate token burns, etc. I believe charging issuers a percentage of AUM would be fair, I think a technology intermediary could charge 50bps or so. I dont believe most issuers are set up like funds (at least we are not), so we make our revenue on the originations and spread.

Could LPs also pay a small fee taken off their top of their gains?

[ImdioR]

@roollie

As a core contributor who speaks often to the issuers,

Would be great to receive more feedback from issuers.

@prankstr25

I agree, I think the protocol needs to have sustainable revenues and treasury to support long term growth, perhaps initiate token burns, etc.

Thank you prankstr25 for your feedback.

[ImdioR]

Good day!
We would like to hear the opinion of our Issuers about Protocol Fees.

Some of the questions:

• What currency of the fee we should implement in your opinion?
• Structure of the initial fee implementation? Any ideas, or suggestions?
• Who is the fee charged to (Issuer, Investor or both)?
• What is the fee based on? Is it a fixed fee or variable?
• Fees are paid into the on-chain treasury?
• Should we have an insurance pool or some supply set aside to cover pool losses?

@roollie

We can also consider charging issuers a % of AUM like a technology provider, and investors on a per-trade (investment and/or redemption), much like how Fidelity charges per stock trade. The issuers can choose to pass on the costs to investors in the form of % of AUM or some sort of performance fee for the junior tranche (i.e. if junior returns more than x%, issuer gets y% of the delta). Perhaps we should also discuss what are standard fees that go back to the protocol to support its growth, and what are fees that issuers can turn on/off that go to the issuers, which should encourage healthy competition among issuers as well.

@ImdioR

Would be great to receive more feedback from issuers.

@Fabien @AleG @JeremyKim @FortunaFi @REIF @SAM226

[prankstr25]

Here are my thoughts on this topic:

@ImdioR

• What currency of the fee we should implement in your opinion? - CFG
• Structure of the initial fee implementation? Any ideas, or suggestions? - Having a couple options is always best, as @roollie mentioned, the possibility of charging both the issuer and the investor is appealing, and the issuer can decide what amounts, and if its’ a transaction fee or a “management fee” type of an arrangement. Overall, I believe a total of around 50 bps is what I have seen other tech-enabled providers charge.
• Who is the fee charged to (Issuer, Investor or both)? - option to charge both would be great
• What is the fee based on? Is it a fixed fee or variable? - see above
• Fees are paid into the on-chain treasury? - yes. I suppose if this functionality is being implemented, could there be a feature that lets issuers charge an AUM fee in DAI as well? Perhaps this is for another release.
• Should we have an insurance pool or some supply set aside to cover pool losses? - great idea

[Harbor]

Agreed. Fees should somehow be tied to AUM as opposed to transactions… reason being, shorter dated tenors will always have granularity in the portfolio and higher transaction volume. I acknowledge that we are biased in this regard given asset tenors and liquidity in trade finance.

We 100% support the implementation of protocol fees.

[Stu]

Hi All,

My thoughts below:

1. If the circulation of CFG continues to increase then it will continue to be debased.
2. Asset Originators (of which we are one) should be paying CFG fees now for minting NFTs
3. Those fees should have a minimum and then be related to consideration / monetary value of drawn down funds on each NFT as this will volume weight the costs fairly vs the utility derived
4. The fees should not be sent to the on-chain treasury but instead be sent to a warehouse which is then burnt on a regular basis.
5. Fees in aggregate should be larger than issuance, constricting the supply of CFG
6. Only the issuer need pay fees, as funders will be paying indirectly as the spread between issuer income and issuer rewards to funders will widen to cover the cost of transactions.
7. $80M TVL is tiny in the world of finance. Many of the A/O’s can deploy multiples of that amount of capital on their own (eg Amazon seller financing for just the top 20% of sellers is many billions of dollars) so fees will be able to drop over time.

[ImdioR]

Good evening prankstr25!
Thank you for you full and detailed answer.

@ImdioR

What currency of the fee we should implement in your opinion? - CFG

Hm… If the fees should be paid in CFG this is mean that you can not predict the value of the token in near future for 6-9 months and as a result, you can not plan your future developing, hiring, partnerships and etc.

I’m not sure if still possible to pay the fees in the on-chain treasury in Polkadot in DAI,USDC, USDT (maybe Devs could provide some information).

Anyway, thank you again for your input.

@Harbor

We 100% support the implementation of protocol fees.

Good evening Harbor !
Thank you for your feedback!

Hello Stu!
First of all, thank you for your feedback and for providing answers for all questions!

@Stu

• If the circulation of CFG continues to increase then it will continue to be debased.

So would be better to pay fees in DAI, USDC, USDT or?

@Stu

• Fees in aggregate should be larger than issuance, constricting the supply of CFG

Any indicative value could you provide, please?

[ImdioR]

Good day @Will_Coleman
We would like to hear your opinion about Centrifuge Protocol Fees!
Please provide your feedback, thoughts, or concerns that you might have
Thank you in advance.

[lakejynch]

@ImdioR

• What currency of the fee we should implement in your opinion?

The goal of the fees should be to produce value while maintaining Centrifuge as a competitive option against TradFi alternatives. For this reason, I’d lean towards protocol fees being charged in a stable as the user experience will be simpler. This would shift the burden of acquiring CFG from the issuers to the DAO, which should be trivial for the DAO and could be challenging overhead for the issuer.

With the fees, the DAO can then choose to purchase (buy-back) CFG, or to fund operations, without the concern of having to sell CFG - selling governance tokens is something I’ve found to be extremely challenging for most DAOs.

@ImdioR

• What is the fee based on? Is it a fixed fee or variable?

As far as I understand, from an economic standpoint, the “cost of servicing” would be a fixed cost. Regardless of the size of the pool, the costs are fairly similar. However, strictly using a fixed cost could reduce the upside for the DAO. I’d opt for a max(x,y) solution whereby x is the cost of servicing a pool with an additional margin, and y is some function with a variable rate based on the size of the pool or the credit utilized.

@ImdioR

• Who is the fee charged to (Issuer, Investor or both)?

Softly held opinions here, but I believe the issuer would be in the best position to shoulder this cost.

@ImdioR

• Should we have an insurance pool or some supply set aside to cover pool losses?

No downside in setting this up and setting it at 0% to start.

[ImdioR]

Good day lakejynch
Welcome to our forum!

@lakejynch

The goal of the fees should be to produce value while maintaining Centrifuge as a competitive option against TradFi alternatives. For this reason, I’d lean towards protocol fees being charged in a stable as the user experience will be simpler. This would shift the burden of acquiring CFG from the issuers to the DAO, which should be trivial for the DAO and could be challenging overhead for the issuer.

Thank you for your elaborate feedback!

[lakejynch]

I appreciate the welcome.

Some background - I am part of the L1 Digital investment team and led our recent investment in the protocol. We’re excited to be joining the community and hope that our input here is helpful and constructive.

[ImdioR]

@lakejynch

Some background - I am part of the L1 Digital investment team and led our recent investment in the protocol. We’re excited to be joining the community and hope that our input here is helpful and constructive.

We are happy to see investors who are directly involved in governance and who could provide important and relevant feedback.

At this moment we also collecting feedback about Founding Documents:

• Part 1&2 - Founding Documents for the Centrifuge DAO? Part 1 & 2 - #2 by devin
• Part 3&4 - Founding Documents for the Centrifuge DAO? Part 3 & 4: Code of Conduct & Levels of Engagement
  Would be great to get feedback from L1 Team too! If you don`t mind

[Will_Coleman]

Hello @ImdioR,

Thanks for the mention! Let me do some research and thinking and I will follow up with my thoughts on the protocol fees

Are there any other resources outside of this thread you would recommend I look through to make sure I am fully understanding the fee discussion up to this point?

I will aim to give you my in depth thoughts by Monday or Tuesday next week!

[ImdioR]

@Will_Coleman

Are there any other resources outside of this thread you would recommend I look through to make sure I am fully understanding the fee discussion up to this point?

Good day Will_Coleman and thank you for your comment and for your time.

You can find some more info here:

RFC: Additional CFG Token Utility

Proposals for additional functionality for the Centrifuge Token (CFG) to improve the protocol The Centrifuge Parachain is live! So, what’s next? If you haven’t had a read yet - check out Lucas’s post on our Real World DeFi Roadmap. He touches on a crucial element of the parachain launch, and with it, the migration of asset financing pools from Tinlake on Ethereum to the Centrifuge parachain: CFG utility. CFG utility should empower holders to participate in the protocol long-term and actively s…

and something more here:

RFC: Increase Transaction Fees on Centrifuge Chain by 100x and Use the Fees towards a Token Burn

Hey everyone! I would like to propose an increase in transaction fees on the Centrifuge parachain. The aim of this proposal is to burn the excess CFG in the transaction fee, to help reduce circulating supply and positively effect CFG token economics. At current network use, transaction fees for a single CFG transfer on Centrifuge Chain is about 0.000052 CFG, which at current price is $0.000028 per transfer. Other transactions on Centrifuge such as voting, creating proposals, and more complex ex…

This is the reason why we, GCG, decided to reopen a post with 1 topic to discuss, otherwise, commenting on two different proposals could dissipate focus and attention.

[Will_Coleman]

Thank you! I will review these over the weekend and send my thoughts next week.