In this article, we dive into the different types of fees that DeFi users can expect to pay on their digital assets. Where relevant, we’ll compare each to fees in traditional finance (TradFi) and conclude with an explanation of Flash Mint, Index Coop’s zero-slippage mechanism allowing for instant liquidity on large purchases of any Index Coop product.
All exchanges and products have different fee structures that make it difficult to generalize fee rates amongst them. However, understanding what each fee means will help DeFi users evaluate exchanges and products to determine the most cost-effective way to purchase digital assets.
In TradFi, fee rates are measured in basis points (bps); in DeFi, rates are commonly displayed in percentages. One basis point is equivalent to 0.01%. Typically there are five types of fees DeFi users can expect to pay on their digital assets:
Streaming fees are holding costs charged on digital asset indices, analogous to TradFi’s expense ratio. The percentage charged as a streaming fee corresponds to the percentage of the product’s total assets and is used to cover administrative, management, advertising, and other expenses for the protocol or project. Instead of hiring a middleman to collect fees on products annually, DeFi employs streaming fees, which accrue continually but are collected periodically via smart contracts.
Streaming fees on Index Coop products vary. Fees are charged over time based on the entire market cap of a given product. The streaming fee is calculated constantly over the lifespan of the product. For example, Interest-compounding ETH Index (icETH) has a 0.75% annual streaming fee. This means that 0.75% is charged consistently on icETH economics, block by block. This charge will be automatically removed from end users’ returns. For example, if you hold 1 icETH, 0.0075 icETH will be paid out in total streaming fees each year, though fee events are constantly streaming.
Performance fees are charged on the positive value increase of a particular digital asset, typically a yield-generating product. Unlike a management fee, which is charged without regard to returns, a performance fee is only charged on positive returns. Collection of performance fees is determined by the methodology behind the digital asset product, and usually occurs on a weekly, monthly, or quarterly basis. For example, if a product has a performance fee of 20% and the product yields 10%, the product manager behind the digital asset would earn 2%, leaving the user with 8%. If the product yields 0% or a negative value, no performance fee is charged. Performance fees incentivize builders to build sustainable, well-performing products as they too receive returns on the products’ profits.
Index Coop does not charge performance fees on any products, including yield-generating products like Interest-compounding ETH (icETH). All economics go to the holder.
Trading fees are charged on every digital asset trade made by users and can be either percentage fees or flat fees. Trading fees are separate from gas or other fees paid to deposit, transfer, or withdraw funds. Exchanges charge users this fee for buying or selling a digital asset. While both centralized and decentralized exchanges charge trading fees, decentralized exchanges direct a percentage of the fee to liquidity providers of the digital assets involved in the trade.
A flat fee is a set amount that is charged on every trade, regardless of the size of the trade. For example, a platform with a $2 flat trading fee would charge $2 on every trade, whether it was a sale of $1 million of Ethereum or $1 of Ethereum. Flat fees may be attractive to users making large purchases or sales. Compared to percentage fees, a flat fee structure may be disadvantageous for users looking to trade smaller amounts or make many trades. For example, on orders under $200, Gemini charges a flat fee regardless of the order amount.
Most digital asset exchanges charge percentage fees between 0.05% and 1.5% per trade. For example, decentralized exchanges Uniswap and Sushiswap both charge 0.3% trading fees (of that, liquidity providers receive 0.25%). Centralized exchanges, which pocket the entirety of the trading fee charged, like Coinbase and Gemini, charge 1% and 1.49% on trades over $200, respectively. Sometimes this is not a “fee” per se, but a spread; many trading platforms charge a percentage to cover the difference between the bid and ask price of a digital asset. In addition to trading fees, spreads protect platforms from market volatility and provides revenue.
Depending on the exchange they are trading on, Index Coop products may incur trading fees. Trading fees are external to Index Coop; they are charged by exchanges and Index Coop does not receive a cut of the fees.
Gas fees are charged on all transactions on the Ethereum blockchain. Gas fees are paid in Ethereum’s native cryptocurrency, ether (ETH) and are denoted in gwei, which is a denomination of ETH (1 gwei =0.000000001 ETH). For example, a gas fee of 100 gwei would charge 0.0000001 ETH. A user can set gas limits, the maximum amount of gas they are willing to consume on a transaction. Simple payments may require low gas fees, but more complicated transactions involving several smart contracts may require higher gas fees as they employ more computations.
Gas fees are charged by the Ethereum network. They rise and fall according to the demand for transactions. At times when less transactions are submitted, gas fees are lower, and vice versa. Other actors involved in the transaction, such as the miners or stakers who validate the transaction, receive a cut of the fee charged.
Mint/redeem fees are charged on the creation of new units of digital assets. Minting is the process of generating new tokens by validating data, creating new blocks, and recording that information onto the blockchain through a proof-of-stake (PoS) protocol. When liquidity of a product is low or nonexistent, users can mint and redeem new units to purchase the product. Redeeming is how users take ownership of an existing unit of a digital asset. The TradFi equivalent of mint/redeem fees is issuance/redemption fees. While TradFi users must gain approval through a centralized exchange (CEX) to issue and redeem stocks during trading hours, DeFi users can mint and redeem digital assets through a decentralized exchange (DEX) at any time, permissionlessly.
Mint/redeem fees are typically flat and small (<1%). For example, on a digital asset with a mint fee of 0.15%, a user minting $1,000 would receive $998.50 worth of the digital asset (assuming no other fees). The same is true for redeem fees, which can be charged in conjunction with mint fees. So, when a user goes to redeem $1,000 of a product with a 0.15% redemption fee, they would receive $998.50 of the digital asset.
On products with low liquidity, Index Coop charges mint/redeem fees. These products are the flexible leverage indices (FLIs) which charge a mint/redeem fee of 0.1% and the NFT Index (JPG) which charges 0.5%. Minting allows users to avoid high slippage by creating new units, and therefore liquidity.
For large purchases, Index Coop offers zero-slippage Flash Mint. Flash Mint allows users to individually buy the underlying components of an index then mint a new unit to avoid slippage. Slippage is the difference between the expected price of an order and the price when the order actually executes. Slippage typically affects large trades more than small trades. This is because it is determined by the amount of liquidity, or how quickly an asset can be bought and sold without impacting the price on a given DEX.
On DEXs, smaller trades are unlikely to encounter significant slippage, so they are usually cost-effective for users. However, at some threshold on larger trades, users are likely to encounter significant slippage (>1%). While this threshold varies significantly across products, users can typically assume to face significant slippage on trades of more than $10,000. Flash Mint solves this cost impediment by providing instant liquidity on all Index Coop products.
Take the following example: If you are buying $100 of the DeFi Pulse Index (DPI), it is cheap to swap on a DEX because you won’t see much price impact from such a small trade. You’re likely to get about $100 worth of DPI for your $100. On the other hand, if you are buying $1 million of DPI using a DEX, insufficient liquidity is likely to create a massive price impact. If you face a 2% price impact, you would only get $980,000 worth of DPI for your $1 million.
Index Coop’s Flash Mint software development kit (SDK) allows dApps and exchanges to integrate easy mint and redemption of Index Coops sector index tokens such as DPI or Interest-compounding ETH Index (icETH). It is available for products on Layer 1 blockchains (L1s) and Layer 2 blockchains (L2s).
For example, here’s how that works for the DPI:
It is important to note that flash mint automatically routes users' trades through DEXs so swap fees will be incurred.
A similar practice exists in TradFi. To avoid slippage on indices like the S&P 500 Trust ETF (SPY), users can go directly to providers to buy underlying components and create a new unit of SPY. Index Coop’s Flash Mint SDK brings this cost-effective concept to DeFi.
Index Coop is a decentralized autonomous organization (DAO) that powers simple and secure structured DeFi products, which enable easy access to a range of crypto strategies.
You can also earn or buy Index Coop products directly via your favorite decentralized exchange or on the Index Coop App.
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