First off, apologies in advance to everyone that is tired of the fee debate. If it were up to me, we would instead be focusing this energy on solving problems for users and building things they actually want. Of course I’m just one community member, and fortunately it’s not up to me. It’s up to you (and you, and you…). To everyone reading this, thanks for taking the time to read my arguments for why we should not enable fees at this time along with a proposed alternative.
As many of you know, the topic of whether ShapeShift should charge fees on top of the protocols and services that it integrates is one that I’ve been pondering for years. If you haven’t already, I invite you to check out either this thread and/or presentation where I summarize my thoughts on this important topic.
As one of the primary (or at least loudest) proponents for ShapeShift’s no-fee model (specifically for protocols and services SS integrates), I’ve heard every argument for why ShapeShift should give up on the no-fee model and charge fees. Rather than convince me, the ongoing debate continues to strengthen my conviction that
-
enabling fees is not in ShapeShift’s best interest
-
the no fee + FOX Reward model first outlined in ShapeShift’s decentralization announcement is a winning strategy and the best path forward that’s been proposed
While I know some feel equally certain that the best path forward for ShapeShift is to enable fees, I feel compelled to dao my best to make the following proposal to the community:
–
Summary
This counter proposal to SCP-153 signals that the community prefers to experiment with no fees & FOX rewards prior to enabling fees on top of protocols or services that ShapeShift integrates.
It does not mandate that FOX Rewards need to be prioritized immediately, and leaves this discretion to the Product Workstream.
The impetus for this proposal is to provide the community with a compelling alternative to SCP-153: Parametric Survival - A Pragmatic Fee Model along with a summary of arguments for why approving SCP-153 would not be in the DAO’s best interest.
Abstract
On February 15th, the community voted for SCP-128 (opt-out donations) instead of SCP-131 (added fees on THORChain). Since then, the majority of trades, traders, and trade volume have optionally donated. This has enabled ShapeShift to generate additional revenues, maintain its status as a 100% free Public Good, and gather valuable data. THANK YOU to everyone that’s supported ShapeShift’s mission with your donations.
Additionally, ShapeShift has established a wide variety of affiliate revenue partnerships with protocols and services that it’s integrated. These partnerships are offered by some of the top providers and cover the main activities that DeFi users demand, including buying/selling, trading, earning yield, and more. Further, they enable ShapeShift’s products to generate revenues and capture value in a way that does not hinder their competitiveness.
Unfortunately, like 99% of crypto companies in this market, including Coinbase, ShapeShift is not yet profitable/sustainable despite these revenue streams. To address this, SCP-153 argues that “We need to promptly course correct from our current default-dead business model.” While this argument sounds logical, its premise is based on an incorrect assumption that ShapeShift’s business model is the main thing holding it back from profitability. If it were true that ShapeShift had enough users/volume that enabling the parametric fee model could cover even 1/10 of ShapeShift’s expenses, AND that the current revenue streams were not delivering, this would be a much better argument. However, the reality is that there is no realistic business model that would make ShapeShift profitable with its current usage levels and volume. Even if we aggressively assume that enabling fees would not decrease ShapeShift’s volumes at all, the incremental revenue this generates relative to donations would be on the order of single digit thousands per month. What ShapeShift actually needs is 1-2 orders of magnitude more users and/or volume, and while adding easily avoidable fees will have little-to-no impact on ShapeShift’s runway, it will make it significantly harder for ShapeShift to achieve what it actually needs to not only survive, but thrive.
The three main arguments that I’ve heard for enabling fees are as follows:
- The DAO needs to generate more revenues. Even though the revenues may not be significant, the DAO should generate as much revenue as it can.
Counter argument: At current volumes (even if we assume that enabling fees will have no negative impact), enabling fees would add <$2500 of monthly revenue. Over the next 12 months, that would amount to <$30,000, or less than 1 week of additional runway. $30,000 happens to be approximately what the median project received in round 2 of Optimism’s Retroactive Public Goods Funding. In the upcoming rPGF round 3, 3x the amount of OP is being distributed (30M OP). Considering that ShapeShift has been a top project in the latest quadratic funding rounds from Gitcoin and Giveth and has helped onboard over 20k unique users to Optimism, community member @fireb0mb1 estimates that ShapeShift could receive $200-600k of OP which can be used to cover operating expenses. However, Optimism’s definition of public goods clearly states that “Public goods are valuable things (goods, information, services, etc) that cannot charge money.” There are many arguments for why no fees can actually lead to more revenues, but this single example illustrates how enabling fees could actually decrease ShapeShift’s runway by an estimated 1-3.5 months.
- The DAO needs to run experiments and collect data. It’s easier/less risky to run a fee experiment now when the DAO has fewer users than in the future when it potentially has far more users.
Counter argument: What data are we hoping to collect from the fee experiment? Is the goal to measure how many users/volume ShapeShift will lose by enabling fees? How will we know if any future user growth/loss is attributed to fees vs. the quality of the product relative to other available options? If the goal is to measure whether users or not users are willing to pay fees, the existing optional donations experiment already gives us equally if not more valuable insights into whether users are willing to click an extra button to avoid fees. What the mandatory fee experiment can never tell us is how many users/volume ShapeShift could have if it did not enable fees. Lastly, enabling fees now means that ShapeShift does not get to experiment with no fees & FOX Rewards. Which data is more valuable? Which experiment has fewer downsides? Which experiment makes sense to run first? I would argue that the no fee + FOX reward experiment will provide more valuable data, has far fewer downsides, and at the very least makes sense to run first.
- SCP-153 will add utility to FOX by enabling holders of FOX to waive the additional fees levied by the interface.
Counter argument: While it’s true that this would add some utility, the amount of utility is equivalent to the incremental convenience that the interface provides relative to other avenues. In other words, the utility is equivalent to the value of saving a few clicks. If this same model is instead applied to FOX Rewards, the added utility for FOX becomes equivalent to the incremental revenues the user earns by using ShapeShift (aka uncapped). By holding more FOX, users could generate additional revenues that would otherwise be inaccessible (ie. 10% for holding a FOXatar, 20% for holding a FOXatar and 10k FOX… 50% for holding a FOXatar and 1M+ FOX)
If there are any other arguments for fees, please share them in the comments and I will add them to this list along with a counter argument.
If you’re interested in diving deeper into the logic behind the no-fee + FOX Reward strategy, check out this thread and/or presentation.
Mercle.xyz, the team responsible for powering the FOX Avatar NFTs, has developed a Proof of Concept for FOX rewards where you can trade, bridge, and deposit to DeFi and earn real FOX instantly in proportion to the volume of your transaction. They’re doing some maintenance on the proof of concept this weekend, but it will be live again for anyone who wants to test it next week.
FOX Rewards Spec
A spec for FOX Rewards powered by Mercle is drafted and available for review here. The hard work has been done, and the lift to bring this to production is reasonable considering the opportunity.
Financial Model
Financial models were also requested to help compare the potential of the no fee + FOX Reward strategy to the parametric fee strategy. A financial model for FOX Rewards is available here; feel free to duplicate it and modify the assumptions which are highlighted in blue.
This proposal will also formalize the following cross-workstream Rewards Committee that was assembled to oversee the Explore Optimism mission and delegate authority to them to be able to oversee FOX Rewards and adjust quickly as needed. To alleviate the burden on governance, this committee can self-govern by voting internally to remove or add new members. A new discord channel, #rewards-committee-voting will be created which will use the same bot as #tmdc-voting, Sesh to power voting, and each member will get 1 vote. Simple majority will rule, and a minimum quorum of 4 is required to pass a vote.
Giantkin - Moderation
Hpayne - Growth
PTT - Product/ops
Willy - Foundation
Tyler - Ops
Kent - TMDC
Firebomb1 - Global
Motivation
-
Opt-out donations generate more valuable data than mandatory fees with fewer downsides
- FOX Rewards is designed to attract more users and drive increased retention, engagement, and volumes
- Equitably distribute voting power to users that generate the most value, evolving these users into community members, and further decentralizing ShapeShift’s governance
- By not adding fees and sharing a portion of affiliate revenues with the user, make ShapeShift objectively the best way to use a growing number of protocols and services (from financial perspective: no added fees and a sustainable FOX incentive that's not available anywhere else)
- Maintain ShapeShift’s public good status
Maintain ShapeShift’s eligibility for grants and matching donations that are limited to public goods, such as Optimism’s RetroPGF Round 3
- which alone could generate 10x the incremental revenues that enabling fees will drive at current volumes (if we assume that fees don’t cause volumes to decrease)
Specification
-
If passed, workstreams will not have approval from the community to add fees on top of protocols or services that ShapeShift integrates (a future proposal would be required for this)
- The cross workstream rewards committee will be formalized and delegated authority to make changes to the reward % for each incentivized action, enable or disable incentivized actions, approve FOX for distribution, and pause the program in case of emergency OR if the committee deems that the experiment is a failure
- 10M FOX will be budgeted for FOX Rewards, and the rewards committee will be able to request FOX from the main treasury to fund rewards as long as the total balance in the new Safe does not exceed 2M FOX
Product workstream will maintain authority to prioritize FOX Rewards and engineering will maintain authority on how to implement. All workstreams will be expected to do everything in their power (within reason) to launch the FOX Rewards experiment within a reasonable time frame. A draft spec including a proof of concept implementation is available
- here
- Product and engineering workstream will maintain authority to experiment with opt-out donations, and could choose to apply the parametric fee model to donations (ie. the larger the size of the trade, the lower the suggested donation %)
Success/Failure criteria
-
The following goals are included in the FOX Rewards spec:
Increase the WATs (Weekly Active Transacting Users) by 73% in the 3 months following launch (20% MoM growth)
- Increase trade volume by 51.7% in the 3 months following launch (15% MoM growth)
- Increase cumulative monetizable DeFi deposit volume by 137% in the 3 months following launch (33.3% MoM growth)
If these goals are hit, the experiment will be considered a success. If not, the experiment will be considered a failure and the rewards program will be sunset. Further, at any point in time the rewards committee can vote to conclude the experiment OR the community can pass a proposal to end the experiment and/or enable fees.
Benefits
-
Potential to significantly and sustainably accelerate ShapeShift’s user, volume, and revenue growth
- Increases stickiness; users who know about what ShapeShift offers would have to be crazy to do the incentivized actions outside of ShapeShift because they would be acting out of their own self interest
- Adds utility to both FOX and Foxatars
- Adds a new revenue stream through Foxatar minting costs
- Builds unstoppable and unforkable network effects
- Maintains ShapeShift’s Public Good status and eligibility for grant opportunities such as Optimism’s rPGF and Gnosis Builders as well as quadratic donation matching on Giveth
Drawbacks
-
Like all innovative experiments, FOX Rewards is not guaranteed to be successful, will require time and effort to execute, and includes risks (detailed in the spec)
The community will not be able to test the proposed fee model unless a future proposal is passed
Additional background:
While added fees are a tried and true method in Web2, they work best for ‘walled garden’ platforms, in which either the technology, content, or network (ie. buyers and sellers on a marketplace) cannot easily be accessed outside of the platform. Unlike walled gardens in Web2, the protocols and services that ShapeShift integrates are completely open. ShapeShift has no exclusive access to these protocols relative to competitors and end users. In fact, the majority of protocols or services offer their own interfaces that users can access from a multitude of wallets with a few clicks. While some interfaces and wallets have been successful charging fees atop protocols or services they integrate, they are either first movers and/or have established strong network effects (ie. Metamask and THORSwap). ShapeShift does not (yet) have these same critical advantages. Further, as a fully open-source project, if ShapeShift was able to craft a UX capable of attracting sufficient users willing to pay the added fees, it would be very compelling for an entrepreneur to fork ShapeShift, undercut the fees (or perhaps launch the no fees & FOX rewards strategy
- outlined in this spec), and launch a new governance token along with a vampire attack designed to steal ShapeShift’s current and future users. It could have all of the same functionality as ShapeShift’s app, but would be objectively better because it had less (or zero) fees. The API that ShapeShift has been developing as well as the upcoming launch of Arkeo only make this hypothetical endeavor easier.
While this is subject to change via governance, the vision and mission for ShapeShift DAO since its genesis is as follows:
Vision:
We envision a borderless financial system built on open, decentralized protocols.
Mission:
We shall be the pathway into this borderless financial system; an open-source, multi-chain, self-custody crypto platform enabling billions to achieve financial sovereignty.
Part of the inspiration for the no fee model comes from first principles thinking of what the best pathway to the borderless financial system (I like to refer to this as “the ultimate interface to the decentralized universe”) will look like.
the ultimate interface will adhere to the following principles
- no such interface exists yet
- ShapeShift is in the best position to deliver this
- The opportunity for whichever community achieves this is massive; arguably larger than the opportunity for any single protocol or service
While we’ve been DAOing it for over 2 years now and have yet to achieve this mission, I still believe that we can. I am of course just one of many community members, and I’ve always encouraged suggestions for alternative visions or strategies. However, I have personally yet to hear any vision or strategy for ShapeShift that’s more compelling. If ShapeShift attempts no fees & FOX Rewards as outlined in the decentralization announcement and draft-specified here, and finds that the market does not validate these hypotheses, I would be much more open to considering fees or alternative directions.
We’re so close to being able to experiment with no fees & FOX Rewards. Let’s not give up on it before we even try, especially for a strategy with negligible benefits that will arguably make it much harder for ShapeShift to achieve its vision.
The decision of whether or not to enable fees has historically been the most controversial decision in ShapeShift DAO’s history. The longer the bear market goes on and the shorter ShapeShift’s runway becomes, the support for added fees as well as the belief that the current business model is not working has understandably increased. Fortunately, the DAO still has an estimated 12 months of stable runway at current burn. We still have time to experiment with both no fees & FOX rewards, as well as with fees if that doesn’t work out. Plus, while the FOX Rewards strategy is designed to work best when the revenues don’t come from added fees, everything developed for FOX Rewards would still work in a world where the revenues do come from added fees. Even if the community does decide to enable fees in the future, the time and effort spent on FOX Rewards could still be valuable and could help increase ShapeShift and FOX’s utility despite the fees.
It’s important to note that FOX Rewards alone can not be counted on to guarantee product-market fit/success. Ultimately, ShapeShift needs to be the best way to do things that enough users want to do, and while FOX Rewards can help make ShapeShift the best and accelerate user acquisition and retention, it’s imperative that the community continue listening to users and improving its offerings.