Rate Swap Protocol

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Revenue Model ​

How the Rate Swap Protocol generates and distributes value.

Protocol Revenue Streams ​

1. Trading Fees ​

Mechanism: Fee charged on swap notional

  • Fee rate: Configurable (e.g., 5-10 bps on notional)
  • Charged on position open and close
  • Paid by trader, accrued to pool or protocol

Example:

  • $100,000 notional swap
  • 10 bps (0.10%) fee
  • Fee = $100 per trade

Revenue Potential:

  • $1B monthly notional volume
  • 10 bps average fee
  • $1M monthly trading fee revenue

2. Spread Capture ​

Mechanism: Pool earns on bid-ask spread

  • AMM quotes different rates for buy/sell
  • Spread depends on market volatility and liquidity
  • Additional profit for LPs beyond fees

Spread Sources:

  • Rate impact from large trades
  • Liquidity depth-based pricing
  • Volatility-adjusted spreads

3. LP Pool Profits ​

Mechanism: Pool takes opposite side of user trades

  • When users profit, pool loses (and vice versa)
  • Diversified exposure across users reduces risk
  • Pool aims for positive expectation from balanced flow

Risk Management:

  • Reserve requirements limit exposure
  • Liquidity depth controls max position
  • DV01 budgeting for risk limits

4. Liquidation Penalties ​

Mechanism: Penalty charged when positions liquidated

  • Liquidator receives portion of penalty
  • Protocol/pool receives remainder
  • Incentivizes healthy margin management

Example:

  • $10,000 unhealthy position liquidated
  • 5% liquidation penalty = $500
  • Split: $250 to liquidator, $250 to pool

Value Distribution ​

Liquidity Providers (LPs) ​

Share of Value: Majority (70-90%)

Sources:

  • Trading fees proportional to pool ownership
  • Spread capture and market-making profits
  • Liquidation penalty share
  • Appreciation of pool NAV

Returns:

  • Target: 10-30% APY on LP capital
  • Varies with trading volume and market conditions

Protocol Treasury ​

Share of Value: Minority (10-30%)

Uses:

  • Development and maintenance
  • Audits and security
  • Liquidity incentives
  • Ecosystem grants

Mechanism:

  • Protocol fee on trading fees (e.g., 20% of fees)
  • Or direct fee on swaps routed to treasury

Token Holders (Future) ​

Share of Value: TBD (if governance token launched)

Potential Mechanisms:

  • Fee sharing with token stakers
  • Governance over protocol parameters
  • Revenue buyback and burn

Fee Structure Examples ​

Conservative Model ​

  • Trading Fee: 5 bps (0.05%)
  • LP Share: 90%
  • Protocol Share: 10%

Assumptions:

  • $100M monthly volume
  • Fee revenue: $50,000/month
  • LP revenue: $45,000/month
  • Protocol revenue: $5,000/month

Moderate Model ​

  • Trading Fee: 10 bps (0.10%)
  • LP Share: 80%
  • Protocol Share: 20%

Assumptions:

  • $500M monthly volume
  • Fee revenue: $500,000/month
  • LP revenue: $400,000/month
  • Protocol revenue: $100,000/month

Aggressive Model ​

  • Trading Fee: 15 bps (0.15%)
  • LP Share: 70%
  • Protocol Share: 30%

Assumptions:

  • $1B monthly volume
  • Fee revenue: $1,500,000/month
  • LP revenue: $1,050,000/month
  • Protocol revenue: $450,000/month

LP Economics ​

Depositing to Pool ​

  1. LP deposits collateral (e.g., $100,000 USDC)
  2. Receives pool shares based on NAV
  3. Shares represent claim on pool assets

Earning Returns ​

  • Fees: Proportional to share ownership
  • Market-Making: Pool profits from balanced flow
  • Compounding: Fees increase NAV, boosting share value

Withdrawing from Pool ​

  1. LP burns shares
  2. Receives proportional NAV in collateral
  3. Realizes gains/losses from pool performance

LP Risks ​

  • Directional Risk: Pool takes opposite side of trades
  • Liquidation Risk: Undercollateralized positions drain pool
  • Oracle Risk: Stale or manipulated oracle impacts settlement
  • Smart Contract Risk: Bugs or exploits

Mitigation:

  • Reserve requirements
  • Health monitoring and liquidations
  • Robust oracle framework
  • Audits and testing

Protocol Sustainability ​

Self-Sustaining Model ​

  • Fees cover operational costs
  • Treasury builds reserves for development
  • No reliance on token inflation

Growth Investment ​

  • Early stage: Lower fees to attract volume
  • Mature stage: Optimize fees for sustainability
  • Use treasury for ecosystem growth

Long-Term Vision ​

  • Become core DeFi primitive
  • Integration across Solana ecosystem
  • Self-sustaining through organic fee revenue

Fee Optimization ​

Balancing Act ​

  • Too High: Reduces volume, drives users away
  • Too Low: Insufficient revenue, unsustainable
  • Optimal: Maximizes volume × fee rate

Dynamic Fee Potential ​

Future enhancement: Adjust fees based on:

  • Market volatility (higher vol = higher fees)
  • Liquidity depth (lower liquidity = higher fees)
  • Competitive landscape

Market Research ​

Monitor competitor fees:

  • Perp DEXs: 2-10 bps
  • Spot DEXs: 5-30 bps
  • Rate swap protocols: 10-20 bps

Next Steps ​

Released under the ISC License.

Rate Swap Protocol Documentation