Treasury Fee

Treasuries are used to bootstrap and maintain deep liquidity for the protocol's native token and other critical trading pairs.

• Providing liquidity to Automated Market Makers (AMMs) like Uniswap or Curve to reduce slippage.
• Funding liquidity mining programs to incentivize users to provide liquidity.
• Engaging in protocol-owned liquidity (POL) strategies, where the treasury itself acts as a permanent liquidity provider, reducing reliance on external incentives.

Protocols can use treasury revenue to conduct token buybacks from the open market, subsequently burning the tokens or distributing them to stakers.

• This reduces the circulating supply, creating deflationary pressure.
• It directly rewards long-term token holders and stakers by increasing scarcity and potentially boosting the token's value.
• Example: A portion of every transaction fee could be automatically used to buy and burn the native token, as seen in tokenomic models like that of Binance Coin (BNB).

Funds are allocated to create a safety net for the protocol and its users.

• Capitalizing decentralized insurance funds or security modules to cover losses from smart contract exploits or hacks.
• Providing backing for over-collateralized stablecoins or other synthetic assets issued by the protocol.
• This builds user confidence by demonstrating the protocol can absorb unexpected losses without collapsing.

To mitigate volatility and ensure long-term sustainability, treasuries often diversify their holdings beyond the native token.

• Swapping a portion of native tokens for stablecoins (e.g., USDC, DAI) or blue-chip assets (e.g., ETH, BTC) to preserve purchasing power.
• This creates a more stable balance sheet for funding operations regardless of the native token's market price.
• Diversification is often managed via treasury management DAOs or dedicated sub-committees.

Treasuries fund programs that drive community engagement and ecosystem growth.

• Distributing retroactive airdrops or rewards to early users and contributors.
• Funding community initiatives, educational content, and hackathons.
• Compensating governance participants for their time and expertise, though this is less common to avoid centralization of influence.

A treasury fee is a percentage of transaction value or protocol revenue automatically diverted to a communal fund. This is a primary mechanism for protocol-owned value creation, ensuring the project has sustainable capital for future development, grants, and operational expenses without relying on external funding.

• Typical Sources: Swap fees, loan origination fees, or a portion of staking/yield rewards.
• Automated Collection: Fees are typically collected via immutable smart contract logic, not manual intervention.

Control over the treasury fund and its fee parameters is a fundamental governance right. Token holders typically vote on:

• Fee Rate: The percentage taken from transactions (e.g., 0.05% of every DEX swap).
• Allocation Policy: How accumulated funds are spent (e.g., grants, buybacks, security audits).
• Treasury Management: Decisions on asset diversification or investment strategies.

This makes the treasury fee a direct link between protocol utility and governance power.

Uniswap's Protocol Fee Switch: A canonical example where UNI token holders can vote to activate a fee (e.g., 0.05-0.25% of swap fees) to be directed to the treasury. The specific rate and recipient address are governance parameters.

Compound Treasury: The protocol's Reserve Factor acts as a treasury fee, siphoning a percentage of interest paid by borrowers into a Reserves contract controlled by COMP token holders for future use or distribution.

Implementing a treasury fee involves critical trade-offs:

• Protocol Competitiveness: High fees can drive users to rival protocols with lower costs.
• Value Accrual: Properly designed, fees can directly accrue value to governance tokens, potentially supporting their price.
• Security Model: A well-funded treasury is essential for funding bug bounty programs, insurance funds (like MakerDAO's Surplus Buffer), and paying for critical audits, making the protocol more resilient.

• Protocol Revenue: The total fees generated by the protocol; the treasury fee is a slice of this revenue.
• Fee Switch: A governance-controlled parameter that toggles treasury fee collection on or off.
• Revenue Sharing: A model where fees are distributed directly to token stakers rather than a central treasury.
• Burning Mechanism: Fees can be used to buy and burn the native token, creating deflationary pressure instead of filling a treasury.

A strategy where a protocol uses its treasury assets, often funded by fees, to provide liquidity for its own tokens. This creates a sustainable, self-reinforcing liquidity base that reduces reliance on external liquidity providers and mitigates sell pressure.

• Purpose: Stabilizes token markets and generates fee revenue from trading pairs.
• Funding Source: Often seeded or replenished by treasury fees.
• Example: OlympusDAO's use of treasury bonds to build POL in OHM-ETH pools.

The process of allocating protocol-generated income (e.g., swap fees, loan interest) to various stakeholders. A treasury fee is a specific slice of this revenue stream directed to the protocol's coffers.

• Components: Typically split between liquidity providers, token holders (via buybacks/staking), and the treasury.
• Governance: Ratios are often set and adjusted via governance proposals.
• Contrast: A 'protocol fee' is the total take; the 'treasury fee' is the portion sent to the treasury.

The democratic process by which token holders decide on protocol parameters, including the treasury fee rate and how accumulated funds are deployed. This aligns the fee mechanism with the community's long-term vision.

• Typical Votes: Adjusting fee percentages, approving treasury grants, or allocating funds for development.
• Power Dynamics: Fee changes can be contentious, balancing immediate rewards for stakers vs. long-term treasury growth.
• Example: Uniswap's governance votes on fee switch activation.

A deflationary action where a protocol uses treasury funds to purchase its native token from the open market and permanently remove (burn) it. This is a common expenditure funded by treasury fee accumulation.

• Effect: Reduces token supply, potentially increasing scarcity and value.
• Alternative to Staking Rewards: Directs value to all holders proportionally rather than just stakers.
• Example: Binance Coin (BNB) uses quarterly burns funded by exchange profits.

The strategy of deploying treasury assets into yield-generating activities (e.g., staking, lending, LP provision) to create a recurring revenue stream independent of primary protocol fees. This diversifies the treasury's income sources.

• Goal: Fund operations and grants without constant token issuance.
• Risk Management: Requires careful asset allocation and risk assessment.
• Foundation: Initial capital often comes from treasury fee accumulation.

A configurable parameter in a protocol's smart contracts that activates or adjusts the collection of fees (including the treasury portion). It is often kept off initially to encourage growth and later activated via governance.

• Function: Literally 'switches on' a fee mechanism that was previously set to 0%.
• Strategic Tool: Used to monetize protocol usage after achieving sufficient network effects.
• Famous Case: The ongoing debate and proposals to activate Uniswap's fee switch.