Fee Sharing

A direct model where users stake a protocol's native token to receive a share of the fees generated by the protocol's operations. This creates a direct link between network usage and stakeholder rewards.

• Mechanism: A percentage of all transaction fees or other protocol revenue is diverted to a treasury or distributor contract, which then allocates it proportionally to stakers.
• Example: A decentralized exchange (DEX) might allocate 0.05% of every trade to a pool distributed weekly to users who stake its governance token.

Fees are shared directly with users who provide liquidity to Automated Market Makers (AMMs) or lending pools. This is the primary incentive for capital providers in DeFi.

• Mechanism: Trading fees (e.g., 0.3% per swap) are automatically added to the liquidity pool, increasing the value of the LP tokens held by each provider.
• Key Feature: Rewards are earned passively and in real-time as the protocol is used, without requiring a separate claiming action for the base fees.

A model where a protocol uses its revenue to purchase its own native token from the open market and permanently destroy it. This reduces the token supply, applying deflationary pressure.

• Process: Revenue (often in a stablecoin like USDC) is used to execute market buys of the protocol token, which are then sent to a burn address.
• Effect: This indirectly benefits all token holders by increasing the scarcity and potential value of the remaining tokens, rather than making direct payments.

Fee distribution is controlled by on-chain governance, where token holders vote on how to allocate treasury funds. This can include grants, liquidity incentives, or direct staker rewards.

• Flexibility: Allows the community to adapt the economic model over time, directing fees to strategic initiatives like growth, security, or partnerships.
• Example: A DAO's treasury earns fees; token holders propose and vote on quarterly budgets to fund development, marketing, and community rewards from this pool.

Users receive a portion of the fees generated by new users they refer to the protocol. This incentivizes organic growth and user acquisition.

• Structure: A referrer gets a predefined percentage (e.g., 10-20%) of the transaction fees paid by the referred user for a set period.
• Application: Common in broker-like DeFi protocols, trading platforms, and wallet services seeking to build their user base through network effects.

A sophisticated system where users lock governance tokens to receive vote-escrowed tokens (veTokens), which grant both governance power and a right to a share of protocol fees.

• Core Principle: Longer lock-ups grant more voting weight and a larger share of fee distributions.
• Dual Incentive: Aligns long-term holders with protocol success, as their rewards are tied to fee generation. Pioneered by Curve Finance with its veCRV model.

Fee sharing protocols automatically divert a predefined percentage of transaction fees or protocol revenue (e.g., from swaps, loans, or NFT sales) to a designated pool or smart contract. This pool is then distributed according to a transparent, on-chain logic, such as pro-rata based on staked tokens or contribution metrics. It transforms users from mere participants into economic stakeholders with direct skin in the game.

The primary goal is to create powerful, aligned economic incentives.

• Token Holders: Receive yield for securing the network, encouraging long-term holding (staking) over speculation.
• Liquidity Providers (LPs): Earn a share of trading fees on top of standard LP rewards, boosting capital efficiency.
• Validators/Delegators: Supplement block rewards with fee revenue, enhancing network security.
• Protocol Treasuries: Fund development and grants through a sustainable, fee-based revenue model.

While incentivizing participation, fee sharing introduces unique security considerations.

• Attack Surface: Complex distribution logic increases smart contract risk and audit requirements.
• Centralization Pressure: If fees flow disproportionately to large stakers, it can reduce validator decentralization.
• Governance Attacks: Control over the fee-sharing mechanism becomes a high-value target for governance exploits or token accumulation attacks.
• Regulatory Scrutiny: May influence how tokens are classified if rewards are deemed investment returns.

Different protocols implement distinct fee-sharing economic models.

• Direct Revenue Share: Protocols like SushiSwap (xSUSHI) and Curve (veCRV) distribute trading fees directly to stakers/lockers.
• Buyback-and-Burn: A portion of fees is used to buy and permanently remove the native token from circulation (e.g., Binance's BNB burn), creating deflationary pressure.
• Treasury Funding: Fees accrue to a DAO treasury (e.g., Uniswap DAO) to be governed and deployed by token holders for ecosystem growth.

A critical distinction exists between a fee token and a governance token, though they are often the same asset.

• Fee Token: The asset used to pay for network operations (e.g., ETH for gas on Ethereum). It may not confer governance rights.
• Governance Token: Grants voting power over protocol parameters. When this token also captures fee revenue (e.g., Compound's COMP), it accrues real yield and becomes a cash-flow generating asset, fundamentally changing its valuation model from pure utility to a hybrid utility/equity instrument.

In Proof-of-Stake networks, fee sharing is integral to validator economics. Beyond block rewards (new token issuance), validators earn transaction fee premiums. Delegators who stake tokens with a validator typically receive a share of both. The fee portion:

• Provides a more predictable, market-driven income stream less dependent on inflation.
• Incentivizes validators to prioritize network usage and uptime.
• Can be manipulated via MEV (Maximal Extractable Value) strategies, where validators capture value by reordering or inserting transactions, sharing a portion with delegators through tools like MEV-Boost.