Proposal: Activate the Protocol Fee Switch with V2 Launch

Proposal: Activate the Protocol Fee Switch with V2 Launch

Short Description: Activate uniform Protocol fees to secure a fair and transparent fee structure at mainnet launch.

What are Protocol fees?

Protocol fees are an adjustable parameter, which allows the protocol to maintain itself self-sustainably by collecting a percentage of the interest of each repaid loan in a certain pool. All collected fees are then handled by the DAO as part of its treasury. As stated in the documentation, the default value for all pools is 0, which translates into 0% collected fees from interest payments. But implementing

  1. Protocol fees will create an inflow of ADA and CNTs into the DAO treasury.
  2. It will stimulate the DAO members to be proactive and engage in discussions on how to utilize the collected funds.
  3. The collected funds will give the DAO a broader range of possibilities when it comes to making use of the treasury capital.

Why implement Protocol fees for all pools?

  • Consistency without complicated fee structures - Applying protocol fees uniformly across all pools creates a consistent and straightforward fee structure that is easy for users to understand. This approach reduces complexity for both users and developers, making the protocol more user-friendly.
  • Equal market opportunity - It promotes fairness and inclusivity, as all users and liquidity providers get the same treatment regardless of the pool they’re using.
  • Predictability - It makes it easier for users to anticipate the underlying fees they will incur when using any pool without having to navigate varying fee structures.
  • Simplified DAO governance - Setting and managing fees uniformly across all pools can streamline decision-making and reduce the need for complex parameter adjustments.

Tiered protocol fees or flat protocol fees?

Implementing fees is a feasible strategy to bring liquidity to the DAO without forcing holders to lock their LENFI tokens in a smart contract. However, the opportunity brings up another question: Should we implement a flat fee for all pools or agree on tiered percentages based on the Utilization Rate (UR).

What is Utilization Rate (UR)?

In simple terms, the UR measures how much of the available balance in a pool is currently used. The algorithm applies the formula (loanAmount + lentOut) / (balance + lentOut), raising the interest rates when more funds are borrowed from the pool and vice versa.

Given the general sentiment, the Tiered fees could be around 1% or as follows:

Tier 1: If the Utilization Rate (UR) is below 15% - 1%

Tier 2: If the Utilization Rate (UR) is between 15% and 45% - 2%

Tier 3: If the Utilization Rate (UR) is above 45% - 3%

An alternative variant, starting at 2%:

Tier 1: If the Utilization Rate (UR) is below 15% - 2%

Tier 2: If the Utilization Rate (UR) is between 15% and 45% - 3%

Tier 3: If the Utilization Rate (UR) is above 45% - 4%


If the loan interest is 50 ADA, the Protocol fee paid to the DAO treasury will be as follows:

Variant 1:

Fee Tier Utilization Rate (UR) Range Fee Percentage Fee Paid to The Treasury
Tier 1 UR < 15% 1% 0.5 ADA
Tier 2 15% ≤ UR ≤ 45% 2% 1 ADA
Tier 3 UR > 45% 3% 1.5 ADA

Variant 2:

Fee Tier Utilization Rate (UR) Range Fee Percentage Fee Paid to The Treasury
Tier 1 UR < 15% 2% 1 ADA
Tier 2 15% ≤ UR < 45% 3% 1.5 ADA
Tier 3 UR ≥ 45% 4% 2 ADA

Note (Taken from the Lenfi docs): Cardano’s native minimum ADA requirement to send is approximately 1 ADA if the fee is in ADA, or approximately 1.2 ADA plus the fee if the asset is a native asset (CNT).

Final Note

While collecting platform fees seems natural, it’s crucial to implement reasonable and user-friendly % rates. Fees should not be too high to avoid disincentivization and not too low, so they are feasible. All figures could be changed at a later time by the DAO.

P.S. The following thread will serve as a temp check and any ideas are welcome. The proposed fee percentages are based on the general sentiment in the community and are not final. The proposal will be amended and moved for off-chain voting after gathering community feedback.


Hi, is there a way to vote on the two variants ? thanks

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Yes, I will move the proposal for voting, but I think we need some feedback from the community before that.

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Since interest rates already rise with utilization rate, I don’t think we also need the fee rate to increase as well. The increased interest rate will lead to higher fees generated even without a higher fee rate.

If someone borrows 5k ADA when the UR is low, they will get a lower interest rate. The smae 5k borrowed when UR is high will have a higher rate. So if the 1st loan is at 5% and the 2nd loan is at 10%, the 2nd loan will generate twice the fees with a flat rate. If you also double the fee rate, it leads to the 2nd loan costing 4 times as much.

I realize the borrower isn’t paying the fees but the lender shouldn’t have to pay a higher fee rate when UR is high.

I assumed the rate would be set based upon the UR at borrowing but it isn’t clear in the proposal. I’m not sure what the reasoning would be behind setting the fee rate at repayment but that maybe needs to be clarified.

Thank you for your feedback. The protocol fee is not derived from the interest paid to the lender, so lenders do not lose anything by implementing protocol fees. Instead, these fees are put on top of the interest, meaning borrowers will pay an extra, e.g. if the interest is 100 ADA and the fee is 1%, the borrower will have to pay 101 ADA.

I am not against flat fees, just trying to get a discussion going. The notion here is not whether tiered fees or flat fees are better, but what priorities the DAO wants to set regarding the protocol. In simple terms:
Flat fees = simple rules that apply in all cases
Tiered fees = better risk management with maximized revenue for the DAO

Of course, each option has its pros and cons. That’s why I wanted to bootstrap a discussion before we get anything up for voting.

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The reality is that there is no right choice, as both options have their pros and cons. For example:

  1. Flat fees are simple to understand and equal for everyone regardless of the market conditions.
    they do not reflect the dynamic nature of lending markets. During periods of high demand (high UR), the protocol might lose out on potential revenue. Conversely, in low demand (low UR), a flat fee might discourage borrowing.
  2. Tiered fees usually translate into better market responsiveness, usually resulting in more revenue for the protocol in high UR periods combined with better risk management through risk-adjusted pricing (higher fees at higher UR compensate for the increased risk).
    They might seem complex to new users and lead to potential user deterrence during periods of high demand (high UR), possibly leading to decreased protocol usage.
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A consensus between the 2 models could be tiered fees with smaller differences between each tier, e.g.
Tier 1: 1%
Tier 2: 1.5%
Tier 3: 2%


So is the fee rate set at borrowing?

Yes for this approch

It makes more sense that it will be set when repaying the loan

Lenfi has fixed interest rates on loans (massive feature in my opinion) so it would only make sense to set it at the time of borrowing because that is when the interest will be set


With the utilisation rate of pool at the moment when borrowing, it will mean that people who take loans early after pool creation pay less fees. It would make sense to calculate the fee when you reimburse your loan. Or we could have it when borrowing but you have to pay it when taking the loan, but i don’t like it as much as paying after.

are the fees to be paid at the time the loan is taken, or when the loan is repaid? At the time it is taken makes more sense since the user could pay back the loan in any time from, correct?

how do we take this and submit an official poll for voting?

Since Lenfi will offer a fixed fee based on the time of borrowing, protocol fee % should also be calculated at the time of borrowing to offer full predictability for the borrower. This is very important for borrowers, more important than whether their total interest (incl. protocol fee) will be 10.1, 10.2 or 10.3%, as long as they know that it will not suddenly jump to 22% for example.

I like the option of tiered fees, as the protocol needs to generate fees for its functioning.

Going up in the UR will bump the interest quite a lot, so whether the interest (incl protocol fee) bumps up for example from 10.1% to 18.18% or 18.36% should not make big difference for the borrower, in my opinion at least.


liking the idea of dynamic fees! imo interest rate should be due when users are taking the loan for obvious reasons mentioned in previous comments. thanks @neophyte for kicking off the discussion :pray:

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I am for a tiered protocol fee model. Something such as:

Tier 1- 0-15% UR = 0.2% fee
Tier 2- 16-30% UR = 0.5% fee
Tier 3 - 31- 50% UR = 0.75% fee

Also, I think perhaps we should have different tiers for stablecoins seeing as they will most likely be our biggest source of revenue.

Tier 1- 0-15% UR = 0.5% fee
Tier 2- 16-30% UR = 0.75% fee
Tier 3 - 31- 50% UR = 1% fee

Interest is normally collected at the end of a loan term. I’m seeing suggestions for it to be collected at loan origination but that wouldn’t make sense. It isn’t certain when a user will pay back a loan unless the duration of the loan is predetermined. Interest accrues until the borrower pays back the funds which is what incentivizes the lender.

Too low, for a 100 Ada interest, 0.5 Ada doesn’t even cover the transaction. The minimum should be set at 1prc-1.5 then 2 prc