Dynamic Fee Selection

Dynamic Fee Selection (DFS) is a mechanism to help liquidity providers (LPs) make better decisions about the fees they charge in Dynamic Flow Automated Market Maker (DFAMM) pools. In AMMs that support concentrated liquidity, LPs have to choose from different fee tiers for each pool. Even if the pools contain the same tokens, the trading volumes, price actions, revenues, and risks can vary depending on the fee tier selected. DFS simplifies this decision-making process by working closely with the Automated Liquidity Controller (ALC) to determine the optimal fee for each pool.

Here is how DFS responds with ALC

1. Increase fee: Immediately ALC Extension exceeds the maximum price.

2. Decrease fee: When concentration increases from ALC compression every 3 days.

Price Ranges	Fee Tiers
equal or less than 6.4%	0.1%
equal or less than 12.8%	0.15%
equal or less than 19.2%	0.2%
equal or less than 25.6%	0.25%
equal or less than 32.0%	0.3%
equal or less than 38.4%	0.35%
equal or less than 44.8%	0.4%
equal or less than 51.2%	0.45%
greater than 51.2%	0.5%

In the example above, when the ALC of asset X increases by two times and the ALC of asset Y widen by two times, the trading fees will adjust accordingly. The fee for asset X will rise by 1.5 times, while the fee for asset Y will decrease by 1.5 times. As a result, the lower fee on asset Y makes it more attractive for traders to exchange asset X for asset Y, since they can do so at a reduced cost. This creates a more efficient trading environment, especially for those swapping asset X for asset Y.

To ensure competitiveness and fairness, the system establishes a range of fee percentages from 0.1% to 0.5% for all pools. These limits are designed to be reasonable and offer competitive rates compared to both centralized and decentralized exchanges. Pools with lower volatility tend to have lower fees, which can attract more trading volume, while pools with more volatile or exotic token pairs may use higher fees, closer to 0.5%, to help compensate LPs for the increased risk of impermanent loss. This approach helps reduce liquidity fragmentation and the complexity of fee selection for LPs.

For pools that have a very low volatility (stable coins, liquidity stakiing, etc) where ALC is barely changed, DFS will continue to decrease close to 0.1 (TBF)