Analysis: Jupiter Perpetuals Fee Structure Implementation and Proposed Adjustments

On June 4, 2024, Jupiter Perpetuals implemented a new price impact fee structure based on our recommendations to address concerns about large order manipulation and protect JLP holders. The price impact fee structure introduced a dynamic fee based on trade size across each market. 

To assess the impact of this substantive fee change, we compared trading volume, fees, and JLP APY three weeks before and three weeks after the introduction of the price impact fee. Following our analysis, we provided Jupiter with updated recommendations that reduce the fixed base fee across all markets and reduce SOL impact fees via an increase of 25% in the impact scalar parameter.

To provide the Jupiter community with more details on our analysis of the fee structure and insight into our updated recommendations, we cover the following in this blog:

1. Key Findings
2. Updated Recommendations
3. Detailed Analysis of Price Impact Fee Structure
4. Current Fee Structure and Proposed Updates
5. Conclusions and Recommendations 

To view our full report, you can access our forum post here, and you can find our partner announcement blog here. 

Key Findings

Below are key findings after analyzing the impact of our initial impact fee structure recommendations: 

1. Trading Volume and Fee Revenue:
   • Overall trading volume remained relatively stable, showing a slight increase of 1%.
   • Total trading fees increased by approximately 11%.
2. Trader Behavior:
   • Large trades ($1M+) decreased by approximately 30%.
   • Medium-sized trades ($250K-$1M) increased, suggesting traders are adapting by consolidating or breaking up larger orders.
3. Asset-Specific Trends:
   • SOL: Volume decreased, particularly in $1M+ trades, with a shift to the $250K-$500K range.
   • ETH: Overall volume decreased, but increased in $500K+ range.
   • BTC: Trading volume increased by 30%, with the highest increase in the $500K-$1M range.
4. Fee Revenue Impact:
   • Total trading fees increased by 11%, primarily driven by the SOL market.
   • SOL: Trading fees increased by 15%, primarily from the $250K-$500K trade bracket.
   • ETH: 15% decrease in fees despite increased volume in larger trade sizes.
   • BTC: 6.55% increase in fees, mainly from $1M+ trader sizes.
5. JLP Performance:
   • JLP outperformed the index by 9% after the mechanism change, and maintained lower volatility than its benchmark index.

Gauntlet's Updated Recommendations

After reviewing the impact of our initial price impact fee structure recommendations, we shared the following updated recommendations with Jupiter:

1. Base fee: Reduce from 7 bps to 6 bps for all markets. 
2. SOL price impact fee scalar: Adjust to 1.25 billion (from 1 billion).
3. Max trade size: Increase from $1.5 million to $2.5 million for all markets. 

Detailed Analysis of Price Impact Fee Structure

Impact on Trading Behavior

Before digging in, it’s worth noting that after the price impact feed change, overall crypto prices declined, which typically has a negative impact on trading volume. 

Below are the price and volume charts for SOL, BTC and ETH:  

Trader PnL

When comparing overall performance, gross and net trader PnL decreased for SOL, ETH, and BTC trades, signaling a healthier ecosystem and lower probability of manipulating the protocol design.

Overall Trading Volume and Fees

As shown on the table below, total volume increased by 1% during the observation period, and total trading fees increased by almost 11%. The main inflow for total trading volume came from the $1M+ traders splitting up their trades into the $250K-$1M range. However, even with traders decreasing their trading volume by 30%, Jupiter's revenue from those traders increased by 12%.

Platform Health Indicators

In both regimes, JLP continued to maintain lower volatility than its benchmark. Post the mechanism change, JLP outperformed its index by roughly 9%. 

JLP average APY reversed a downward trend, increasing from 57.4% pre-price impact change to 69.5% post-implementation.

Current Fee Structure and Proposed Updates

The fee structure implemented on June 4, 2024, introduced a dynamic fee based on trade size:

trading_fee_coefficient = base_fee + trade_notional_size / impact_fee_scalar trading_fee_usd = trading_fee_coefficient * trade_notional_size

Current fee structure:

• Base fee: 0.07% for all assets
• Asset-specific impact fee scalars:
  • SOL: 1,000,000,000 
  • ETH: 5,000,000,000 
  • BTC: 8,000,000,000

Newly proposed structure:

• Base fee: 0.06%
• Adjusted impact fee scalar: 1,250,000,000 for SOL
• BTC and ETH impact fee scalars remain the same

The rationale for the updated fee structure

Jupiter's current fee structure for large trades ($1M) aligns with centralized exchanges (CEXs) like Binance. This positioning allows Jupiter to compete effectively in the market for large trades while maintaining a balance between attractiveness to traders and platform sustainability. The newly proposed fee structure would make Jupiter more competitive for large trades. 

This positioning could give Jupiter a significant advantage in attracting high-volume traders. Compared to traditional order-book trading, impact fee savings for a $2.5 million trade can amount to 0.04%.

When comparing Jupiter fees to CEX fees, we notice the following: 

a) For smaller trades ($70,000), the differences between systems are minimal. 

b) As trade size increases, Jupiter's proposed system shows a lower impact on total fees compared to both order-book trading and Jupiter's current system. This discount conceptually reflects less demanded “edge/compensation” from JLP liquidity providers relative to liquidity providers on centralized order books. 

c) Jupiter's proposed system could offer a 0.04% savings in impact fees compared to order book trading for a $2.5 million trade. 

We recommend slightly relaxing the base fee to 6 bps, down from 7 bps, and adjusting the SOL price impact fee scalar to 1.25B. 

Regarding the proposed trading fee difference, if we had recommended the implementation of these changes three weeks ago, the total trading fee revenue would have remained about the same (-2.95%), assuming the same volume setup. In reality, we expect the trading volume to increase due to lower trading fees. Consequently, we anticipate that fees will either increase significantly or, at minimum, remain consistent with pre-change levels.

Conclusions and Recommendations

Our quantitative analysis strongly supports the implementation of the recommended fee structure adjustments. The data-driven insights reveal several key points:

1. Fee Elasticity: The proposed reduction in base fee from 7 bps to 6 bps, coupled with adjusting the SOL price impact fee scalar to 1.25B, is projected to optimize the balance between trading volume and fee revenue. Historical data suggests that this calibration will maintain or potentially increase total fee revenue, with our models predicting a negligible -2.95% change in fee revenue if applied retroactively, assuming consistent volume.

2. Volume Dynamics: Post-implementation data shows a 1% increase in overall trading volume despite unfavorable market conditions. This resilience, combined with lower fees, is expected to drive significant volume growth, particularly in the $250K-$1M trade range.

3. Competitive Edge: The proposed fee structure positions Jupiter more favorably against both centralized and decentralized competitors. For $2.5M trades, Jupiter could offer up to 0.04% savings compared to traditional orderbook trading, potentially attracting high-volume traders.

4. Platform Health: The initial price impact fee implementation has already shown positive effects, with JLP average APY increasing from 57.4% to 69.5%. This trend is expected to continue or stabilize with the new proposal, ensuring sustained liquidity provider participation.

5. Risk Mitigation: The observed 30% decrease in $1M+ trades, coupled with increased activity in medium-sized trades, suggests effective mitigation of malevolent manipulation risks without compromising overall platform activity.

The quantitative evidence strongly suggests that implementing the proposed fee structure will enhance Jupiter's competitive position, increase trading volume, and maintain fee revenue without compromising platform health. We recommend proceeding with these changes with ongoing monitoring and analysis to ensure optimal performance of the Jupiter Perpetuals Exchange in the dynamic DeFi landscape.

Gauntlet Team