The dynamic fee model powering Mosaic’s Transfer Availability Layer
Disclaimer: Information as of Feb 2, 2022. For the most recent updates, dive into our comprehensive documentation here.
Mosaic — an advanced liquidity management and transfer availability layer created to ensure uninterrupted transfers throughout DeFi and introduce bridging-as-a-service for projects seeking to deepen liquidity for their protocols. Our dynamic fee model allows Mosaic to adopt a free-float fee system, unlike other bridging infrastructures that maintain a static fee system. The underlying aim allows Mosaic users to enjoy the best fees for cross-layer transfers while supplying significant yield for liquidity providers (LPs).
As Mosaic transitions to Phase 2, we are making numerous improvements to the infrastructure — and the dynamic fee model, a critical feature of Mosaic. As Mosaic grows towards chain agnosticism, we aim to ensure that these improvements provide users with lower fees and even better returns.
The history of Mosaic’s dynamic fee model
Mosaic was introduced on the first day of September 2021. A few weeks later, the system was launched as the Arbitrum-Polygon Transferal System Proof of Concept (PoC).
Since its origin, Mosaic has maintained a dynamic fee model. Our consistently-low fees for transferring assets across layers allow us to distribute more yield to liquidity providers (LPs). We firmly believe that providing yield is a driving factor in a successful liquidity layer. As fees are collected in Mosaic, we distribute them to LPs.
The maximum fee in our original dynamic model was 5%, and the minimum was 0.25%. The fee was based upon a linear curve until the trade size was greater than 30% of the available liquidity on the destination layer, at which point it became a flat 5%.
Shortly into Mosaic’s PoC, we assessed the model and adjusted it to have a maximum 4% fee. We also changed the liquidity threshold to 40% when implementing a flat fee. We took these steps to maximize the number of transfers in the system — increasing the flow of liquidity and simultaneously increasing the yield LPs earned.
In November, our founder and head of product, 0xbrainjar, published an article analyzing the PoC’s dynamic fee model. The data used was taken from the one-month PoC and supplemented by our Liquidity Simulation Environment (LSE).
We based our analysis on the adjusted fee model with a 4% maximum fee, 0.25% minimum fee, and threshold of 40%. From this, our researchers found that LPs would earn an annual percentage yield (APY) of 8.5% across all USDC-equivalent assets and ETH. This APY is for passively contributed capital.
On the other end, users accessing fast transfers across EVM layers averaged a 0.32% fee per transfer.
Mosaic’s optimized fees in Phase 2
These numbers — 8.5% APY for passive contribution and a 0.32% average transfer fee — are remarkable compared to what is available in the industry. However, we strive to do better in Phase 2.
Utilizing the analyzed data, we optimized our dynamic fee model in the research. By changing the liquidity threshold when a flat fee kicks in from 40% to 30% while maintaining everything else, we found that Mosaic could offer an APY of 10.0% for USDC and 10.7% for wETH.
Our data will continue to grow throughout Phase 2 of Mosaic. Utilizing this information, we will continue to refine our dynamic fee to strike a perfect balance between lowering fees and having LPs earn the most yield possible. As more people become empowered by lower fees, more transactions will occur, resulting in greater yield. As a result of the win-win scenario, developers will also reap the benefits of having more available liquidity.
Mosaic’s low transfer fees by comparison
At Composable, we have taken into account different fee models to be aware of best practices and ensure that our fees are more than competitive throughout the industry. It is not uncommon to find that other operators charge a fixed 0.5% fee for all transfers — almost 0.2% more than our average fee in the PoC.
Other systems charge different fees depending on whether the transfer arrives on or leaves a particular chain. Our dynamic fee is based on the available liquidity on the source and destination layer. Significant math has gone into optimizing our model, and it will only become further refined in time.
The future of Mosaic
In Phase 1, Mosaic had single-sided liquidity provisioning. This means an asset would go into a Mosaic pool on L1, and then, based on where the liquidity was facilitated, the assets would be locked in the pool and released on the destination layer.
As Mosaic moves from Phase 1 to Phase 2, an added benefit is that users can provide liquidity on various layers and not just layer 1 (L1) Ethereum. This ease of access will lower the barrier to entry and provide an influx of liquidity into the system. As more liquidity is available, Mosaic as a bridge can guarantee support for large volume transactions which current bridges have had a hard time supporting, our dynamic fee model will be refined, fees will decrease competitively and yield for LPs will increase.
Our dynamic fee model is what powers passive liquidity rebalancing, a module that will become operational in Mosaic Phase 2. This passive management will work synergistically with another Phase 2 innovation — active liquidity management. With active management, Composable introduces just-in-time liquidity bots powered by machine learning-based forecasting technology to ensure liquidity is available when needed. Active LP bots basically front runs transactions competing with passive LPs, robust liquidity is guaranteed at all times positioning Mosaic as the go-to bridge facilitating the biggest cross-chain swaps and transfers.
Continuously striving to optimize our dynamic fee model, and providing more seamless transfers thanks to new liquidity management services, Mosaic will reach new heights in its capabilities. As Phase 2 of Mosaic progresses, our liquidity layer will drive us towards our vision of a fully interoperable future for DeFi.
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