Swap Fee
DeFi Economics, Incentive Model
Swap Fee is a small percentage fee charged on every token trade (swap) executed within a decentralized exchange (DEX) or automated market maker (AMM) protocol. Swap fees compensate liquidity providers (LPs) for supplying capital to the pool, making permissionless trading possible without order books or centralized intermediaries. The rate is typically set by the protocol (e.g., 0.3% on Uniswap) and is automatically deducted from each trade, with proceeds distributed proportionally to all LP token holders.
Use Case: On SparkDex, a 0.3% swap fee is applied every time a user swaps FLR for SPARK. That fee is pooled and paid to all LP token holders, creating passive income for those who provide liquidity.
Key Concepts:
- Liquidity Pool — The source where swap fees are earned and distributed.
- LP Tokens — Represent a claim on both the underlying assets and accumulated swap fees.
- Yield Farming — Earning additional yield by staking LP tokens that accrue swap fees.
- Decentralized Exchange — The protocol where swaps and fee collection occur.
Summary: Swap fees incentivize users to supply liquidity, fueling decentralized trading and yield opportunities in DeFi. They align economic rewards with ecosystem growth and user participation.