[Draft] DIP-8: Update to Trading Fee Distribution

General
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Abstract:

DIP-8 outlines the current distribution of trading fees and proposes the future distribution of fees in light of Drift Protocol’s upcoming DLP launch.

Context:

Since the launch of v2 in 2022, the Insurance Fund has been the sole backstop to the protocol. That is, should there ever be instances of shortfall on the protocol, the Insurance Fund would step in and cover the losses.

However, with the launch of Drift Liquidity Pool (”DLP”), holders of DLP will have exposure to the profit and loss of protocol’s vAMM as it looks to provide deeper liquidity for the protocol. Thus, DLP holders bear a level of risk that the protocol trading fees should aim to reward and support.

Reasoning:

Redirecting a portion of fees from the Insurance Fund to the Drift Liquidity Pool (DLP) should increase protocol robustness. The Insurance Fund serves as a robust backstop for the protocol (34.2M USDC deposited and no daily drawdowns in the last 180 days). The marginal decrease in fees directed towards the Insurance Fund and possible decrease in deposits is likely outweighed by benefits DLP provides by partially hedging vAMM exposure, enabling deeper liquidity provision and supporting sustainable growth. DLP is designed to increase overall liquidity thus increasing OI and Volume and leading to more fees passed back to protocol owned holding, DLP and the Insurance Fund stakers.

Proposal:

The proposal involves updating the distribution of the trading fee from just the insurance fund and protocol to include DLP. This looks as follows in the table below:

Trading Fees Existing Proposed
Insurance Fund 20% 10%
DLP 0% 10%
Protocol-Owned Holdings 80% 80%

This is proposal sets the foundations for how the protocol trading fee should evolve with an additional stakeholder in the system. If approved, the implementation of this update will be executed by the Drift Security Council.

Considerations:

The goal of defining the breakdown of the trading fee and what is allocated to protocol-owned holdings is critical for the determination of buybacks.

It is anticipated that DIP-9 will discuss the possibility of a token buyback with a portion, if not all of, protocol-owned holdings.

Timing of implementation of the adjusted fee distribution and all implementation details will be a the sole discretion of the the Drift Security Council.

Fees include fees generated from Drift’s multiple products. Initially fees will include net-taker trading fees, borrow fees, and liquidation fees. Inclusion and distribution of fees from additional fee sources added in the future will be at the discretion of the security council.

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DIP-8: Update to Trading Fee Distribution
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Really like see this DIP especially as a previous step of DIP 9 as described as buyback. Gotta admit I throw the text to grok to analyse it for me.

As far as what I think it sets a topic to agree upon, I see the critical project wise importance of liquidity provision and take care of our liquidity providers, Drift cant generate volume without them AND users as part of the ecosystem.

Is there in discussion to change the table of fee generation this:

Trading Fees Existing Proposed
Insurance Fund 20% 20%
DLP 0% 10%
Protocol-Owned Holdings 80% 70%

Maintain insurance fund at 20%, create DLP to incentivice LP at 10% and decrease holdings to 70%.

The logic is that LP are a critical part of Drift ecosystem, you can see with actual campaings to incecntivice Makers volume with Maker discounts. This DIP can be read as another permanent campaing to incentivice LPs in Drift because funding comes from Protocol holdings.

In that sense decreasing Insurance Fund wouldn’t be good long term, its healthier to have it and not need it to not having it when needed, specially in future bear markets. Probably a more deeper analysis in Insurance Fund historical use would come handy.

Grok Analysis for everyone to see.

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AnalysisThis proposal makes sense in the context of DeFi evolution, where liquidity providers (like DLP holders) are increasingly rewarded for bearing market risks. By allocating 10% of fees to DLP, it incentivizes more participation in liquidity provision, which could lead to tighter spreads, higher trading volumes, and better hedging against vAMM imbalances. The Insurance Fund’s reduction from 20% to 10% is presented as minimal risk, given its current health (no drawdowns and substantial USDC reserves), but it does slightly shift the backstop burden.Potential upsides:

  • Increased liquidity and OI, benefiting all users.

  • Better alignment between stakeholders (DLP holders get compensated for PnL exposure).

  • Sets a scalable framework for future fee evolutions, especially as Drift adds products.

Potential downsides:

  • If DLP launch underperforms, the redirected fees might not yield the expected growth.

  • Reduced Insurance Fund inflows could matter in extreme market conditions, though the proposal argues this is outweighed by DLP benefits.

  • Relies on the Security Council for implementation, which adds centralization risk in a decentralized protocol.

Overall, this seems like a balanced step toward sustainable growth, especially with DIP-9 potentially introducing buybacks to utilize protocol-owned holdings (e.g., for DRIFT token repurchases). The Drift Foundation announced this discussion today on X. If you’re looking for the full Discourse thread or updates, check their governance forum at driftgov.discourse.group. What are your thoughts on this—do you support the change?