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Clarify trading fees #2902

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Clarify trading fees #2902

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e1573e5
clarify trading fees
oeggert Dec 11, 2024
8596eb5
update to table
oeggert Dec 13, 2024
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12 changes: 12 additions & 0 deletions docs/concepts/tokens/decentralized-exchange/automated-market-makers.md
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Expand Up @@ -100,6 +100,18 @@ Liquidity providers can vote to set the fee from 0% to 1%, in increments of 0.00

Each AMM gives its liquidity providers the power to vote on its fees, in proportion to the number of LP tokens they hold. To vote, a liquidity provider sends an [AMMVote][] transaction. Whenever anyone places a new vote, the AMM recalculates its fee to be an average of the latest votes, weighted by how many LP tokens those voters hold. Up to 8 liquidity providers' votes can be counted this way; if more liquidity providers try to vote, then only the top 8 votes (by most LP tokens held) are counted. Even though liquidity providers' share of LP tokens can shift rapidly for many reasons (such as trading those tokens using [Offers](offers.md)), the trading fees are only recalculated whenever someone places a new vote (even if that vote is not one of the top 8).

{% admonition type="info" name="Note" %}
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_Trading fees_ differ from _transfer fees_.

| Differences | AMM Trading Fees | Token Transfer Fees |
|-------------|------------------|---------------------|
| Who sets the fee? | AMM liquidity providers. | Token issuer. |
| When does the fee apply? | When swapping against the AMM. | Any time the token transfers accounts, except when sending or receiving _directly_ to and from the token issuer. |
| Can fees be redeemed? | Yes, by liquidity providers when they turn in their LP tokens. | No, fees are burned. |

{% /admonition %}

### Auction Slot

The XRP Ledger's AMM design includes an _auction slot_. A liquidity provider can bid LP Tokens to claim the auction slot to receive a discount on the trading fee for a 24-hour period. The LP tokens that were bid are returned to the AMM.
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