AsymmetricFeesHook

The goal is to charge informed traders higher fees to prevent the pool from quoting worse prices than the efficient market price. The mechanism works by adjusting fees based on price changes: if the AMM price increases by Δ in block t, at the start of block t+1, increase buy fees and decrease sell fees proportionally by δ = cΔ (where c > 0). This ensures fair adjustments while preventing fees from going negative.

The goal of this mechanism is to charge informed traders higher fees, thereby reducing the likelihood of the pool being exploited when it quotes a worse price than the efficient market price. The design works by dynamically adjusting fees based on observed price movements, ensuring that the pool remains competitive while discouraging arbitrageurs from exploiting stale prices.

Here’s how the mechanism works: Suppose, in block t, the AMM price increases by a certain amount, denoted as Δ. This movement suggests that informed traders might have acted on new market information not yet reflected in the pool’s pricing. To mitigate the risk of further exploitation, at the beginning of the next block, t+1, the pool adjusts its fees as follows: • For buys: The fee is increased by an amount proportional to the price change, δ = cΔ, where c > 0 is a configurable constant that determines the sensitivity of the fee adjustment to price changes. This higher fee discourages further buys by informed traders seeking to capitalize on the price discrepancy. • For sales: The fee is reduced by the same proportional amount, δ = cΔ, incentivizing trades that move the price back toward equilibrium.

The key idea is to skew the pool’s fees in response to recent price changes, aligning them with market dynamics to protect LPs from unnecessary losses caused by arbitrage. However, it’s crucial to ensure that neither the buy nor the sell fee ever becomes negative, as that would create an incentive for traders to exploit the pool further.

This mechanism effectively uses directional fee adjustments to make the pool less attractive to informed traders during periods of high price volatility, thereby preserving LP profitability while maintaining a fair and efficient market.