Overview

Protocols in decentralised finance (DeFi) often generate revenues by accruing fees across a range of markets in a variety of different asset types. The default behaviour of the protocol will typically be to hold all these asset types on the protocol’s balance sheet as protocol-owned liquidity (POL). However, this will often be a suboptimal use of accrued fees.

In many instances it might be beneficial for the protocol to convert accrued fees into a single currency (perhaps USDC or ETH or the project’s native token) for accumulation or future distribution. Yet mechanisms for converting accrued fees into a single asset are notoriously problematic and generally not common in DeFi. Specifically, they are often inefficient, vulnerable to value extraction by validators (MEV), or otherwise require interventions by governance or trusted parties.

Here, we outline Fee Flow: an efficient, decentralised, MEV-resistant mechanism for protocols to be able to auction their accrued fees for a single type of asset.