Burn & Exit fee

This document outlines the fee calculation mechanism implemented in the smart contract for applying a 7% exit fee on the sDAI reserve during withdrawal or redemption.

Purpose of the Fee

The application of a 7% fee in the Solaxy contract serves multiple purposes more than just generating revenue. It plays a crucial role in discouraging speculators, mitigating front-running attacks and sandwich attacks, and enhances the overall resilience of the token. Additionally, the fee serves as a valuable resource that can be utilized by the community governance DAO (Decentralized Autonomous Organization) for various purposes such as insurance, public goods funding, or any other initiatives that the community deems appropriate.

Disincentive for Speculators

The implementing a 7% fee acts as a disincentive for speculators looking to capitalize on short-term market volatility. Speculators often engage in rapid buying and selling, seeking to capitalize on market volatility. By incorporating a significant fee, the smart contract discourages such behavior, as speculators would incur significant costs, reducing the profitability of their strategies.

Front-Run Attack Prevention

Front-running attacks involve malicious actors exploiting advanced knowledge of impending transactions. These attackers attempt to execute trades ahead of legitimate users, taking advantage of price changes caused by the upcoming transaction. The 7% fee discourage these attacks, as the potential gains would get eaten up by the imposed fee.

Sandwich Attack Mitigation

Sandwich attacks occur when attackers manipulate a transaction by placing their own transactions before and after the target transaction. This manipulation aims to influence the transaction's outcome, typically leading to unfavorable results for the target. The fee mechanism helps prevent sandwich attacks by making them more expensive and complex to execute of orchestrating such attack, thus less attractive to potential attackers.

Community Governance DAO Utilization

The collected fees are both a protective measure and a valuable resource for funding various community-driven initiatives:

1. Insurance: The fees can be used to establish an insurance fund, providing a financial safety net for users in case of unforeseen events, smart contract vulnerabilities, or other risks.

2. Funding for public goods: The DAO may allocate funds towards supporting public goods that benefit the broader community, such as development grants, security audits, educational programs, or ecosystem enhancements.

3. Community Initiatives: Funds can be directed towards projects that align with the community's vision, fostering innovation and sustainability within the ecosystem.

4. Active Participation in Decentralized Governance: The collected fees empower the community to actively participate in decentralized governance, empowering stakeholders to shape the protocol's future through proposals and upgrades.

How it works

A 7% fee is applied when a user redeems SLX. The fee is deducted from the sDAI reserve. During redemption, 73.6% of the user's SLX is burnt, and the length of the linear slope of the bonding curve is reduced to 26.4% of the original slope. The area under the burnt section of the slope represents approximately 93% of the total area under the curve (sDAI reserve).

Calculating the Withdrawal Fee

The withdrawal function in the smart contract implements a 7% fee. The calculation is executed within the computeWithdraw function to to optimize gas usage and maintain accuracy up to 0.002 sDAI.

Example Calculation

Let's assume:

• User owns 100,000 SLX (100% of supply)

• Slope is 0.00125

1. Current Price Calculation:

   • Current Price = User SLX * Slope = $100,000 * 0.00125 = $125

2. Total Area Under Slope:

   • Total Area = 0.5 * User SLX * Current Price = 0.5 * 100,000 * $125 = $6,250,000

3. Price After Burning:

   • Price After Burn = Remaining SLX * Slope = $26,400 * 0.00125 = $33

4. Remaining Area Under Fee Slope:

   • Remaining Area = 0.5 * Remaining SLX * Price After Burn = 0.5 * 26,400 * $33 = $435,600

5. Fee Percentage:

   • Fee Percentage = Remaining Area / Total Area = $435,600 / $6,250,000 ≈ 0.069696 or ~7%

In Conclusion

In summary, the 7% fee is not merely a financial transaction cost; it serves as a powerful tool to influence participant behavior, mitigate specific attack risks, and provide resources for community-driven initiatives. This mechanism maintains the integrity of the bonding curve and ensures the efficient management of the sDAI reserve.