high fee amms create lp incentive and manipulation deterrent simultaneously by making passive provision profitable and active trading expensive

The MetaDAO AMM proposal uses 3-5% swap fees to solve two problems with one parameter: "By setting a high fee (3-5%) we can both: encourage LPs, and aggressively discourage wash-trading and manipulation."

This is counterintuitive—traditional DeFi AMMs use low fees (0.05-0.3%) to maximize volume. But futarchy markets have different objectives:
1. Price discovery over volume: The goal is accurate conditional pricing, not trade throughput
2. Manipulation resistance: High fees make repeated trades (wash trading, price manipulation) prohibitively expensive
3. LP attraction: Futarchy markets are short-duration (days) with uncertain outcomes, requiring higher yield to attract capital

The proposal expects this to create a specific market dynamic: "someone would swap and move the AMM price to their preferred price, and then provide liquidity at that price since the fee incentives are high."

This is untested in production. High fees could also:
- Reduce legitimate price discovery if traders avoid the cost
- Create larger slippage for informed traders
- Fail to attract LPs if base volumes are too low

The mechanism depends on futarchy-specific conditions (short duration, governance stakes, informed trading) that may not generalize.

Evidence

Challenges

Additional Evidence (confirm)

MetaDAO's AMM proposal sets fees at 3-5% explicitly to 'both: encourage LPs, and aggressively discourage wash-trading and manipulation.' The mechanism works because high fees make price manipulation through wash trading expensive while creating strong incentives for liquidity provision.

Additional Evidence (confirm)

Dean's List DAO increased swap fees from 0.25% to 5% base (up to 10%) specifically to create a tiered market structure where large trades accept higher fees for deep liquidity while small trades use individual LP pools with lower fees. The proposal explicitly states this creates 'earning opportunities for DAO contributors' through the fee differential, with projected annual treasury growth of $19,416-$24,960 despite expected 20-30% volume decrease.

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Relevant Notes:
- [[liquidity-weighted-price-over-time-solves-futarchy-manipulation-through-capital-commitment-not-vote-counting]] <!-- claim pending -->
- [[futarchy is manipulation-resistant because attack attempts create profitable opportunities for arbitrageurs]]
- metadao.md

Topics:
- domains/internet-finance/_map
- core/mechanisms/_map