Conceptually, in decentralized exchange such as Uniswap or Balancer, fees are both a value-capture and an access control mechanism.
Value Capture
The fees need to capture value from those accessing the resource and reward those providing it, the resource here being liquidity.
However, liquidity is relative to the size of the transaction that demands it over the depth of the market that will service it. In other words, a small transaction
in a deep pool will have less demand for liquidity than a large transaction in a small pool. As such, Fixed-rate fees models such as Uniswap V1 30 basis points fee have poor value capture.
Indeed, since fees are proportional to trade size, the pools with the largest depth will attract the most volume and thus the most fee revenue leading to a potential bootstrapping problem where
low-depth pools have less incentives to add liquidity, even though the demand for liquidity may be much higher. On the contrary, Slip based fees model given their inherent nature appear to be
much better value capture mechanism when demand for liquidity is high no matter how the size of the transaction is compared to the depth of the market while allowing over time the market depth to
converge toward an equilibrium that is proportionate to the size of the transactions that are passed over it. This way, low-depth pools may turn out to be more profitable than high-depth pools to
liquidity providers solving altogether the potential bootstrapping problem that could occur on the platform.
Access control
The other reason for fees is access control, in order to dispose of a tool allowing to throttle demand for fixed resource that is liquidity and let natural market
forces take over. However, as we can easily point out the fixed rate fees model has poor access-control since in high demand scenario, the fees does not increase. As such Slip based fees model
appear again here a better solution since the more a trader will demand liquidity the more he will pay to pay for it. By the way, it also prevent sandwich attacks by rendering them prohibitively
expensive while enabling pools to become reliable price feeds.
