Proposal: Add Hook for Volume-Based Dynamic Fees

[Alexhandru]

Hello OpenZeppelin and Uniswap teams,
I would like to propose the inclusion of a new hook, VolumeBasedFeeHook, into the uniswap-hooks repository. This hook introduces a dynamic fee mechanism that adjusts swap fees based on the transaction volume, offering a tiered fee structure that can incentivize larger trades and provide more sophisticated fee strategies for liquidity providers.

Motivation

Dynamic fees are a cornerstone of Uniswap v4's flexibility. A volume-based fee structure is a common and effective model in both traditional and decentralized finance. Including a canonical implementation in this repository would be highly valuable for the ecosystem.

For Liquidity Providers:

• Attract Larger Trades: By offering lower fees for larger volumes, LPs can attract whales and arbitrageurs, increasing the total volume and fees generated in their pools.
• Increased Competitiveness: Pools with volume-based fees can be more competitive than those with static fees, particularly for high-volume trading pairs.
• Sophisticated Fee Strategies: It provides LPs with more granular control over their fee strategies, moving beyond a single static fee.

For Traders:

• Reduced Costs: Traders executing large orders can benefit from significantly lower fees, improving their execution price.

Functionality

The VolumeBasedFeeHook allows for the configuration of a tiered fee structure for each token in a pool. The fee calculation logic for different swap volumes is as follows:

• Below a minAmount threshold: A defaultFee is applied.
• Between minAmount and a maxAmount threshold: The fee is calculated using linear interpolation between a feeAtMinAmount and a feeAtMaxAmount.
• Above maxAmount: A flat feeAtMaxAmount is applied.

This logic is applied symmetrically for both tokens in the pool and correctly handles both exact input and exact output swaps.

Implementation Details

I have developed an implementation of this hook (VolumeBasedFeeHook.sol):

• Link to my fork of the uniswap-hooks repository
• Link to the VolumeBasedFeeHook contract
• Link to the test suite of the VolumeBasedFeeHook contract

Proposal

I believe the VolumeBasedFeeHook would be an excellent addition to the uniswap-hooks collection. It serves as a practical and powerful tool for developers and LPs building on Uniswap v4 and aligns perfectly with the goal of providing secure, reusable, and community-vetted smart contracts.
I am happy to open a pull request with the implementation for your review if this proposal is of interest.
Thank you for your time and consideration.

[luiz-lvj]

Hey @Alexhandru, thanks for the issue open!
Your idea for the VolumeBasedFeeHook is really good, but in this library the idea is to have less opinionated hooks that people can leverage to build their own custom implementations. For example, the VolumeBasedFeeHook could be a contract that uses this library by inheriting BaseOverrideFee

[Alexhandru]

Hey @luiz-lvj, if you see any abstraction that can be extracted from the VolumeBasedFeeHook that could be beneficial for the repository, I could work towards adding it ^^
If not, any suggestions on how to push the hook to production are very much appreciated!

[Alexhandru]

I've been thinking a little bit more why the hook would still be a good addition to the library, although it's not designed for custom implementations first.

I believe LPs of hook-enabled pools wishing to add an additional incentive to better attract traders can do so if the underlying hook inherits from VolumeBasedFeeHook. This way, protocols building on top of v4 can gain traction faster for offering a better fee percentage compared to other more established pools of the same assets.
This hook is not a fit all solution for every pool to rely upon, but for some of those searching to gain the edge of having swaps routed to more often, it does a good job by being gas efficient while being paired with well considered volume/fee threshold parameters.

Excluding hooks that already implement logic for dynamic fees, other categories can inherit from VolumeBasedFeeHook to access a straightforward way to divert volume from bigger pools to their own pools.