Thanks for that summary @Mkflow27. A few responses:
Your simulations show that with decreased fees, arb volume would increase (figure1)
LPs fare slightly better if swap fees are higher (figure2)
Yes, arb volume should see a mechanistic increase with lower fees, simply do to the fact that more profitable opportunities will arise with lower fees. This again would help the Balancer spot-price more closely track external prices, so could potentially be a part of Balancer’s protocul level utility (e.g. Balancer is great because I can always expect the spot price to reflect the price off chain)
And yes, slightly higher fees will probably be slightly better for LPs, but LPs likely care much more about incentives, so the rewards program is likely the best lever for attracting capital.
Hypothesis: LP revenue can increase if Balancer bumps fees up given enough non-arb volume. However, most of the volume as of now seems to be from arbs. Therefore this hypothesis needs to be treated with caution.
Yes, we have estimates of roughly how much of this volume is from arbitrage, though, so we can take that into account when setting fees. The real question, though, is how to weight the tradeoff between raw volume and fees from that volume.
Compare the top two rows: In the first case, trader utilities are quite high and we see more retail volume; in the second case we expect lower trader utility and higher LP revenue. Should we maximize swap fee revenue (regardless of whether its from arbitrage) or should we instead try to favor retail volume at the expense of some extra fee revenue?