Swap Fee

How It Works

When a trader executes a swap on a DEX, a swap fee is deducted from the trade. On Uniswap v2, this is a flat 0.30% of the input amount. On Uniswap v3, pool creators choose from fee tiers: 0.01% (stablecoin pairs), 0.05% (correlated pairs), 0.30% (standard pairs), or 1.00% (exotic pairs). The fee is automatically collected by the pool smart contract.

In most AMM designs, swap fees are distributed to liquidity providers proportional to their share of the pool. Some protocols also take a protocol fee — a portion of the swap fee directed to the protocol treasury or token holders. Uniswap's governance can enable a protocol fee of up to 1/4 of the swap fee, though it has historically remained off.

For multi-hop swaps (trades routed through multiple pools), each pool charges its own fee. A swap from Token A to Token C through A/ETH (0.30%) and ETH/C (0.30%) incurs approximately 0.60% in total fees. DEX aggregators factor these cumulative fees into their routing optimization to find the cheapest path.

Why It Matters in DeFi

Swap fees represent the primary revenue model for DEXs and liquidity providers. They are the incentive that attracts capital into pools — without swap fees, there would be no reason for LPs to provide liquidity and bear impermanent loss risk. Higher-fee pools compensate for greater volatility and impermanent loss risk.

For traders, swap fees are a direct cost of trading. Frequent traders and arbitrage bots are sensitive to fee differences and will prefer lower-fee pools when liquidity permits. Fee tier selection also affects LP returns: too high a fee drives away volume, too low a fee does not compensate for risks.

Real-World Example

A trader swaps $10,000 USDC for ETH on Uniswap v3 through the 0.05% fee tier pool (chosen because ETH/USDC is a high-volume pair). The swap fee is $5.00, and the trader receives $9,995 worth of ETH (before slippage). If they had used the 0.30% fee tier pool instead, the fee would have been $30 — but the 0.30% pool might have deeper liquidity and lower slippage on large trades, potentially making it cheaper overall for very large swaps.