The total fee is the fee in BPS paid on the annualized interest rate by borrowers and lenders on every trade.
The purpose of the fee is to increase liquidity provider returns and increase Notional's protocol reserves.
Based on exchange fees currently charged in the DeFi ecosystem and based on nToken returns analyses, we selected the following annualized interest rate fees:
The reserve fee share is the share of the total fee that goes to the protocol reserves. The rest of the fee stays in the pool, thus accruing to liquidity providers.
The purpose of redirecting part of the total fees to the protocol reserves is to build cash reserves to protect the protocol against potential undercollateralized accounts. In such events, Notional's reserve funds would be used to cover the account's obligations to the protocol.
The part of the total fee that flows to liquidity providers incentivizes them by enhancing their returns and by partly compensating them for impermanent losses.
We selected an 80% reserve fee share for each cash group: