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Fee-On-Transfer Tokens

Fee-on-transfer tokens, sometimes called “taxed tokens”, are a type of token that automatically deducts a fee from some or all types of transfers. This fee, typically a percentage of the transaction amount, can go toward various functions like rewarding holders, contributing to liquidity pools, or funding project development. While these tokens have become popular for incentivizing holders and building project sustainability, they have specific compatibility requirements, especially on decentralized exchanges like ElectroSwap. Currently, ElectroSwap V2 is the only version of ElectroSwap that fully supports fee-on-transfer tokens, while ElectroSwap V3 lacks this compatibility.

What Are Fee-On-Transfer Tokens?​

Fee-on-transfer tokens have smart contract code that applies a small transaction fee, often between 1% and 10%, on certain transfers.

tip

These fees may apply to buys and/or sells, or they could apply to all token transfers. Check with token dev teams to get clarity.

This fee is typically allocated in one or more of the following ways:

  1. Rewards to Holders: A portion of each transaction fee is redistributed to existing holders, encouraging long-term holding.
  2. Liquidity Pool Contributions: Part of the fee may automatically add liquidity to a liquidity pool, enhancing trading stability.
  3. Burn Mechanism: Some tokens include a burn feature, sending a portion of the fee to a “dead” wallet, reducing the token’s supply over time.
  4. Project Development: Fees may fund the development or marketing efforts of the project, ensuring sustainability and growth.
Example

If you send 100 tokens, a 2% fee-on-transfer token would deduct 2 tokens as a fee, meaning the recipient receives 98 tokens while the remaining tokens are allocated per the token’s design.

Why Fee-On-Transfer Tokens Are Only Supported on ElectroSwap V2​

ElectroSwap V2 and V3 handle token transactions differently, and these differences impact their compatibility with fee-on-transfer tokens:

  1. ElectroSwap V2’s Flexibility in Token Transfers
    ElectroSwap V2 was designed to handle standard and fee-on-transfer tokens without issues. In ElectroSwap V2, token amounts are based on input/output after each swap, meaning it can handle fee deductions mid-transaction without error. This flexibility makes it ideal for tokens with transaction fees, as the protocol can handle variations in the token amounts seamlessly.

  2. ElectroSwap V3’s Fixed Output Calculations
    ElectroSwap V3, on the other hand, has a more complex fee structure and relies on fixed output amounts for each swap. This fixed-output calculation does not account for fees deducted mid-transaction, leading to potential errors or failed transactions with fee-on-transfer tokens. Because ElectroSwap V3 cannot handle the fluctuations in token amounts caused by these fees, it’s incompatible with fee-on-transfer tokens.

Practical Implications for Fee-On-Transfer Tokens​

  1. Limited Trading Options
    Fee-on-transfer tokens can only be traded on ElectroSwap V2 or other DEXs that support fee deductions mid-swap. This restriction may limit the visibility and trading volume for fee-on-transfer tokens compared to other tokens that can be listed on ElectroSwap V3.

  2. Higher Gas Costs
    Because ElectroSwap V2 is less gas-efficient than V3, trading fee-on-transfer tokens can incur slightly higher gas fees. Users should be prepared for these additional costs when transacting with fee-on-transfer tokens on ElectroSwap V2.

  3. Liquidity Pool Impacts
    For tokens that automatically allocate a portion of the fee to liquidity, ElectroSwap V2 allows this process to work smoothly. However, token developers should communicate that users need to use ElectroSwap V2 to ensure successful swaps.

Conclusion​

Fee-on-transfer tokens provide unique benefits for holders and projects by redistributing fees to various uses, but they come with limitations regarding platform compatibility.

Currently, only ElectroSwap V2 supports these tokens, while ElectroSwap V3’s design prevents it from handling fee-on-transfer mechanisms. Users interested in trading or holding fee-on-transfer tokens should ensure they use ElectroSwap V2 to avoid failed transactions, and developers should clearly communicate this limitation to their communities. By understanding these constraints, users and developers can navigate fee-on-transfer tokens more effectively in the DeFi ecosystem.