Fee Switch

A fee switch is a governance-controlled mechanism, built into many DeFi protocols, that can redirect a portion of the protocol's trading or usage fees — which might otherwise flow entirely to liquidity providers or other direct service providers — toward the protocol's token holders or treasury instead. Many protocols launch with their fee switch turned off, routing all fees to liquidity providers initially, with governance later voting on whether and how to activate it.

Activating a fee switch is often a contentious governance decision, since it directly creates a tradeoff between two different stakeholder groups: liquidity providers, who see at least part of their fee income redirected elsewhere, and token holders, who gain a direct claim on protocol revenue (see Kaavon's "Protocol Revenue" glossary definition) they didn't previously have. Activating a fee switch is also closely watched because many securities-law analyses of a token's status consider whether holders have a direct claim on the protocol's revenue, making the fee switch decision potentially relevant to that broader legal question as well.