Dynamic Fees
Dynamic fees are AMM fee rates that adjust algorithmically based on market conditions rather than remaining fixed. The core insight: during high volatility, LPs face higher adverse selection risk from arbitrageurs and require higher fees to remain profitable. During calm markets, lower fees attract more volume. Some AMMs adjust fees based on the pool's recent volatility or the divergence between the pool price and an external oracle price. Uniswap V4 introduces hooks that enable custom dynamic fee curves, allowing pool creators to program fee logic — for example, raising fees when the rate of price change exceeds a threshold. Dynamic fees can partially internalize MEV by widening the spread when informed traders are likely active, reducing the information leakage from the AMM price to arbitrageurs.