Unfortunately with this sort of thing I think there is no 'one size fits all' answer.
I dont think she is providing free childcare if she is living for 'free', because no one can. Life is expensive. However why is she asking for payment? Is it because she is being expected to do more and more? Definitely a conversation you need to be having together because surely she can't expect to live without paying you anything and also get paid for childcare.
I've used both registered childcare and grandparents in the past. Personally I feel registered childcare did the world of good for my child but I have always appreciated the help from my parents. My parents now help in school holidays only. I have offered to pay, they refuse. I provide my child's everything. His food, drinks, spending money, I pay for their days out etc. He is the easiest child and literally sits playing with lego and occupies himself. I am often told we don't know we have him. It's worth saying my parents no longer work and barely leave the house so helping me in school holidays doesn't stop their lives at all. Unfortunately it is still thrown in my face that I use them for childcare. This is despite me offering to pay them and me paying for and supplying everything for when he is with them. I have absolutely no social life, it's only during school holidays because childcare is expensive, which they keep telling me, which is the reason they offer to help. I would understand if I keep putting on them. I dont, I get very little annual leave at work, my salary is low, it literally covers our monthly outgoings. I am also a lone parent and have no help from my child's other side of the family.
My point is even with my circumstances with grandparents 'wanting' to help it becomes quite a sore point that apparently I am using them for childcare, which upsets me alot. Probably because i help them all year round so help isn't one sided. And I do feel it's upsetting when at the core of things is your child/their grandchild.
I remember when I was a child my grandparents regularly had us for the weekend and in school holidays at their request. My parents don't have my child other than when i have to work during the school holidays. They never offer which I am fine with. When they help me I genuinely need it.
When my son is older I will always be willing to help him whenever he needs it, as long as I don't have to work, and I would never view time with my grandchildren as childcare.
But I do think it depends on the amount of help grandparents are giving. If it's a regular thing and becoming more and more an expectation I can understand why grandparents would feel taken advantage of.
In hindsight it's probably important when going into an arrangement like this that boundaries are put in place before it starts.