"Fee Switch" Design Space & Next Steps

For example, Imagine you are an LP and the fee switch is turned ON. What do you say to yourself? You say, “Ok, now I am making less return because we are paying UNI holders. What should I do?” Let’s explore that – What can you do? Option 1) Move liquidity to another AMM that is far less reputable and has far less growth momentum, or Option 2) Buy UNI tokens so that i) you partake in the fees switch being turned ON, ii) partake in any other future utility ascribed to the UNI token, iii) continue accruing significant fees as an LP on Uniswap, iv) gain voting power in Uniswap governance.

I’d choose option 2 all day, everyday.


This is the crux of where you and I disagree. As an LP, why would I want to be taxed without any explanation as to where my taxes are going?

LPs are here to trade IL risk for fees.

Theoretically, UNI holders hold UNI because they are aligned with UNI’s goals (which aren’t even explicitly “make the value of UNI go up”).
If UNI leadership wants more eth/usdc in the treasury to prove out UNI’s ability to allocate capital efficiently towards UNI’s goals in a way that is net-positive to LPs, I think they should sell enough UNI to reach that number.

Only then, with some track record for LPs to look at, should the ask for capital be directed to LPs

Taking your assumption as true. The “why” actually doesn’t matter at all to LPs. If they are purely acting in economic interest they will leave if it no longer benefits them and return if / when it does benefit them. There would be no reason to stay in anticipation that it might benefit them more in the future. They would simply return at that future time. The “why” does not matter to an LP acting purely in economic interest.

Perhaps there is some subset of LPs that don’t act purely in economic interest and therefore might stick around solely based on a “why” but I doubt that is a large amount.

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Hey, LP speaking, I think this proposal is great, whichever form it takes. However, the ratio should be carefully considered. Taking away 10% of revenues from LPs risking impermanent loss etc… Might be considered too high. On the other hand, LPs are indeed interested in seeing Uniswap have more assets to incetivize development and innovation. Instead of doing a unilateral proposal for fee switch with predetermined parameters, I think an invite to LPs should be done and ask what would be an ideal fee switch for them to decide to provide more liquidity, in different pairs, for example. I think this kind of proposal should be really discussed with LPs, a roadmap should be designed, and the future should not be uncertain, the opposite as Uniswap only exists because of the LP-protocol relationship. Having said that, until april 2023, Uniswap has a form of protection, what will happen after that, what about VCs, using the Uniswap code, forking it and developing for stocks for example… So many questions out there, but honestly, I feel like the fee switch is something that could benefit everyone if enacted properly.

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After having read a lot of interesting comments, there is one crucial thing that comes to my mind, as a large LP on UNI V3. Decentralized governance is achieved through holding UNI tokens. If LPs want to have a say here, they should hold UNI tokens and vote on proposals. The power of UNI V3 is its safety and liquidity. Safety will not be impacted by the fee switch. Liquidity can be controlled by the fee switch, for example, do a proposal to award UNI tokens at a discount to LPs that commit to provide liquidity for a certain amount of time. That would be “money well spent” or some sort of incentive so that research can strive along the giants that provide for “gasoline”…

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Disclaimer: this comment was co-authored by Alana Levin and Derek Walkush, investment partners at Variant. Variant is an investor in the UNI token and Uniswap Labs, Inc.


  1. In favor of experimentation
  2. The experiment should test non-core pools for data points that map to the rest of Uni pairs; strong candidates include WBTC/USDC, DAI/ETH, and USDC/ETH
  3. The first fee switch worth testing may be one that generates non-UNI assets for the treasury; these funds should be used to incentivize ecosystem growth among other Uni stakeholders

Derek and I are in favor of experimentation with fee splits, and think the proposal outlined is incredibly thoughtful and a strong step in the right direction.

Pool Analysis
We agree that the biggest risk, as pointed out by several commentators, is a liquidity drain among core pools. As such, there’s likely a good middle ground of pools to test – ones that are not core pools (e.g., USDT/USDC and USDC/ETH, as pointed out by Monet Supply) but are still sufficiently large to gather data points that map to the rest of Uni pairs. Having relevant data points will help better understand the potential impact of broader / more widespread fee switch implementations.

The optimal pool should satisfy the following conditions:

  • Relatively high Volume / TVL (APY) so LPing still remains profitable
  • Relatively deep liquidity to not potentially drain important liquidity
  • Ideally relatively similar valued assets to avoid potential IL increases

Below is an analysis of Uni V3 pools 11th-20th in TVL:

From the analysis, WBTC/USDC, DAI/ETH, and USDC/ETH (1% tier) seem to be suitable pools for experimentation.

Fee Switch Design
We’re supportive of directing a portion of the fees toward building non-UNI reserves in the treasury (with funds potentially stored in stables), in line with Toby’s comment. We agree that those funds should be invested in continued growth, e.g., funding grants, incentivizing integrations, and whatever else the community determines may help Uniswap grow.


I agree it would be nice to test this on pools that are a bit less important (measured by volume) but curious what you both think of @guil-lambert’s comment? It seems important to pick one stable / volatile pair and then compare across non-overlapping fee tiers with a consistent fee switch setting.

It’s a good point, and our suggested pools are mostly in line with @guil-lambert’s argument. DAI/ETH (0.3%) and USDC/ETH (1%) are both stable/volatile pairs with non-overlapping fee switches, while still being in the top 11-20 pools by TVL. A solid candidate for a third pool to test might be ETH/USDT (0.05%) instead of our original WBTC/USDC suggestion.

The key difference between these suggested pools and the ones @guil-lambert suggests is that our proposed pools rank much higher in TVL, which we think is important for simulating the outcome should new fee switch designs be implemented on more core pools. We do agree that having stable/volatile pairs and non-overlapping fee tiers is useful.


It is difficult to gauge the likely impact on LPs from a fee switch without understanding the state of profitability for LPs in various pools.

The “Impermanent Loss in Uniswap v3” paper released in Nov’21 sampled pools representing ~50% of TVL and found that those LPs, in aggregate, are operating at a -30% margin.

If this is still the case today, I don’t think it would suggest a lot of room for the protocol to extract revenue.

To that end, has anyone seen a more updated version of this study or seen / has conducted similar analysis on LP profitability?


I see a lot of good comments, good ideas, and good direction toward the question “how should the fee switch be enabled” - rather than -should we enable the fee switch" - as this discussion matures, LPs will slowly but surely realize that the UNI token price is currently extremely low compared to what it will be when decentralized governance starts to really work out. This experimentation is amazing, thrilling, and it will probably be seen by others as one of the biggest revolutions in Web 3.0 if properly enacted. Probably a sort of “think-tank” should be put in place and the HOW should be discussed extensively. More than happy to participated.

One problem with only enabling certain pools to “test” is you are now changing the properties of very similar pools. You’re very likely to see liquidity leave ETH/USDT 0.30% pool if you enable the fee switch because they can just join ETH/USDC 0.30% pool without the fee switch on.

If you’re going to turn it on for a pool, it needs to be on all comparable pools (same/similar risk profile) if you actually want a proper test.

Disclaimer: I work at Pantera Capital but views expressed are my own


  • You can’t create protocol fees for free
  • Either traders or LPs have to pay, and in practice both will
  • A protocol switch will result in worse net pricing for traders

@guil-lambert’s post is excellent but could be slightly misleading - there isn’t, of course, any way to create protocol fees ‘out of thin air’ without the ‘tax’ being paid by someone.

Guillaume suggests that liquidity reshuffling between fee tiers would create an equilibrium of LP fees per unit of liquidity provided, which is in theory completely correct. However, this equilibrium would either be:

  • a) Lower than the previous equilibrium - i.e., the protocol fee is ‘spread’ across all fee tiers (and ‘sister pools’ in theory) and still paid by LPs, albeit by each pool in a smaller amount;

  • b) The same/similar, but transaction routing moves trades to tiers with worse net pricing as a result of liquidity reshuffling, and so traders pay the fee;

  • c) Some combination of a) and b), which is what would happen in reality.

A key insight from a) is that a lower equilibrium fee switch, i.e., below the 1/10 minimum, could be applied to all LPs by only turning on the fee switch in select pools (as is being suggested for testing).

To think about this differently, the current liquidity distribution is, of course, optimizing for LP revenue, which in turn is optimizing for maximum daily volume per unit of liquidity in each pool, which in turn is optimizing to give traders the best net pricing experience across the pools. Turning on a switch in any fee tier will alter the liquidity distribution and result in sub-optimal/worse net pricing across all tiers for a given pair/collection of ‘sister’ pairs.

The traders who would have been trading in that pool on the margin will then either continue with their trade anyway (i.e., scenario b) or halt their trade entirely (scenario a).

The extent to which scenario a or b occurs will be determined by the price sensitivity of the traders, which in turn will be determined by the availability of strong alternative protocols.

Thank you for this proposal. I agree that we must explore this design space.

However, I think that you are not giving enough credit and consideration to the unique potential of UNI holders passively accruing fees simply by staking UNI. This possibility should neither be written off nor disregarded. Please consider this more carefully. The Uniswap protocol touches just about every compelling asset in cryptocurrency landscape by enabling permissionless liquidity provision. Now imagine staking UNI and passively accruing an entire portfolio of assets (volume-weighted by trading volume on uniswap).

UNI, in this sense, could become the ultimate Web3 “fixed-income” asset. Holders of UNI can passively accrue every asset that trades on the protocol. This is incredibly powerful and unprecedented. Wealth managers across the world would pile into UNI simply to have this exposure, and accrue exposure for their clients to all Web3 assets trading on the Uniswap protocol. Nothing like this has ever been done before. It’s magical, in a way. Eventually, we can assume that tokenized equities, fixed income assets, tokenized real estate, tokenized fiat currencies, tokenized derivatives/options/swaps/etc and much more may trade on Uniswap v3. And simply by holding the UNI token, one can slowly accumulate exposure to all these different assets… Imagine that. WoW! Incredible…

You say at the beginning of your proposal: “I see an assumption that using the fee switch = money going to UNI token holders. I think this is limiting.”

I disagree strongly. I don’t think this line of thinking is limiting at all. In fact, it is fascinating! I believe this is what UNI was in part destined to be… the primary asset that allows holders to accumulate and accrue a vast and diversified portfolio of positions across every Web3 asset that trades on the Uniswap protocol.

To me, a veteran of traditional finance, this is simply an incredible opportunity for the UNI asset - and it should not be ignored.


So the last community call got me thinking about the fee switch and ways to overcome all the obsticles there are in creating this outside of a contract

The idea of testing this out with V3 having full control over which pools have this fee switch and how much

my proposal is that we create a Staking contract in conjunction of the fee switch contract receiver, and also adding on a ERC20 Wrapped UNI where this wrapped Uni is used in a ETH/WUNI pool, allowing this to be unwrapped as well via contract.

This would allow UNI holders to stake the uni and provide that wrapped UNI to the pool to limit loss from the fees lost in the LP, Also having a UNI/WUNI pool would allow routing through this pool with regular UNI token routes

Now the main reason we can bring in UNI LP providers is that in this contract we would want to retain UNI Holder Voting rights, the Vote would need to be done via this contract and have a ipfs site to vote on, but by tracking and setting the users ability to send vote via the contracts holding of their UNI, this would allow them to still Vote, although a different delegate system would also have to be set up

But by reducing the loss in LP fees and allowing UNI holders to keep their voting power, I do believe this would be enough incentive for LP providers of UNI token at least

Obviously this would be a very complicated contract, but I do believe that this would offer a good incentive to open a Fee Switch Testing pool


Can’t we combine these two things?
Everyone who participated in governance gets 2x as those who only hold UNI tokens but not improve the protocol.

Question is, what about UNI token becoming a security because of this. Also, can we make sure JIT MEV and other scalpers get double taxed ? Or something like that? Do they actually accrue value to the protocol ? Anyway, talk soon.

Wanted to try to give some constructive feedback as a UNIv3 LP and how the fee switch would affect profits and even the decision to LP at all or move liquidity elsewhere.

As a constructive idea that will make this easier for LPs:
The #1 aspect that affects LP profit is trading volume. What if there is a way to have fee switch dialed up/down (0% to 100%) based on a pairs recent trading volume. When volume is down, LP profits are down and the fee switch will be ‘felt’ more for LPs, when volume is up respective to some recent time frame, the fee switch could be dialed up to max and an LP may be fine with a portion of fees being deducted.

Not quite sure how the time frame would work to decide how much to dial up/down fee switch, but just something that could help ease the LPs mind.


What if we added 5-10% to the fees for the end users.

Instead of 0.3% we would charge 0.33% and those that hold a certain amount of Uniswap and have it staked will not have to pay the extra fee + other incentives.

**** Important ****
I would want to see the fees generated being used to also provide liquidity for major pairs acting as a treasury for Uniswap holders where we can compound the rewards in major stable pairs like DAI/USDC further deepening liquidity for the protocol and protecting against those leaving LP.

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It is better to make data based decisions, then assumptions about the outcome.

A few items that is unknown till data is gathered is:

-Is the liquidity sticky? If a fee switch goes on higher tier pools, do those LP’s move towards a lower tier fee or move to another platform? If the LP’s move to a lower fee tier, then this provides better liquidity, and pricing for traders (instead of “worse net pricing”).

-Is the LP experience, trust and branding on Uniswap enough for LP’s to not mind a fee switch?

I am for having the fee switch on higher fee tier pool’s and for the protocol to collect data on how LP’s in those pool’s react to make more informed decision’s.

I am curious to your insight on how Pantera portfolio companies such as FTX, Bitstamp, Coinbase etc… are able to charge fee’s and make profit without losing trader’s/user’s. Is there a price sensitivity metric of the typical CEX user accross platform’s, or is there some other evaluation tool?


What an exciting conversation!

Our community (Civilization) have been working over the past 12 months on building a decentralised hedge fund, with an initial priority focus on v3 liquidity mining. So we have collected a significant body of evidence, research and technical expertise. Rather intimate knowledge of the mechanisms surrounding concentrated liquidity.

This proposal directly affects and changes our ability to generate a return for our community, and I feel it’s worth sharing my perspective for everyone’s benefit (in case anyone cares to follow up, please feel free to give me a shout @civ100 on Telegram).

In my view, the “fee switch” is equivalent to a “revenues-based income tax”, similar to European-style VAT, whereby the government earns a % of revenues before anything is paid into the seller’s account. There are some technical differences, in who pays how much and how, but substantially the outcome is the same, minus the important “recover VAT on purchases” element, which makes VAT sustainable.

As an income-generating entity, the LP provider will only get 90% of their earnings, whereby 10% is paid to the “government” (UNI governance).

In this way, the “government” effectively can accrue a benefit equivalent to having up to $400mln of TVL invested = 10% of current total TVL of >$4 billion, assuming the fee will be switched on for all pools, which eventually would likely be, post-experiments.

Crucially, the “government” doesn’t suffer any entrepreneurial risk, no impermanent loss, and doesn’t actually need to invest those $400mln.

Is this beneficial, desirable and survivable for both Uniswap and UNI?

Yes, for sure. Uniswap has a strong enough brand and technology lead for sustaining this over the medium term, beyond the initial experiment. The concentrated liquidity research was pioneering and market-defining, and I am sure Uniswap will continue to lead the rest of the DEFI market by a wide margin. However painful this will be for LP, who already contend with extremely razor-thin profits after hedging, this is unavoidable.

Today, v3 is the only protocol with a chance of going mainstream. Also, this must be tested and implemented well ahead of the 2-year code-lock expiring, so it feels like the time has come. Writing and maintaining protocols is complex and expensive, and after all, there must be rewards for their authors, it’s only fair.

But - will this be sustainable long-term? It depends.

If the comparison reference is to the government’s VAT tax, then a 10% tax is relatively cheap when compared to a 20% VAT rate, or even higher in some countries.

If the comparison is the government’s “revenues tax” levied by some countries on e.g. technology companies, then 10% is a lot: 2-3% is more common.

However, crucially, if the comparison was to TradFi, I can’t begin to imagine how exporting Uniswap technology beyond DeFi could sustain this type of monopolistic margins. A traditional market-maker charged 10% of their revenues to access a platform just feels unreal. Market-making will need to be more profitable and easier than would be the case for v3 LPs after the fee switch, so the new technology can be equally beneficial to all parties.

Long story short: I think the fee switch is inevitable, but in Uniswap v4 it better be brought to a lower level than 10%. This brilliant tech will then get the mainstream adoption it fully deserves!