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!