Love your analysis as always! One of the things that I think we need to be aware of is not just the allocation of trade volume and the IV of strictly the Uni v3 pools, but the effect this would have in diverting the trade volume away from Uniswap as a whole to another AMM when using a DEX aggregator. Small divergences in liquidity could lead to leakage of trade volume that would have been allocated to Uniswap. I think it’s a mistake to assume that the fee switch would involve liquidity or volume moving to a different Uniswap v3 pool as they could just leave Uniswap entirely!
For example a 10 ETH trade for USDC on Paraswap does not even make it to a Uniswap v3 pool as the price impact would be lower going through Paraswap’s pools instead.
So, I can’t imagine that any further restrictions on liquidity such as a fee switch would help us in competing as a whole against other AMMs when it comes to DEX aggregators. Therefore, I think a technical analysis needs to include how a fee switch could affect our competitiveness on DEX aggregators as well.
But more importantly, before we even get there, I wish there was more clarity and information given on whether implementing a fee switch is really the best way to achieve the outcomes we’re trying to accomplish. I’m not so sure. What alternatives are there to implementing a fee switch in getting the revenue that we need to get? I worry that this sets a dangerous precedent and moral hazard issues when it comes to a treasury that is flush with trade fee revenues. Like it hasn’t been made entirely clear what specifically these funds would be used for. Like what kinds of public goods? Like the DeFi Education Fund? I sure hope not.
I’d rather we have the specific goal in mind first before getting the funds. Right now, it seems like we’re getting the funds first and then figuring out what to do with them. It creates a moral hazard in my opinion. Right now the UNI distribution is still very much concentrated in the hands of a very few influential parties. I would wait for a more decentralized distribution of UNI before implementing this kind of power.
Research without actually implementing the fee switch is certainly possible thru backtesting. Using the pretenses of “research,” to actually implement a fee switch into production for the first time is a very dangerous precedent.
This is the smallest portion the code allows, it’s impossible to set it lower.
Is that a feature or a bug? It seems kind of silly to be limited to such a large increment increase. Can this be changed?
The whole point of my post is that I am suggesting NO PLAN for how these accrued tokens might be used. I’m explicitly trying to separate the testing of value accrual from how / if that value is disbursed.
But this plan does propose how these funds might be used, by suggestion and omission. The glaring one is no distributions to UNI holders. I get what you’re saying, but any fee switch is inevitably going to discuss the trade-offs from taking said fees. Just like a tax increase, someone has to pay for this, and someone gets to spend the money on something. I think that is the most important part of a fee switch scenario.
If this is just a test in prod of how the fee switches will affect liquidity, the LPs, and determine fee generation/mechanics, I would suggest conducting a controlled test over a specific period of time. Then stopping to assess the test.
The purpose of this post is make clear UNI governance has two very different decisions to make 1). should a fee switch be turned on? and 2) how should fees be utilized?
I agree these are separate decisions. I think they are being asked in the wrong order.
The first decision should be the business decision: What is Uniswap looking to fund, and to who’s benefit?
Only then should we think about the financing decision: How are we going to fund what we want to fund?
Said another way:
By taxing LP’s fees by 10%, you’re implicitly saying “Uniswap governance knows what to do with this 10% of these fees better than you do”.
I agree with @Buckerino’s point that it’s not the most important question. I think the most important question is “What is goal/mission of Uniswap and its treasury?” Until that question is answered, along with how funds would be allocated to further that goal, it doesn’t make sense to divert fees from LPs to the treasury.
I just created an account to voice my concerns as liquidity provider about this idea.
It’s an absolute bad idea to me. Taking 10% of the fees away from LP’s is an enormous cut. That 10% is often the difference between making a gain or a loss. If the Fee Switch would be 1-2% I could live with it as liquidity provider.
In the case that the 10% fee would be introduced I would remove my liquidity and use my capital somewhere else.
Meanwhile Kyberswap, fee switch fully enabled and no shenanigans on getting around of paying it to holders.
Concentrated Liquidity tick-based or as LP tokens both.
Deployed on 12 chains.
Faster in deployments (see OP 0.01% fee tier).
All Uniswap has at this point is the brand.
I am for using a fee on strategic pools as @guil-lambert has stated. It is true that if you charge a fee on only a part of the fee levels, the liquidity will spread out to where it is treated best. The idea is maximum extraction of value for minimum effects on liquidity. I would also restrict fees from full-range liquidity positions, since they protect from long tail events, but are inefficient during normal conditions. At the same time, I do not think the specific plan matters for the revenue, and starting small and gathering some empirical evidence minimizes the risk for the protocol
Fee switch is not high priority at this stage, and other projects are higher priority
Uniswap Governance needs to figure out what it wants to even spend funds on first
Other Internet has studied Uniswap governance extensively and has talked to stakeholders of many different types, and while I hear these concerns, I do not believe they are entirely correct.
Part of the reason for general governance inaction in Uniswap is, in fact, the lack of non-UNI funds in the treasury. Without stables or more liquid currencies like ETH to spend, the UNI token must be liquidated every time a significant opportunity arises. We currently are in a situation in which UNI selloffs to service providers, public goods projects, and grantees that exert downward price pressure on the token in the long run. (Recall the significant backlash about UNI price when DeFi Education Fund liquidated $12.5m in one day). Moreover, generating assets in the treasury that can be spent on protocol growth and expansion makes the governance token more valuable. Recently governance nerds have been obsessed with NounsDAO, a protocol with extraordinarily high levels of governance activity. The number one reason Nouns has generated such a high volume of proposals is that it has significant treasury holdings, spending of which do not dilute Noun holders’ token value. Everything we’ve seen so far suggests that if Uniswap were generating even $10k of ETH & USDC in fees per day, we would likewise see a much higher volume of governance activity and proposals on this forum.
Firstly, we have to stop referring to “Uniswap Governance” as a monolith. What we are is a collection of actors with very different incentives. Uniswap is very poorly structured from an ownership perspective, having airdropped to all classes of users. This makes it incredibly unrealistic for people to come together to intentionally decide what to fund at the current moment. Outside of an off-site retreat for major UNI voters, I don’t see a good way to reach consensus on this. OI has taken some responsibility for advocating for specific outcomes we’d like to see here; one of these is the creation of concentrated centers of authority, such as an expanded version of Uniswap Grants Program with a bigger mandate, who we believe would be suitable to set specific goals and drive specific visions.
In lieu of these authority centers existing right now, I believe that the higher volume of proposals stimulated by more liquid assets in the treasury would incentivize a greater degree of competition and higher quality proposals brought to this forum. Right now delegates have too little work to do. Perhaps this is idealistic, but more competition among a higher volume of proposals would force all of us to be more selective and evolve a set of criteria for treasury spend.
A final comment is that nonnative assets in the treasury would make it easier to conceive of spending money on things like paid delegation programs, which would overall improve the quality of governance.
In short, I can’t conceive of the fee switch initiative as low priority. The fee switch is one of the few clear on-chain levers we have available to us to drive more governance work and better outcomes at this time.
There are two ways to get non-UNI funds into the treasury.
Sell UNI from the treasury, which impact UNI holders (by decreasing the price)
take a portion of LP fees, which impacts LPs (by taxing them)
Assuming LPs are providing liquidity out of pure economic interest, to impose #2 on LPs, the case has to be made “this tax will improve your economics in the long run”.
I have looked through everything I can find from/on Uniswap, and I cannot find a stated goal or mission.*
I agree that having some amount of ETH or USDC in the treasury might attract more proposals. But without having a more clear goal or mission for UNI holders and arguably more importantly, for LPs to get behind, the fee switch is a hard case to make.
A world in where I see turning on some fees working:
State the goal of UNI is to create the deepest liquidity and thus the best to trade in the universe
Pick a number: $5m, $10M, and turn fees on for less important pools until that number is reached, and then turn them off. It’s a seed round.
Fund individuals / teams that are directly aligned with the stated goal of UNI.
Long term, I think fees on top of LP fees instead of taking a portion of the LPs’ fees is more sustainable. It affects LPs less, and doesn’t directly drive liquidity to other AMMs.
Which can or may be separate from Uniswap Lab’s goal or mission. Since it’s a C-corp, by default it is “make a return on investment for shareholders”. And I’m sure they have their own way(s) they plan on doing that, separate from the fee switch.
I’ve been thinking of it being more time bounded though rather than focused on acquiring a specific amount of capital.
i.e. run this experiment for 90 days after which fees revert to 0%.
Functionally somewhat similar to what you are suggesting but IMO simpler because you avoid needing to determine any specific usage of capital. As stated in my original post, I think that is crucial to keep the discussion simple and empirically driven.
This is a good point. My gut tells me that instead of removing liquidity, LPs will go and buy UNI token… Most LPs love the protocol and will be willing to contribute more capital to the ecosystem by buying UNI token. I also would like feedback on my Temperature check here, for UNI-based Fee Tiers. Upon turning on the fee switch, this would provide additional incentive for LPs to buy UNI instead of withdrawing liquidity.
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.
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.
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.
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”…
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.
TLDR:
In favor of experimentation
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
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.
