Hey everyone,
Miles and Porter here with a16z. Thanks to @Leighton and @guil-lambert for their proactive stance on the fee switch discussions. From our perspective, the risks associated with turning on the fee switch generally fall into three brackets and could be addressed as follows:
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Risks Associated with Commissions - Generally, there are regulatory risks associated with taking commissions on the trading of assets, though as indicated in the Uniswap Foundation’s post, most of these can likely be addressed by limiting commissions to trading pairs with an unambiguous status as not a security.
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Risks Associated with UNI Token - The protocol accruing profits from trading also impacts the analysis as to whether any transactions of UNI tokens could be deemed to be transactions involving investment contracts requiring the application of U.S. securities laws. However, given the significant decentralization of the Uniswap protocol, we do not believe it would be reasonable for anyone to be dependent on the managerial or entrepreneurial efforts of any party associated with the Uniswap protocol. Further, if profits are not directly distributed to UNI token holders, the complications and impact of such a proposal could be greatly reduced.
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Risks Associated with Organizational Structure - If the fee switch is turned on, then the DAO could have control over accruing profits, which could have implications for tax purposes. We believe a very narrowly tailored legal entity structure (relating only to the profits accrual and use of those funds) could potentially be used to enable the DAO to pay any required tax obligations and could provide DAO members with limited liability protections. The additional goals of any such structure would be to maximize flexibility of the DAO, enable UNI members to opt out from participation in such structure, limit the impact of the structure on the DAO’s broader activities and regulatory positioning, and preserve the ability of the DAO to dissolve such structure if an alternative approach became available.
We’re actively working to assess the above risks as well as a potential entity structure that meets the organizational requirements, and we’re interested in hearing other perspectives and proposed solutions for the risks identified above.
However, for this specific discussion, we ultimately cannot support (and will vote against) any proposal that fails to account for these factors. While we appreciate the efforts to drive the fee switch forward and believe this proposal solves the first two issues, in its current form it does not address the third one - an organizational structure for tax purposes.
Even though the proposal is labeled as a “test run only” it would set in motion potential organizational and tax issues. We believe the risk from the proposal outweighs the potential benefits. We are evaluating a plan that will address each element (including the organizational issue), but that process will continue to take time. As that analysis continues, we think patience is warranted to get the full legal and regulatory analysis correct before proceeding further. In light of all that has happened in the web3 sector this year, we believe it is fundamentally necessary for Uniswap DAO to lead the industry on a pathway that shows that DeFi can exist and operate in a legally compliant manner.
On a final note, one other way to potentially avoid many of the risks associated with the fee switch would be to implement a system that accrues fees to UNI token holders who actively “opt-in.” In this scenario, LPs would stake UNI and their LP tokens to receive boosted rewards from the liquidity pools in which they are providing liquidity. This has the added benefit of incentivizing liquidity providing and directly rewarding the parties that actively participate to keep Uniswap running. We recognize there are a number of technical hurdles prior to implementation, including fee claiming, fee management, and multi-chain fee switches, but we think this option should be explored further in parallel to the general fee switch discussion.
We can be reached here on the forums or on Twitter for those with additional questions!
Best,
Miles and Porter