First, thanks to @GFXlabs for pushing this.
Since last year, a number of positive steps have been taken in Uniswap DAO in the fee switch initiative, but these steps have mainly concentrated on the discussion and analysis around the topic. Discussion is always healthy, but we have finally come to the point where we need action on this initiative in addition to discussion.
Out of any possible revenue model, it is clear that the fee switch is the simplest and the most meaningful monetisation path, essentially just introducing a take-rate to an exchange business. Practically every single exchange globally has the same primary monetisation model, take a cut of the volume for the house and that’s it.
There are a few main aspects to the fee switch discussion:
- Why and how should the fee switch be activated?
- How should the captured value be distributed to UNI-token holders?
- Risks involved
Why should the fee switch be activated:
Uniswap DAO does not have a revenue model, but has a growing cost structure. It is a separate discussion how the expenses are allocated or which investments are made, the key point is that every single investment Uniswap DAO does is currently at the expense of UNI holders. It is simply ownership dilution. I do not want to discourage great initiatives like the Uniswap Foundation, I’m just pointing out how Uniswap initiatives are currently financed.
Let me attempt to fix the widespread misconception about treasury funds that @GFXlabs also pointed out: Uniswap does not have a treasury. I will re-emphasize this so there is no ambiguity around this topic: Uniswap DAO does not have a treasury by any reasonable definition of a treasury whatsoever. Uniswap DAO has a large genesis allocation of UNI allocated to “community”. Whenever this “treasury” is used, UNI is sold on the market, diluting existing holders. This point is particularly important, because it seems to be widely used as a counterargument against the fee switch: “We already have a treasury, therefore we don’t need a revenue model to generate more treasury”.
The only funds that can even remotely be called a treasury for Uniswap DAO are ARB-tokens and similar sizable airdrops, but everyone understands these are one-time occurrences now in the early phases of the crypto economy. The major point stands, which is that there is no sustainable revenue strategy to generate a treasury, and there is practically no treasury. These are the two key points answering the “Why”-question.
How should the fee switch be activated:
There should be a gradual rollout to ensure that risks are minimised. Further, there have to be some predefined metrics on turning the switch off due to possible market share losses in volume. While I personally do not see Uniswap losing market share as a result of the revenue model, this issue is not binary in the sense that the answer might be a -1%, or -5% decrease in the comparable overall volumes long-term, when we have a system-wide fee switch in place.
How should the captured value be distributed to UNI holders:
The best way to begin is to simply accumulate the revenue into the Uniswap treasury in the form of stablecoins and/or ETH. In practice, this could be 50% USDC, 50% stETH.
Once we have run this strategy for a while, some of the revenue needs to systematically be distributed to UNI-token holders. We are not fans of the burn model in general and hope to see a staking module implemented, in which participation is voluntary (also legally more sound). This would create an organic yield for the UNI token in the form of directly distributed USDC / stETH tokens. In addition to this, there needs to be an option to stake delegated UNI, so that delegation is not disincentivized.
For GFX’s questions, we agree with steps 1-4 and for 5th: 50% USDC, 50% stETH.
Addressing the risks:
The main counterarguments around the fee switch seem to circle around 1) regulation 2) the idea that all the “LPs would fork Uniswap and leave”.
Regulatory risks need to be carefully balanced with the financial reality Uniswap DAO is currently at. In practice this means that risks need to be understood, the best model forward needs to be determined, and then proceed to move forward with that model. We are definitely not regulatory experts with @mhonkasalo, but as non-US people we clearly see how US-centric the regulatory discussion is. We want to see Uniswap DAO evolve into a truly global project. This means creating its own global sustainable financials outside of any specific country.
As for all the LPs leaving Uniswap due to this initiative, we have @WintermuteGovernance, a large Uniswap/DeFi MM, expressing a positive view on this thread. While this is only one data point, due Uniswap’s market position and reputation, we would probably not see a mass exit of LPs. Moreover, Uniswap users have trust in the current battle-tested contracts. The volume loss risks can further be minimised by the gradual rollout of the changes.
Finally, I’d like to make it clear that our delegate platform represents the interests of UNI-token holders, which includes financial interests. We are not comfortable seeing UNI declining until eternity due to the previously mentioned imbalance in the revenue/cost structure. The key challenge here is that everyone has a different view of what Uniswap is. Especially to @guil-lambert’s points:
The Uniswap infrastructure is a public good. Turning on the fee switch in this manner would lead to the deterioration of the Uniswap protocol’s public good nature (in a very tragedy of the commons-like manner) and would undoubtedly push the $UNI token closer to being a security.
We do not see Uniswap purely as a public good or a non-profit entity. Uniswap has elements of a public good, but it also has elements of a traditional exchange business. We have to be able to critically look at the Uniswap DAO financials and understand that the decision to do nothing means driving the UNI token ultimately to 0, long-term. Turning on the fee switch would lead to long-term prosperity (not deterioration) of the Uniswap DAO and all the related protocol infrastructure.
The Uniswap protocol is currently valued at $5.3b. Who here truly thinks that this value is based on the market’s willingness to finance a public good infrastructure on a charitable basis?
We fully support proceeding with the fee switch implementation with the delegation we have been trusted with and want to see Uniswap DAO and the UNI token prosper long-term. This initiative is ultimately not only about a revenue model. It is about deciding whether Uniswap is inherently a global project or a US-project.