Greetings! Can someone explain me how regular liquidity providers would benefit from turning fees on? And can you specify a simple example of a fee which a regular liquidity provider should be paying?
Also, have you calculated the potential impact of this proposal on earnings and on customer churn/influx?
I would say buy back UNI and burn 100% of it. Managing treasury funds have proved erratic at best. Burning ‘should’ drive UNI’s utility and - one would think - price. The Treasury can sell UNI then and deal with diversification and other strategies.
3 Likes
Interesting post @GFXlabs! I think you raise great points about collecting fees. Capturing fees from thousands of token pairs would be a logistical nightmare.
We had a similar problem to solve for PoolTogether V5, so I want to share our solution with you!
Our Requirements:
- Needed a mechanism to sell token A for token B
- Token A accrues slowly, and Token A liquidity is held in an external contract
- Cannot use an oracle, because there will be obscure tokens
- Must be fully automated, because there will be many tokens
- Is not prescriptive on where liquidity comes from; it should be open and allow token B to come from anywhere.
Our Solution:
The Liquidation Pair: a single-sided virtual AMM based on the CPMM x*y=k. You can find the full explanation here.
Here is the Liquidation Pair on Github
The Liquidation Pair has Token A and wants Token B, so it only supports B → A swaps.
How it works:
- The Liquidation Pair stores a virtual reserve A and reserve B amounts. These are configured at creation time. Generally we just make sure it’s a small amount.
- The “total” reserve A is actually virtual reserve A + available A liquidity, so as liquidity accrues the liquidity balance shifts and it becomes an arbitrage opportunity
- Arbers swap Token B for Token A when the shift becomes profitable
- The tokens from the arb can be sent anywhere and trigger a callback; that is configured when the liquidation pair is created.
The algorithm also includes an additional mechanism to ensure the liquidation price tracks the market price accurately and adjusts K automatically so that the virtual reserve amounts are proportional to the rate of accrual. See the link to the full explanation above!
If you move forward with the proposal, then I hope you find the code useful! The PoolTogether team is happy to answer any questions you have. Feel free to join our #developer channel.
5 Likes
Thanks for the proposal @GFXlabs!
The discussion around Uniswap’s fee switch has been ongoing for a while now with various alternatives proposed, introducing different trade-offs at various levels of the protocol. Tax implications aside, the idea of a fee switch seems counterintuitive at the protocol level as it directly levies a tax on LPs, and indirectly on users (traders) assuming liquidity diminishes. It’s also probably hard to find a mechanism that uses the revenue from the fee switch to generate a surplus for the protocol (i.e., post-fee switch revenue > pre-fee switch revenue).
However, if we think about revenue benefits at the DAO level it can begin to make sense for the protocol to start accruing fees to the DAO’s treasury to ensure Uniswap’s longevity. Largely, reducing the need to sell large amounts of UNI to fund development and operational costs, which come at the cost of UNI holders. But more importantly, becoming a self-sustaining DAO through revenue earned by the protocol.
So we encourage the experimentation of the fee-switch and think that Uniswap is in a good position to do so. We also believe that once live, having an active treasury opens up the next chapter of decentralization for the protocol as it begins to attract service providers from the treasury management realm and ‘risk’ teams to assess which pools should have an active fee switch.
Some thoughts on your questions:
- Do you agree Uniswap does not need to offer substantial fee rebates to liquidity providers?
This is slightly misguided as there are major exchanges that offer maker rebates (e.g. Bybit). However, most of these fee structures are only available to high-volume liquidity providers. Nonetheless, we believe the current rebates are sufficient even with a 1/5 protocol fee; catering to Uniswap’s supply side is important for the protocol to remain competitive.
- Do you agree a one-fifth fee tier is the appropriate starting point for a protocol fee?
Yes, it’s likely sufficient enough to understand the implications of the fee switch and somewhat in line with what order book exchanges capture at the higher end of their discount tiers.
- Do you agree a new system for fee management is a good approach to carrying out the necessary maintenance surrounding the fee switch?
The proposed solution is great and allowing anyone to call the fee collector contract is a nice addition. Having the ability to call setFeeProtocol over 10 times is important for reducing governance fatigue.
One question we had and is related to Q5, will there be a token whitelist function that blocks certain tokens from being sold when the fee collection contract is called? e.g. If the DAO decides ETH, USDC, and USDT are assets that want to be held, it doesn’t make sense to sell these assets only to rebuy them in the token consolidation phase.
- What token do you think the DAO should trade fee income for to be held in the protocol treasury?
We don’t have a strong opinion on this but an obvious starting point would be a set of stablecoins to begin building a safe and strong financial foundation.
3 Likes
Thanks for writing this up! It’s an exciting proposal.
I think this proposal is a nice iteration in several ways over the one that @guil-lambert and I wrote up. However, I am going to focus on where I’d like to see continued work before I would support it.
I believe this proposal shares the same weakness that the proposal Guillaume and I had… it does not address what to do with any fees collected.
I’ve come to the strong belief that any fees collected by the protocol should be autonomously distributed in a programmatic way. There is a big design space in what that could look like but the main point is that they should not simply collect to a treasury where they are then arbitrarily distributed based on later token votes. My reasons for this belief are the following:
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Token holders have a very poor track record in managing protocol treasuries via discrete voting. It has not proven to be efficient or effective.
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Ideologically, this is much more aligned with traditional crypto ethos of immutable, forever software. Contra some other commenters, I strongly disagree with the view that the Uniswap protocol is a business… it absolutely is not a business. It is an autonomous piece of software, it doesn’t have employees, it can’t go bankrupt, it doesn’t have revenue and expenses. Protocols are a revolutionary new entity type and we need to think of them as such.
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Although we would still need to be thoughtful about regulatory and tax considerations, the autonomous redistribution should be a much more vanilla tax / regulatory position (i.e. this is the same as how ETH staking works).
I think this proposal is a step in the right direction but the crucial piece I outlined above needs to be addressed before I can support it.
5 Likes
Relaying Leighton’s post:
A trustless system designed to collect fees in the pool, and swapping the protocol fees to be claimable for a designated token should add no more additional taxation responsbility to what LPs are currently responsible for. Unless there is a legal & taxation professional to contest, it appears straightforward that eliminating the requirement for a common enterprise to manage fees also eliminates the debate of legal & taxation concerns. Anecdotally, I’ve never seen any hard evidence on cited laws within these forums proving any impact to the intersection of Uniswap Protocol, Uniswap Labs, and its users regarding the legality of the protocol fees. Unless the cited laws carry merit to being catastrophic towards furthering the protocol fee, the community should just cope with the idea that you can sue anyone for anything.
I believe activating the protocol fee is fairly zero-sum. Here are some reponses to the fantastic proposal:
- Do you agree Uniswap does not need to offer substantial fee rebates to liquidity providers?
In a different lens, turning on the protocol fee could provide a like-for-like rebate via a hedge for LPs. In light of the fact that Liquidity Providing in volatile Uniswap pairs without considering a larger strategy - absent of protocol revenue mechanisms to hedge - is simply a bad idea.
- Do you agree a one-fifth fee tier is the appropriate starting point for a protocol fee?
Yes, a one-fifth fee tier represents a negligble impact to Liquidity Providers. It’s reasonable to assume that the overwhelming amount of users will always trade on Uniswap regardless of price impact - mostly because they don’t bother to check agregators or other DEXs for fractional savings in slippage. There has been some great research done by @rfritsch on this: https://arxiv.org/pdf/2206.04634.pdf.
- Do you agree a new system for fee management is a good approach to carrying out the necessary maintenance surrounding the fee switch?
Yes, and I believe that funding the design of a PoC system, writing the smart contract(s), and a third-party audit of a deployment strategy is well-suited use of treasury funds.
- Do you agree implementing the system on Polygon is a good first step?
Testing on Polygon and Arbitrum seems fitting before deploying on mainnet.
- What token do you think the DAO should trade fee income for to be held in the protocol treasury?
Protocol fees should be converted to the native protocol token: UNI. Trading fee income to stablecoins or alternative tokens should be decided upon by the claimant.
3 Likes
It is great to make our first post about the Fee Switch. Some background about Native, we are a boutique advisory firm founded by @Kydo
We are thankful to @GFXlabs for producing an informative post on the Fee Switch. It effectively outlines the mechanism of the Fee Switch and provides data on its implications. We also recommend delegates to revisit @Stastny’s post here regarding their Fee Switch report.
Close to 300 forum messages have been exchanged in the Fee Switch discussion, and, as @Leighton has mentioned, we have not made much progress. We believe there are two primary reasons for this.
The minor factor is the lack of on-chain votes tracking our progress in the conversation. We should be continuously making progress on the previous discussion instead of having one vote to sort everything out.
The principal cause is the regulatory ambiguity surrounding the Fee Switch. The tax and security-like implications have significant consequences for those currently working at the lab and the foundation.
Nevertheless, we cannot wait for regulation forever.
This is Native’s proposal to move past this stalemate. The idea is to slowly build towards a comprehensive fee switch design (legal, smart contract, future fee usage, etc)
We should break down this decision into smaller parts and set a deadline for the Fee Switch to be activated. If the Fee Switch is not turned on by the deadline, a simple backup strategy will be executed (eg. all main v3 pools on Polygon will be turned on).
Here is our proposed plan:
- DAO votes on whether the Fee Switch should be activated in the future (time and mechanism indifferent).
- DAO decides on a backup Fee Switch plan and deadline for a Fee Switch decision (time and mechanism sensitive).
- DAO establishes a committee to propose a plan on the legal and mechanism design for the Fee Switch.
- If the DAO approves the committee proposal, the backup Fee Switch plan is forfeited.
- If the DAO does not approve the committee proposal before the deadline, the backup plan is implemented.
We do not consider this to be the definitive plan to bring about meaningful change for the protocol; however, we are confident that making gradual progress is essential to the conversation about the fee switch.
Answering @GFXlabs originally proposed questions to keep the conversation moving forward:
- Do you agree Uniswap does not need to offer substantial fee rebates to liquidity providers? Unlike traditional markets, the Uni LP’s strategy space is much more limited, therefore the high rebate is not as unjustified. However, we do believe exploring with the exact rebate amount is meaningful.
- Do you agree a one-fifth fee tier is the appropriate starting point for a protocol fee? Yes.
- Do you agree a new system for fee management is a good approach to carrying out the necessary maintenance surrounding the fee switch? Yes given the rigid collectProtocol() function.
- Do you agree implementing the system on Polygon is a good first step? Yes. We are indifferent among the L2s.
- What token do you think the DAO should trade fee income for to be held in the protocol treasury? USD-stablecoins and ETH are both acceptable.
2 Likes
Based on my understanding, previous fee switch proposals did not originate from highly active delegates, such as GFX Labs, who possess substantial UNI delegations and have already presented multiple Uniswap proposals from Forum Discussion to on-chain voting and execution. This lack of active follow-up by previous proposers, possibly due to other commitments or limited resources, could be a contributing factor in their proposals not gaining much traction.
Regarding the mentioned concerns about taxes, I would like to inquire about your thoughts on the fact that the treasury has been accumulating value in the form of vested UNI tokens since September 2020. How do you perceive the distinction here? If you consider the control of a value-accumulating treasury as equivalent to running an enterprise, what about the billions of dollars that have gradually vested to the DAO-controlled treasury over nearly three years? Drawing a parallel between a fee switch pool controlled by the treasury and a UNI pool controlled by the treasury, which vests UNI tokens created by Uniswap Labs, doesn’t require legal expertise. This is particularly evident when considering that the UNI tokens from the treasury have been utilized to pay for services and grants.
Furthermore, I have mentioned other examples in this thread, such as the Compound and Aave protocols, both of which have a concept called a ReserveFactor. This function enables the protocol to accumulate value through debt tokens paid by borrowers and controlled by token holders. Recently, AAVE token holders voted to utilize a portion of their protocol reserves, showcasing complete autonomy over DAO-controlled assets.
The main point I wish to emphasize is that the tax and security concerns raised about the Uniswap DAO and its token do not have basis in precedent, yet they continue to be reiterated on this forum. Another U.S.-based protocol, Compound, has already established a clear precedent on this matter, which Uniswap has structurally mirrored in many ways.
I fail to comprehend how we can expect highly active delegates to disregard community support and token holder approval, especially when previous snapshot polls have shown support for some form of fee switch. It seems inappropriate to impede this proposal due to opinions on the forum that lack factual basis and do not align with the technical functioning of blockchain protocols.
For those expressing “legal concerns” regarding this proposal, it would be more appropriate to reference legal precedents rather than relying on views propagated on Twitter or elsewhere. Many law-abiding protocols, including Uniswap, already possess a value-accumulating treasury.
Adopting the legal stance that some have voiced in this thread would essentially mean that almost every DAO (once again Uniswap included!) are already violating tax laws.
Since this proposal is a technical one that does not aim to distribute the funds accrued by a DAO-controlled pool, I believe it is best to encourage further technical discussions at this stage, allowing us to focus on the remaining technical uncertainties.
If there are genuine legal concerns, the proposers deserve well-founded arguments supported by facts, either from legal professionals or by citing relevant case law, explaining why they should not proceed with the proposal after receiving feedback.
Ultimately, if this proposal indeed carries catastrophic legal implications, those with voting power who hold such concerns should exercise their votes when we proceed to an on-chain vote. This approach would be the fairest way forward, adhering to the protocol’s rules and to token holders’ beliefs.
5 Likes
We agree that this is the best path forward.
Moreover, we agree this thread is best kept around the technical questions. For us to discuss legal matters here are not useful to anyone. To finish this conversation, lawyers most of the time do not and will not post on forums. And these legal questions are real concerns we have heard in private conversations expressed by experienced crypto-native lawyers.
Blockworks Research is currently participating in the Uniswap Foundation’s delegate race. While we await delegation, we will continue to be active participants in governance discussions.
We are in favor of GFX Lab’s proposal to move forward with testing the fee switch on Polygon, but require clarity on a few points before voting yes to the proposal.
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It should be more clearly stated that this proposal is solely to turn the fee switch on for all Polygon V3 pools, to the tune of 20% of swaps fees, and only applicable to pools with >$10,000 in expected fee revenue. Additionally, we’d like all pools that currently meet this criteria officially listed.
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Who will be building the contract that sits between the timelock and the factory? This is a non-trivial task that will require audits as transferring ownership of the factory contract poses extreme risks to the DAO and protocol. We’d like to see a clear and technically specified plan as to this transition.
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What token(s) will the proceeds be sold for? “collect the fees, sell the fee tokens automatically via the Uniswap auto-router, and then send the proceeds to the protocol treasury” is not sufficient without a goal of what tokens we’d like the treasury to end up with (EG a mix of 33% USDT, USDC, and ETH). Additionally, we highly recommend the use of an application like Milkman in place of selling via the Uniswap router in order to mitigate MEV and frontrunning. This has been a huge problem for Curve and Sushi who employ similar models.
We agree with Leighton’s sentiment that a discussion around the use of the funds should begin prior to the implementation of this proposal, but disagree that it should pose a roadblock to its passing.
We view this fee switch proposal as an experiment that tests the protocol’s ability to turn on the fee switch without disrupting the DEX. A use for the revenue is far more vital prior to the implementation on mainnet. This should be a barrier to mainnet deployment rather than testing. After all, Polygon V3 pools only make up ~5% of the total V3 volume and ~2.5% of the total V3 TVL.
We have many ideas for using protocol revenue, which we will include in a separate discussion surrounding this topic. Having a diverse and powerful treasury is a huge benefit to the protocol in itself and dependent on total revenue received, the optimal use cases may vary.
8 Likes
TL;DR I strongly disagree with this proposal.
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.
I’ll try to be concise my response, but for those that want to better understand my competing (?) view, please read this post about how I think the proposal to turn on the fee switch should come from protocols themselves, not UNI token holders.
Why this is bad economics and poor long-term planning
Thinking about the fees switch in terms of revenues misses the point: the Uniswap smart contracts have no expenses, no payroll, and no COE/board/managing entity. The smart contracts will continue to operate long after all of us are dead. To echo what @Leighton has said:
[Uniswap] is an autonomous piece of software, it doesn’t have employees, it can’t go bankrupt, it doesn’t have revenue and expenses. Protocols are a revolutionary new entity type and we need to think of them as such.
The protocol does not exactly “need” revenues to operate. Token holders may want a slice of the pie, but any proposal that enact a return of the collected fees to $UNI token holders would unequivocally make the $UNI token a security – it is easies to make the argument that the $UNI token satisfies the Howey test prongs 3+4: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, or (4) to be derived from the efforts of others.
Espousing a securities role for the $UNI token, the largest DeFi protocol, would certainly create a precedent --and I’m OK if that’s the route the UniswapDAO wants to take-- but it would also create a huge target on the back of the UniswapDAO in the eyes of the sεc and other regulatory agencies.
Answer to Key questions
Thinking in terms of public goods management, the question UniswapDAO voters need to ask themselves is: how is that fee switch proposal contributing to the sustainable growth of the Uniswap protocol (and not of the $UNI token)?
I don’t really grasp how decreasing the revenues for liquidity providers on all* Uniswap v3 pool grows the protocol. LPs can, and definitely will, move to a different fork of Uni v3 if they’re unhappy.
My answers to @GFXlabs’ questions:
- Do you agree Uniswap does not need to offer substantial fee rebates to liquidity providers?
- Not at all. CEXs and DEXs are two completely different economies. Comparing maker-taker fees on CEXs to Uniswap is like comparing the cost of a stamp to the cost of sending an email (ie. look, it costs 0.5$ to send a letter, email should at least cost 0.1$!).
- Do you agree a one-fifth fee tier is the appropriate starting point for a protocol fee?
- I reject the premise that the UniswapDAO should be turning on the fee switch for all* Uniswap v3 pools.
- Do you agree a new system for fee management is a good approach to carrying out the necessary maintenance surrounding the fee switch?
- No. I don’t think we should be compromising on security by implementing a new on-chain system to execute DAO operations. Having to vote every day and potentially spend 30M gas for doing so should not be seen as an “inefficient process for the protocol to upkeep”. It’s a feature not a bug.
- Do you agree implementing the system on Polygon is a good first step?
- No. A good first step would be The Uniswap DAO turning on the fee switch for the ETH-UNI-30bps pool. In fact, all protocols should be requesting to turn on the fee switch on their own token pools. Let protocols XYZ figure out the tax+securities implications for their own token, and let the Uniswap DAO be the credibly neutral overseer of that process.
- What token do you think the DAO should trade fee income for to be held in the protocol treasury?
- I am against the view that the fee switch revenue should touch the treasury in any way. We must first figure out how to handle the tax/securities implications of capture protocol fees, and be ready to jump through Gary’s hoops if the UniswapDAO chooses to make the $UNI token closer to a security.
Conclusion
I firmly believe that the proposal to turn on the fee switch for all* Uniswap v3 pools as described by @GFXlabs should not be enacted.
The Uniswap protocol, as a public good, should prioritize sustainable growth and the overall health of the ecosystem. This involves ensuring liquidity providers are adequately incentivized and maintaining the neutral status of the Uniswap DAO. While revenue generation may seem attractive, it could potentially turn the $UNI token into a security and attract unwanted regulatory attention.
The decisions we make today are shaping the future of Uniswap. It is crucial that we think critically about the long-term implications of any vote, and ensure that they align with the core principles of Uniswap: decentralization, openness, and neutrality.
2 Likes
Love you Guil but your post reminds me of this video:
2 Likes
The protocol does need revenue to have sustainable operations. We like funding ecosystem developments and public goods through the UF. The DAO also needs to continue to pay service providers such as labs to keep iterating and making sure our tech stays competitive.
According to who? I am not a lawyer but a security in the US must have an “expectation of profits from the efforts of a promoter or 3rd party” and I don’t see how UNI unequivocally fulfills that requirement (not a lawyer). Additionally, there is zero indication of that use for revenue in this proposal, making it irrelevant to the discussion around testing the fee switch and seeing if it can be deployed without losing marketshare (what this proposal does cover).
That’s why we are testing it on Polygon which makes up ~5% of total volume. If LPs leave, we will have concluded a successful experiment and head back to the drawing boards with only a slight hiccup to the overall success of Uniswap. Growing Uni as a whole is about bringing more user adoption globally. There are many uses for the revenue that could grow the protocol with this in mind.
7 Likes
Hi Uniswap Governance 
,
“1. Do you agree that Uniswap does not need to offer substantial fee rebates to liquidity providers?”
Uniswap has established itself as a trusted brand. For liquidity providers who commit for longer durations and offer a wide tick range, it provides a sense of security. While reducing fees for LPs may lead to some migration, it could also result in increased fees for those who remain.
“2. Do you agree that a one-fifth fee tier is an appropriate starting point for a protocol fee?”
Starting with a one-fifth fee tier seems reasonable. It strikes a balance by not being excessively high while still being meaningful enough to have an impact.
“3. Do you agree that a new system for fee management is a good approach to carrying out the necessary maintenance surrounding the fee switch?”
The proposed approach makes sense as it lays the foundation for capturing fees, which is an essential first step towards determining how those fees could be utilized.
“4. Do you agree that implementing the system on Polygon is a good first step?”
Polygon has demonstrated its reliability and maturity over time, making it a suitable platform for testing the fee switch and observing the loyalty of existing LPs. Additionally, with Polygon’s growing partnerships with traditional corporations, there may be additional opportunities to explore the utilization of collected fees to users.
“5. What token do you think the DAO should trade fee income for to be held in the protocol treasury?”
It would be advisable for the DAO to consider holding fee income in tokens such as USDC, ETH, and UNI. USDC provides stability during volatile periods, while ETH showcases alignment with the development of the Ethereum protocol and the potential for staking. UNI tokens can be utilized for buybacks, creating a solid foundation for the development of the Uniswap ecosystem, as well as supporting the community and builders.
Regarding @guil-lambert’s proposal for the fee switch:
The proposal primarily focuses on the potential use case of fees for liquidity management and falls short in terms of establishing the necessary infrastructure for the protocol treasury.
A fee switch that functions as a pass-through exposes Uniswap to external rent-seeking behavior and may solidify the position of early adopters of specific fee utilization, such as liquidity management protocols or on-chain options companies.
In response to the question of how the fee switch proposal contributes to the sustainable growth of the Uniswap protocol (rather than solely benefiting the $UNI token), it’s important to note that revenue generated through fees enables Uniswap to serve the public good. UNI represents a unit of public good. Without fee income, the fees would solely benefit profit-motivated LPs. The same applies to liquidity management protocols or other protocols competing for a share of the fees, as they are primarily focused on their own token holders and user base.
While I am not a lawyer, passing the responsibility of the fee switch tax to other decentralized protocols would introduce additional complexity. Those protocols would also face uncertainties regarding legality, jurisdiction, and potential conflicts with regulations, especially if they are located outside of the United States. This approach could exclude protocols that are unwilling to navigate such risks, further entrenching the fee switch structure. Regulatory opacity should not hold back the DAO from being a leader in the space.
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.
Conclusion:
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.
4 Likes
Had a thought, will there need to be a new proposal for new pools that fall under the above criteria after this proposal is deployed, or would any new pool that meets the above criteria automatically have 1/5 of its pool fees diverted?
Excellent proposal and discussion so far.
But the DAO might just not have enough data to make a good decision at the moment, even leaving the legal issues and conceptual differences aside. How about running some kind of randomized controlled trials (RCT)?
By just enabling the fee on all active pools within an ecosystem the DAO is not going to get a causal relationship between the action (fee switch) and the results (reaction of LPs) because there might other factors (market sentiment, appearance of new v3 clones) that also make the LPs to leave Uniswap. Inter-ecosystem comparison can be done, but the number of ecosystems is probably too small to get meaningful results.
Here’s a sketch of a potentially better study. The DAO could randomly select some pools, but not others for the fee switch. Let’s say there are actively traded coins A, B, C, D. A coinflip selects B and D. The next step is that all ETH and USDC pairs for B and D have the fee switch enabled; then the behavior of B and D LPs can be observed and statistically compared with A and C LP behavior. With a sufficient number of samples, and the assumption of rational LPs, the results should be pretty informative both about the size of the effect and the likelihood that the LPs reacted specifically to the fee switch, rather than something else in the market.
The experimental design needs to be considered in detail, and involve some statisticians, but in general running a RCT is the gold standard of establishing causality.
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Unfortunately, each new pool needs to have a fee set. Fortunately, our design can separate the process of setting a fee such that this isn’t a managerial pain.
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I thought that someday Uniswap would add an option to pay fees with UNI and receive a discount on swap.
GFX has posted three polls. We invite all voters to express their opinions by voting on these three polls. Once the polls are closed, we’ll use the polling data to propose a formal Temperature Check.
Polls
Poll 1: Fee options for V3
Poll 2: Initial deployment chain
Poll 3: Asset to be held in the treasury
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