We (Michigan Blockchain) believe that there certainly needs to be progress made on the fee-switch front, as operationally, this process will take some time to fully complete, from proposal discussions & voting to actual technical implementation–and we believe that GFX is a highly qualified team to spearhead this initiative due to their track record in Uniswap governance.
Summary of our decision:
- Fee switch should be activated, and collected fees should be directed to the treasury
- Fees should be converted to USDC for hedging treasury’s downside risk due to $UNI overexposure (an understatement)
- More conversations should be had regarding long-term treasury management (separate proposal for this)
- Polygon or Arbitrum seem like fitting ecosystems to start fee switch implementation
- All pools with sufficient volume may be activated, but the ⅕ fee tier is aggressive and should be lowered
- Most of the operations here are sound, but the biggest bottleneck is the legal clarity, which, in our eyes, cannot be a separate discussion as the implementation of the fee switch hinges on the legal/tax. Since GFX provides technical expertise, we believe a simultaneous legal discussion needs to be fleshed out in parallel with this proposal. The main consideration here will be regarding income tax and not securities law since, according to this proposal, the DAO alone will have income, but other stakeholders like $UNI holders won’t (yet) receive dividends. A justifiable compromise, however, may be paying any income tax from the USDC that the treasury holds upon the DAO’s approval.
Treating Uniswap as a Business
An important consideration we need to think on is the mismatch between protocol value creation vs protocol value accrual. Uniswap has been an extremely valuable asset to the industry, available on multiple chains, driving billions of dollars of volume daily. As far as PMF goes, Uniswap has it–and in compensation, the protocol should earn a due portion of the fees. No revenue for the protocol effectively makes Uniswap an unprofitable business, and as delegates, we ideally like to view the protocol as a self-sustaining business. This is one of the reasons why we’ve been such large proponents of multi-chain expansion, which is akin to evolving a domestic corporation into a multinational enterprise.
Of course, the current treasury has an AUM of ~$2B–which can be heavily discounted since 99.9% of it is in $UNI tokens–so the protocol is overall financially sound. But a strong balance sheet does not warrant an absent cash flow stream. Therefore, we are in favor of generally implementing the fee switch. The caveat is that treasury management should become a more important focus for the DAO (the specificities are out of this proposal’s scope). So what should we do with the fees earned from the fee switch? We should begin diversifying the treasury by converting the earned yield into a mixed pool of stablecoins to hedge the treasury’s downside. For simplicity, we can just start by selling the collected fees for USDC. Evidently, the treasury has lost 87% of its value over the past 2 years, so this seems like a logical step forward while a more robust treasury management plan is fleshed out.
Ecosystem Selection
As for which ecosystem’s fees should be turned on, Polygon seems like a good choice. A primary concern about the fee switch is that Uniswap will lose market share in the ecosystems that enact the fee switch as it becomes less favorable for LPs (makers). But YTD, v3’s volume-based market share on Polygon has straddled between 70% - 85%, generally increasing over time (this data is a month behind). Although Quickswap on Polygon still drives large volume, like today, it had $225M of volume vs Uniswap at $370M. Arbitrum is another good contender. Optimism is less favorable than Polygon and Arb since Velodrome still has sizable market share in the OP market. Overall, we’re good to start with either Polygon or Arbitrum, with a bias towards Polygon.
Source
Legal Clarity is the Bottleneck
That being said, our main concern remains the legal side. How will the protocol go about paying income tax? We realize that this question is outside the scope of the proposal–but doesn’t seem like a viable direction to adopt since the rest of the proposal seems to hinge on the regulatory clarity behind enacting the fee switch. And since that is one of the most prominent bottlenecks, we believe that legal considerations must be taken into account in parallel with a technical/operational proposal like this one.