You make good points, but I believe a good dividend scheme would also put a floor on the value of UNI. Moreover, after the first four years, inflation will remain stable at 2% per year. If the protocol (i.e.: the fees and by extension the dividends) grow by more than 2% a year, which IMO is probably a low estimate given the growth of DeFi in general, then the intrinsic growth of UNI will outpace inflation. In other words, burning is not the only way to increase value. The new tokens (from inflation) mostly to the community treasury, and if we use that new wealth to grow the protocol, then the value will not be negatively affected.
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However, I´d say that the burn brings value to the table, but also the ETH brings value to the table, the only difference is the network usage. We avoid congesting the network with fees.if we vote in for the burn. We can always switch it to eth redistribution after the ETH 2.0 rolls out. The reason why the ETH redistribution would not put a floor under the UNI token as of now are the enormous gas fees which could totally paralyse the network if large amounts get moved everyday.
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thats true, maybe thats why they implemented the 6 months time lock for the fee switch.
Uniswap v3, optimistic rollups incoming (?)
Well the way I was imagining it was that the fees would accumulate, you would not need to collect them every time they are distributed. You could wait to claim it until you need it or the gas price is low enough. Those who rush to collect would be penalized by the high gas price. But youâre right that even if a fraction of UNI holders are impatient and collect immediately, then that would paralyze the network (just like when the UNI airdrop happened).
One solution could be to have a staking mechanism, where you accumulate dividends only for the time when you stake your UNI (kind of like YFI dividends) and the dividends are transferred to you only when you unstake. This would solve the gas problem and would also incentivize people to hold their UNI longer.
This is not perfect however, because if you want to use your dividends to do something else but keep receiving dividends, you would have to unstake and restake (although this could be done atomically with a smart contract).
The point is that there are a lot of options when it comes to implementing dividend distribution (the EVM being Turing complete and all) and Iâm sure we can find a middle ground that doesnât involve burning. If you want a good example of why burning might not be a good idea, take a look at CREAM (they burned ~67% of the supply on Sep. 19 and the token now trades even lower than before).
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Your argument does make sense in general, but I think it gets too complex in the end. We have to come up with a simple, yet elegant solution and I do not think the burn is the optimal decision overall, but it fits best given the situation. If it were not for the gas fees and etc⌠ETH distribution is the optimal choice. One can try to work a solution around it, but it will never be frictionless.
I do not think CREAM represents a good example as this is a case of an extreme burn. UNI would have more of a steady buy and burn which could have a completely different ramifications I´d say.
Having said all of this, I do understand why people are against the burn. Personally, in an ideal world without gas fees, I would also be against it, but it is what it is.
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@wintermute
How about the elegant solution proposed here:
TL;DR: Buybacks get in the way of issuance and the ability to re-invest in the protocol. Excellent way to redistribute value to shareholders, but poor for the protocol long-term.
Instead of burning, use an imbalanced Balancer-style liquidity pool, stacked to be bullish on your platform token. eg, weighted 90/10 UNI/ETH.
Deposit profits in ETH; this drives the price up just like a burn model.
Bonus of making UNI/ETH a more liquid pair without having to issue additional UNI, and of compounding the treasury via the pool fees.
Obviously, Uniswap only currently allows for 50/50 pools on its own platform, and it wouldnât really do to house our treasury on Balancer⌠but this looks like the simple and elegant solution weâre looking for.
Thoughts?
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That is a very interesting solution!
On the surface it seems like that could be a viable approach. However, depending on the wider market, it might not guarantee an increase in price in the short term.
Letâs look at a toy example:
- 1 ETH = 400$
- 1 UNI = 4$
- UNI/ETH 90/10 Uniswap Treasury Pool: 900 UNIs (3600$) and 1 ETH (400$).
Imagine Uniswap accrues 0.1 ETH in fees, which it adds to the treasury pool. Now the pool has 900 UNIs and 1.1 ETH, which, assuming ETHâs value has not changed, would make each UNI worth 4.4$ (to preserve the 90/10 value ratio).
Now if this Treasury Pool was the only place where UNI was traded, then indeed the market price of UNI would have risen (since the Treasury Pool would be the only market maker). However, in practice, UNI would still be traded on other exchanges at the old price (i.e.: 4$), which means that there are arbitrage opportunities (e.g.: buying from other exchanges at 4$ and selling through the Treasury Pool at 4.4$) which would bring the price quoted by the Treasury Pool back down to where it was before. So in the short term, people might just arbitrage the Treasury Pool and the tokenâs value would not necessarily increase.
In the long term, on the other hand, if the protocol continuously adds the ETH fees to the Treasury Pool, then the arbitrageurs will end up raising the price on other exchanges to bring it on-par with the price quoted by the Treasury Pool (since arbitrageur would be continuously buying UNI from elsewhere and selling it to the Treasury Pool, raising the price of UNI market-wide)!
So yeah I can see how over the long term this approach would gradually raise the price of UNI without the disadvantage of burning. Tbh I have not spent too much time thinking about this so donât take my analysis as gospel. A more thorough economical analysis would be needed to really understand the side effects of this approach.
TL;DR: Long term, it could work. Short term, unsure.
Thanks for gaming that out everyoneâ
I think your short term/long term dichotomy is insufficient. Obviously, it all comes down to the liquidity. If the âtreasury poolâ is sufficiently deep, the arbitrage will only move the price up. It sounds like what youâre saying is that the pool wonât have the liquidity fast enough to be the market anchor for price.
I donât think we have to worry about the pool being subject to short term arbitrage, but I could be wrong.
Thereâs a couple things we can do to keep the treasury pool highly liquid until the treasury itself is large enough to achieve parity with other market makers.
A.) The existing UNI/ETH pool is pretty liquid already with only fee rewards as an incentive
B.) we can incentivize LPs to the treasury pool in and of themselves with additional UNI, scaling inversely with treasury balance
C.) Could also set it up so that the pool needs to capitalize to a certain threshold of the market before going live. This would also incentivize UNI holders to deposit to bootstrap the autonomous buyback machine.
Frankly, I hope there are some folks more educated than myself who can chime in on this idea with the type of analysis youâre describing.
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Yeah youâre right that the short term/long term dichotomy was perhaps not the best way to put it. As you said, itâs more about the liquidity and how deep the Treasury Pool would be vs the rest of the cryptomarket.
In the article you originally shared, the author recommends restricting the ability to add/remove liquidity from the Treasury Pool to the protocol/governance (i.e.: regular users would not be able to add/remove liquidity). I donât know to what extent this is desirable (maybe it prevents users from gaming the system?), and if it is a must-have, how that would work with the reward schemes you describe in B) and C)? Iâm being a bit nit-picky here, but thatâs because I think this is an interesting idea that deserves thorough discussion.
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How would I implement the fee to save gas:
- the fees go to a contract that can hold whatever ERC-20 complying token
- the contract has public functions that make the contract swap any token [that is not WETH or UNI] to WETH.
- it also has a one-way public function that allows to swap WETH to UNI.
- itâs either governable by a vote in Uniswap (so that we can decide whatever we want to do with the tokens), or the UNI simply stays there. optionally, a function for burning UNI could be implemented.
Rationale for different steps:
- it holds tokens
- sells any token to WETH. because itâs public, anyone can go and call the functions so that they donât have to be called automatically, so anyone has the option of using their own gas.
- uses stacked WETH to get UNI, essentially pumping UNI/ETH.
- idea for this is that when V3 launches we can move the bot to work in V3 instead
Why I kinda discourage burning the freshly bought UNI: If in the future gas costs became negligible, we could implement some kind of automatic 0.05% fee payment directly to UNI holders, and the burnt UNI at 0x00âŚ00 would claim and burn quite a bit of those fees. So, if they stood in the contract, we could later govern it to distribute it proportionally between UNI holders.
I really think in addition to rewarding uni holders in the future a lock should be implemented as well
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I like the idea of buying and distributing. Passive income is an incredibly attractive feature. Not sure if staking is the only reasonable way to accomplish this task, but maybe rewards can accumulate and be distributed to wallets during certain contract interactions. Maybe I donât know what Iâm talking about.
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My only issue with burning tokens is that, beyond what people already pointed out with large holders gaining more voting power, it doesnât provide any additional incentive for anyone else to buy the token if theyâre not interested in voting. This further discourages people with smaller wallets from trying to participate since they (rightly) assume itâs impossible to wield any serious voting power. If there were another incentive to buy and hold, people might show up for the APY and end up voting anyway.
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The voting power doesnât change for anyone with token burn.
(example if token supply reduce 50%, the guy with previous 5% vote power will have 10%, and guy with 0.01% will have 0.02% voting power, everyone doubles)
The similar thing exist in stock market when company buy back shares.
If you buy back tokens, you are reducing supply. When buy back demand outstrip sellers, price will start to go up. Thatâs good incentive to invest in something that appreciate in value.
Statistic show that only 25.7% shareholders in US public companies vote on annual meetings.
Why do you think crypto will be different?
Most people invest to make money not to govern companies or projects.
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Sorry if this has been discussed, but why not pass the fees along as a sort of dividend in the form of stablecoins? Buy and burn is great at low prices like this, but that model is not always efficient if youâre buying back at a high valuation.
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I want to chime in here as Uniswap is one of the greatest projects to come along in a while. And the last thing Iâd like to see is another token burn model. Why? Because token burn models donât work.
For a healthy economic system you need velocity of tokens/money. Burn creates a hoarding mentality. Hoarding on the surface sounds great since it boosts scarcity, but the long-term effects dont result in equal amount of price capture.
Why do you think the largest projects have so many tokens in circulation? Velocity, liquidity. Donât burn this away and make this token useless. Instead use it as a yield generating instrument. Uniswap is a DAO. The code determines the payout, not a central entity. Put the SECâs feet to the fire on this one. Make it an actual payout, set precedent, create value. Donât bend.
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âmost people invest to make money not to govern companies or project.â
This sums it up. Give a reason for UNI holders to buy the token, which is the yield/fee. Its the reason people buy blue chip dividend earning companies in the stock market. They donât care so much about share holder buybacks⌠they want income. Give UNI holders income, break the current token mold.
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A dividend is economically interchangeable to a burn, but a burn is more gas-efficient, and in many jurisdictions more tax-efficient.
Berkshire Hathaway , led by the most successful investor Warren Buffett doesnât pay dividend, he buys back shares.
If you need income, you simple sell 1% or 2% of your shares every year, itâs better than dividend and probably tax efficient for many people.
Below is a chart of Bershire Hathaway (BRK.A) shares growing from 1.146mn to 1.653mn in a twenty year period. Share buybacks rarely happened.
Also, Berkshire Hathaway in 2018 collected $3.8 billion in dividends⌠Buffett loves dividends more than anybody else. But the way he operates his company is unique in that he takes these dividends and buys equity in other companies.
This hints at what heâs truly after⌠diversification of various companies with dividends.
For the record, BRK.B did not witness any shareholder buybacks.
So how does this apply to Uniswap? Diversify through the ecosystem. If thereâs a way for fees to be generated from the various markets, it should be deposited in a fund based on the diversification line of thinking.
This means as smaller cap coins grow, theyâll outperform other tokens. Additionally, as trading volume grows UNI holders will slowly accumulate a larger share of that token. Which somewhat is a self selecting mechanism for the strongest coins.
Thatâs my proposal for what Uniswap should do for the UNI switch⌠Pool together the fees earned on the platform in the token the fee is earned from. Then UNI tokens earn a token that represents their share of this pool over time. This way anybody can redeem none, some, or all their share at any given time.
Feel free anybody to post a formal proposal using this line of thinking. I donât know how to go about doing such a thing.
(Turns out I canât post the BRK shares outstanding chart⌠not allowed to post media items⌠so youâll need to take my word for it unfortunately.)