Research on the Fee Switch

Dear Uniswap community,

I’d like to share with you our recent research around the Uniswap Fee Switch, i.e. the question whether a fraction of trading fees should go to the protocol and UNI token holders.

Some takeaways:

  • In a perfectly efficient market, the protocol with the lowest take rate (fraction of fees that goes to the protocol) attracts all liquidity. This is an argument against flipping the fee switch.
  • In a market where a protocol like Uniswap has a “moat” (due to its high profile and brand), the result is different: Assume Uniswap has a fraction of loyal (“sticky”) trade volume, i.e. some users will always trade on Uniswap regardless of price, e.g. because they don’t use or check other DEXs. According to our model, this competitive advantage makes it possible for Uniswap to sustainably introduce a non-zero take rate even when competing with zero take rate competitors. The model also gives some direction on how high to optimally set the take rate.

(Note that, as with every model, simplifying assumptions are made in the paper.)

To be clear, this is not a recommendation for or against flipping the fee switch. Instead, we see this as a first step to providing a basis for making an informed decision whether and how to direct trading fees to the protocol.
We hope our research can be helpful to the Uniswap community. If you have any feedback or suggestions for future research, feel free to reach out, also on Twitter https://twitter.com/robin_ethz.

3 Likes

I agree with you. Facts have proved that if you burn money through web2, you may not be able to occupy the Web3 market. There have been too many cases proving that an excellent token economy model can make the project better developed ~

Yes, indeed. There has to exist a sustainable tokenomic model that generates organic buy pressure for UNI at some point. Otherwise it’ll keep tanking and the treasury won’t be worth anything to further develop the project, which will hurt LPs in the end because liquidity will move to other (more innovative) protocols that can still pay for the cost of development.