Thank you, Austin, for bringing this proposal to the DAO. Historically, the organization has been concerned about fragmenting liquidity; however, as you pointed out, those concerns aren’t as applicable, with Base’s gas costs being significantly lower than Ethereum’s. Also, with v4 on the horizon, LPs will soon have total optionality to choose/program the fees to their desire. While the near-jerk reaction of some may be to postpone this initiative, this proposal will be a good opportunity to test how LPs will manage that flexibility with v4 in a low-risk manner.
We do have two concerns:
When speaking about market share, we should define it as total fees generated because that is how the protocol will generate future revenue. Volume is a secondary KPI for the DAO.
Is this a short-term problem? Once Aerodrome ceases its incentives, will the Uniswap DAO naturally reclaim the lost market share as LPs move back into higher fee pools?
One question that would be good to address before an onchain vote would be selecting the tick spacing for each of these fee tiers. Are you planning on sticking with what is typically done or trying something new? Perhaps there is merit to doing something tighter on Base because of the low gas costs.
The following reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking, and ideation of the two.
We’re voting FOR this proposal.
Although we are not experts in the realm this proposal lies in and do not have strong opinions about the potential impact of activating smaller fee tiers, we’ve read the proposal and the discussion surrounding it, and we believe it’s worth experimenting with.
One thing we’d like to note is that the DAO should monitor the market share difference over the next few months for any unforeseen adverse effects and take action if needed.
I think the experiment is worth running, so long as we analyze the results. L2s are different enough that the optimal fee tier could be a lower one, and the effects of fragmented liquidity don’t seem to be as bad in an L2 environment.
Aerodrome’s TVL is probably most likely the result of the incentive program though.
I agree that fee-weighted volume (or just fees in general) is likely a better metric than pure volume. This should be the KPI for this proposal.
This specific problem may be a short-term, but ultimately I believe this proposal is aimed at giving more flexibility to LPs. This is why I am against giving token incentives to these new pools.
On your comment about the tick-spacings, I was going to stick with the 2x fee-tier that has traditionally been done. While I agree with you that smaller tick-spacings could make sense on cheaper chains, there is little hard empirical evidence of the tradeoffs of tick-spacings. I have no strong opinion however and would take feedback here.
Regarding the second point, we agree that token incentives are not a solution. Our point was that this proposal might be premature since Aerodrome incentivizes liquidity. Our instinct is that AERO emissions are driving the migration in liquidity rather than LPs preferring lower fee tiers. For example, we deposited some test funds four days ago, and if we annualize the AERO rewards it comes out to 40% return. Of course, the range of the position and the volatility of the market play a role in receiving emissions, so that estimate might not be ideal, but at least it gives a sense of what is occurring. Perhaps more research could determine how many AERO tokens are going to the previous LPs on Uniswap.
If the proposal’s goal is to provide LPs with more flexibility, then we should reset expectations that Uniswap will regain meaningful market share on Base while AERO emissions are running. Further, if the goal is to provide flexibility to LPs, we should probably focus on how v4’s roll-out can support them rather than modify v3.
I’m a voter with Blockchain at Berkeley. All thoughts are my own and not representative of the organization as a whole.
Market share, revenue capture, and price stability are all important for this pool in particular. So how can Uniswap compete with Aerodrome? Aerodrome lowers fees and uses Aero tokens as additional incentive. In this proposal, the community discusses the ramifications of allowing more competitive fee tiers through fractionalization of the pool.
Since Base is itself still a relatively nascent market, I believe this experiment would provide valuable data to determine the viability of lowering fee tiers on other markets as well, as well as the stickiness of DeFi users on Base. As well, Base does not provide an oversized proportion of Uniswap’s volume or revenue, so the risk of any price instability leading to decreased usage is palatable. However, the community should treat this as an experiment and just that; this is not the beginning of a race to the bottom against Aerodrome.
Through this proposal, the community has also discussed the differences in trade sizes between Aerodrome and Uni on Base, the greater number of stakeholders for Uni (like oracles which use Uni), and arbitrage loss. These are all important points to further discuss as this experiment goes on.
Blockchain at Berkeley voted yes on this proposal.
As in the Temp Check, we vote in favor of this online proposal in the understanding that this change will make Uniswap more competitive, hopefully capturing part of Aerodrome’s market cap and adapting to new market conditions that may occur in the future, waiting for an expected reaction of this DEX to the move that Uniswap will make.
We expect the proponent to conduct a follow-up analysis and present conclusions on the impact of the changes introduced to confirm that the proposed hypothesis has been validated.
Aerodrome is operating at a deficit. It was recently reported that Aerodrome has spent $2.65 on incentives for every dollar in revenue generated. Curious to see how their market share fares when rewards dry up.
Gauntlet intends to Abstain from this vote per our previous feedback and similar comments from @Doo_StableLab and @GFXlabs. While we see potential benefits, there isn’t a clear path toward success, and it doesn’t appear that additional meaningful research has been conducted to support the thesis that there is a significant upside, as requested following the Snapshot vote.
While lowering fee tiers on Base may provide a short-term victory in attracting volume, a few factors, including the sustainability of the mercenary incentivization of ETH/USDC liquidity on Aerodrome, the potential fragmentation of liquidity across multiple Uniswap fee-tier pools, and Aerodrome’s ability to undercut or match Uniswap fees to win-back volume quickly, limit this experiment’s potential to generate meaningful revenue in both the short and long-term.
We are not outright against the concept, but as expressed in our Snapshot comments, the proposal lacks research to fully endorse the activation of 2/3/4 bps fee tiers for the ETH/USDC pool.
If most volume is being routed through alternative frontends due to Aerodrome’s lower fees, and more competition arises to match those fees, then Aerodrome’s bribe costs will lead to significantly lower trading fee accrual in the long term, even if they continue to undercut the true market fee dynamics.
An observation on potential conflicts of interest:
In DAO proposals involving competitive movements, it is essential to disclose potential conflicts of interest. Some paid delegates work with other DAOs and may hold tokens in those DAOs, which could influence their voting behavior. In such cases, declaring the conflict and abstaining from voting on those grounds is appropriate.
For example, Gauntlet “works closely” with Aerodrome on strategies related to “migration strategy.”
The following reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking, and ideation of the two.
Gauntlet communicated its position following the temperature check, highlighting outstanding questions regarding the proposal and requesting feedback around the second and third-order effects of introducing multiple lower fee-tier pools.
Gauntlet is not outright against the proposal. At this time, Gauntlet has opted not to actively vote for it, with outstanding questions around its effects on liquidity providers and evidence that this will result in a favorable market position for Uniswap.
The proposal focuses on vampiring volume from aggregators with a focus on lower trading fees. We’re most interested in research on how liquidity is affected if Aerodrome cuts fees in response to Uniswap’s lower fee-tier pools. For example, in a scenario where Aerodrome has undercut Uniswap’s most competitive fee-tier pool, Uniswap may find itself with a similar market share; only Uniswap LPs are making less revenue because they’re in a lower fee tier. Will Aerodrome pools become more attractive at lower fee-tiers than Uniswap because AERO incentives account for a larger percentage of LP revenue?
As for the Conflict of Interest claims Gauntlet has been working with a wide range of Base ecosystem projects, including Uniswap, to grow USDC TVL on Base. Gauntlet is not compensated by Aerodrome.
One of my main grievances with the delegate reward initiative is that delegates are being paid simply to vote, rather than to provide insightful data on proposals. Gauntlet, as a recipient of monthly UNI rewards and a specialist in the type of data analytics required to address these questions, seems well-positioned to answer its own questions regarding the second- and third-order effects of this proposal. Is there a reason Gauntlet cannot provide these answers?
I assume this is due to the hypothetical nature of the questions, and that passing the proposal is the only way to find the true answers?
As for conflicts of interest, this is my second major concern with the reward program. Many rewarded delegates are paid monthly by several different DAOs, creating conflicting interests regarding the competitiveness of those DAOs. Additionally, much of the voting power of these delegates is often delegated from one or two third-party organizations. It is important for all rewarded delegates to disclose potential conflicts of interest to eliminate scrutiny, ensure transparency and diligence, and address potential cross-pollination. Thank you for clarifying that Gauntlet has no financial vested interest in Aerodrome, despite past partnership.
I agree with the view that doing the experiment itself is part of the research, so I voted for the proposal. The results will facilitate modeling the various “what if” scenarios in the future, for this and similar situations. We have a research question, we have some hypothesis, let’s see how it plays out.
