Finally fee switch :D, I’ve been waiting for years!
I have a technical question: will it be possible to receive Uni fees even if the token is being used as collateral on Compound or other similar platforms? Thank you.
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has the snapshot for the voting started?
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Nope - if the proposal passes and subsequent proposals pass which turn on fees, you’ll need to delegate and stake your UNI in the new contract described in this post.
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will the snapshot start today?
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This seems to be a positive step forward. However, in my opinion, it doesn’t target governance activation much as soon as it is enough to restake tokens and remain passive to receive further rewards. As for me, rewards should be distributed for real & measurable contributions, such as participation in on-chain voting, proposals creation and so on. Indeed, DAOs with well-aligned incentives will potentially dilute DAOs without any clear value. However, we should reward only active collaborators for activating governance and enhancing thoughtful contributions. Same if we aim to dilute passive delegates and enhance active contributors. Holders who are delegating their tokens will need to monitor their delegates to make sure they are not losing potential rewards
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The transaction flows are described here. Generally, the Uniswap timelock is the admin of the V3FactoryOwner and can call the privileged functions on that contract that get passed through to the V3Factory.
If this proposal passes, fees could be turned on in individual pools by governance vote. Gauntlet has drafted a proposal that outlines a potential fee roll out strategy that would occur over a series of votes over several months. They’re planning to post that proposal next week.
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Thanks @eek637 for bringing up this proposal!
Stanford Blockchain Club is excited to be supporting this proposal, one which we believe will cement Uniswap’s position as a leading exemplar for mature decentralized governance by using protocol fees to incentivize healthy delegation and governance. While this proposal excellent overall, there are a few areas and implications that this proposal brings, that we’d like to work with you and fellow delegates to further refine, possibly in future proposals.
A) Principal-Agent Problem between LPs and UNI holders and delegates
Uniswap’s long-term success relies on having deep, liquid markets for a large varieties. Liquidity Providers (LPs) thus are vital to Uniswap’s success as a protocol. One question that emerges is a principal-agent problem of how to align these LPs with UNI holders and delegates. Others have already mentioned how protocol fees eat into the already thin margins for LPs, which may disincentivize them from providing more liquidity.
We believe the overall solution lies in coordinating incentives between UNI holders/delegates and LPs, possibly through looking at the following directions:
- In the short run, using UNI as a means to reward LP positions, as suggested and passed in Proposal 59 (”Uniswap Revitalization and Growth Proposal”), which Stanford Blockchain is proud to support
- In the medium run, instead of rewarding UNI delegators on a purely pro rata basis, take into account if delegators hold LP positions. For example, set aside a certain X% of the delegator rewards to be distributed as “bonuses” based upon the size of delegators’ LP positions. This would require an additional variable X to be added to the fee distribution logic. The idea is to use this as a means to fairly compensate the loss of revenue for LPs from the fee switch.
- In the long run, consider bicameralism (possibly just as veto rights) as a potential way to allow LPs to retain a “say” in the protocol and keep voting delegates in check.
B) Defining Successful Votes
“Specifically, we believe UNI token holders will be incentivized to choose delegates whose votes and engagement with the protocol will lead to the Protocol’s growth and success.”
One question with this is how “successful votes” can be accurately discerned and measured, especially since it is hard to quantitative attribute value creation to a specific proposal. There are several proxy metrics available, such as UNI token price, participation rates, activity on forums etc. but these all contain major flaws.
Nonetheless, we believe that being able to gauge the quality of contribution for each voting delegate is important for delegators, reducing informational asymmetry and allowing for the success of the whole ecosystem. Having such a metric could also allow future targeted incentives to reward high-quality delegates. We would love to work with UF and other fellow delegates to discuss how this can be successfully implemented.
C) Measuring Governance Decentralization Over Time
We believe that going forward, it would be useful to keep track of Uniswap governance’s overall decentralization over time, establishing a bellweather as to if the protocol’s governance is heading in a healthy direction. One potential idea to this effect would be to implement entropy-based metrics, such as adapting Austgen et al.’s (2023) Voting Block Entropy mechanism to measure decentralization of the DAO over time and assess future directions. However, given that this is another open design space, this is something that we would need to work with UF and other fellow delegates to identify how this can be effective, and how it can be used as a tool to provide information to voting delegates.
Overall, we’re really excited to be supporting this proposal, and can’t wait to see where we go from here 
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We’re very excited to see this proposal and discussion; it represents a significant step forward in enhancing the governance mechanisms of the Uniswap protocol.
We have already seen several community and socially-driven initiatives to spur governance activity, but this proposal furthers those initiatives at a structural level. We agree that tying staking rewards to delegation will revitalize the delegate pool and encourage more communities to experiment with positive and negative financial incentive mechanisms to bolster their governance health.
Although we have settled on support for this proposal, we want to share some of our initial questions below:
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1) Immutability of the Contracts
We had some trepidation about making staking mechanisms immutable, as removing the ability to make changes could be detrimental in the face of unforeseen challenges. After discussion, we respect the commitment to trust and safety as a core tenet and understand that more experimentation can be undertaken on future implementations such as V4. We are glad this is still possible because it is crucially necessary. An ideal end state for strong feedback loops in governance would ensure that a delegatee sets the delegation AND those delegates actively participate in governance to receive rewards. In future experiments, this could be accomplished with periodic resets or negative reinforcement (slashing) of staking rewards for those who have staked to inactive delegates. -
2) Effect on Existing Delegate Programs
The delegation initiatives over the past year have promoted a strong body of active delegates. Through conversations with the @eek637 and the Uniswap Foundation, we understand that this proposal does not negate the importance of socially enforceable mechanisms to increase delegate activity, such as incentive programs or delegation races. -
3) Impact of Fees on Liquidity
The eventual introduction of fees could negatively impact liquidity as users migrate to alternatives with less overhead cost. We have confidence in the modelling done by @gauntlet that will ensure the protocol fees will be introduced in a measured and intentional way that does not detrimentally affect the existing liquidity.
We are grateful that the Uniswap Foundation and partners in this initiative have candidly and collaboratively discussed these topics (and more) at their recent GovSwap during ETHDenver. This level of engagement was optional and has helped alleviate our concerns while making the governance process more inclusive.
We look forward to this proposal moving forward as a significant step to ensure that Uniswap remains the liquidity layer.
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Having had the chance to be part of the GovSwap discussions in Denver, we think this proposal has significant potential to scale Uniswap governance and lead it to the next stage of maturity. By linking delegation and staking, we see it being the right first step to help grow Uniswap’s voter participation rate and re-activate stale delegations. Since UNI holders can delegate to themselves, this proposal does not directly lead to any concentration of power in a certain subset of delegates, which is crucial.
Concerns and Mitigations:
We acknowledge that there are a few concerns top of mind, namely the question of turning on the fee switch and the concern posed by @Juanbug around VCs and large UNI holders part of the ‘stale delegation’ cohort not actively using this opportunity to participate in governance.
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With regard to the fee switch, Gauntlet’s findings indicate that losses to TVL and toxic MEV volume may be significant even with a conservative fee switch. However, this is mitigated by the impact on core, non-MEV volume being very minor under all but the most extreme fees. This provides a road forward - nonetheless, it is very important to ensure a method of aligning LP interests here, since they are the lifeblood of Uniswap.
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Regarding the concern around low governance participation, we think a middle ground should be found by allocating fees based upon voter participation. We share the view, that if, for example, a VC delegates to themselves and does not participate in governance, they should not get any yield. It is important for these considerations to be embedded into the fee distribution mechanics to incentivize actual increases in governance participation.
All in all, this proposal is most definitely a step in the right direction and we commend @eek637 and the UF team big time for drafting it.
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Hi all - timing update:
The Code4rena contest finished today, reports will get cleaned up and come back in a week or so. We’ll address any required fixes and push those through another contest.
Timing for the onchain vote is TBD based on that process.
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The below response 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.
The discussion around the fee switch has been going on for a few years and we’re excited to see this proposal being brought forward by Uniswap Foundation. Overall, we’re supportive of the initiative to activate the fee switch and start directing some of the protocol fees to stakers and people who delegate their UNI.
We are aware if the discussion regarding the lack of a setOwner() function which would allow governance to make amendments to the current implementation if needed, as discussed here. We were part of the group discussing this issue during GovHack in Denver and briefly discussed it with @eek637 as well. While we find this discussion important, it does not affect our overall support of the original proposal being voted on here.
We’ll be voting in favor of the proposal during temp-check, but we’d like to see the discussion around the setOwner() function be resolved before going to an on-chain vote.
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As a strong supporter of Uniswap (UNI) and its future success, we support the idea of better alignment of interest between different stakeholders of Uniswap. However, we in particular agree with @kassandra.eth and others, that the liquidity provided by LPs is essential for the success of Uniswap, and that forthcoming decisions need to properly consider the interests of the LPs in order to secure liquidity of Uniswap.
Most LPs have experienced in practice, what can be shown by simulation, that a standalone strategy of systematically providing liquidity on UNI V3 is a losing business proposition, like swimming against the tide. In order to get it to work one must have superb timing skills or unconventional approaches like inside information or market manipulation etc.
TVL on UNI V3 in ETH terms:
https://defillama.com/protocol/uniswap-v3?denomination=ETH
TL;DR: The negative development of TVL in ETH terms can be assumed to be a result of the poor financial prospects of providing liquidity on UNI V3. Further slashing the topline of LPs, which an introduced protocol fee does, could accelerate the reduction in liquidity. In the worst-case scenario, Uniswap could reach a negative “tipping point” where a majority of liquidity evaporates. Despite a positive report by Gauntlet & @eek637, it’s essential to consider the incentives behind the report itself, which, in my opinion, may not prioritize the interests of the LP providers.
In summary, we support the idea that LP incentives should be evaluated. However, slashing the top line of LPs will accelerate the trend of diminishing, relevant (ETH measured) TVL.
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Something that isn’t clear here is how L2’s factor in. Mainnet has become too expensive for most people to interact with and L2’s are what most people will/are using to interact with Ethereum.
My questions and concerns are: Will staking and delegation be available to users on L2’s, along with collection of rewards?
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so, next steps for fees switch activation ?
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I am very bullish on the future of UNI and UNISWAP, but a pending vote is not a good idea and will take the heat out of us, and I hope to restart the vote soon.
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So the voting will be delayed about 1 week after the end of the 2nd contest? 
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updates ? very interesting topic 
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Any updates on Code4rena audit?
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Butter wants to join this dialogue to contribute to the question of misalignment between LPs and UNI tokenholders, as mentioned notably by @kassandra.eth and @Edvin
Gauntlet’s models show that the impact on LP returns is muted, in a given pool, after a certain amount of liquidity drain occurs. However, it remains to be shown whether LPs can enter new smart contracts, enabling them to follow different, unforeseen strategies.
We have recently produced a theoretical model called Stackelberg Attack on Protocol Fee Governance (Ethresearch post) revealing a class of smart contracts that pose a threat to the stability of any Uniswap v3 pool with a protocol fee.
We believe this line of research is essential to the strengthening integrity of Uniswap, and by extension, to the whole DeFi space as further protocols are considering the implementation of a protocol fee. As such, we recommend funding research in that direction.
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