Uniswap Governance Powers in v3

The deployment of Uniswap v3 brings some pretty significant changes and additional powers to UNI governance.

To review, UNI token holders already have control over the following via Uniswap governance (see v2 blog post):

  • Uniswap v1 SOCKS/ETH LP tokens
  • Community treasury UNI allocation
  • Control over the Uniswap v2 fee switch
  • Uniswap.eth ENS domain

New Updates

Uniswap v3 will grant UNI governance additional controls including:

  • Deciding Uniswap v3 fees on a individual pool basis, with several protocol fee levels to choose from
  • Uniswap v3 license (via the Uniswap.eth ENS domain)
  • Ability to create new swap fee tiers in addition to the existing 0.05%, 0.3% and 1% options

Governance Responsibilities and Choices

Here are some quick takes on upcoming governance decisions and operational needs. This is meant to be a jumping off point for discussion so please call out my blind spots :slight_smile:

Deciding fee strategy for Uniswap v2 Governance can turn on the 0.05% swap fee on Uniswap v2 to earn revenue from trading volumes.

Pros:

  • Earn protocol revenue
  • Passively incentivize migration to Uniswap v3 (where protocol fees will be off by default until governance turns them on)

Cons:

  • Makes competing AMM/DEX platforms more competitive for LPs, and reduces their need to continue paying out high user incentives (eg Balancer v1, Sushiswap, etc)
  • Uniswap may have less dominance in “long tail” / small cap assets

Deciding fee strategy for Uniswap v3 V3 gives governance a lot of strategic discretion, with fees turned on in a case by case process and several protocol fee share options (10-25% of swap fee). This is a lot more open ended than the binary on/off decision for v2 fees. Some heuristics we can consider for fee setting in v3 include:

  • Liquidity fragmentation: Having multiple fee tier pools of the same pair is sub optimal from a gas perspective. It could make sense to charge reduced fees on the highest liquidity/trading volume instance of each asset pair to incentivize LPs sticking together.
  • Bridge asset incentivization: Certain assets (eg fiat stablecoins, ETH, wrapped BTCs, etc) are provide greater utility to the platform overall because they help traders bridge between smaller assets. It could make sense to favor pairs including at least one of these assets with lower protocol fee rates over the long term.
  • Competitive positioning: v3 gives Uniswap a much greater ability to compete on “like kind” asset swaps (eg USDC to DAI, WBTC to renBTC). The community may want to incentivize LPs for these pairs by keeping fees low.

Handling assets accumulated from fees Once Uniswap turns on v2 or v3 fees, it will begin to accumulate protocol earnings in hundreds of separate tokens. While some of the assets might be worth holding on to (USDC, DAI, ETH, WBTC, UNI, certain defi tokens, etc), there are also a lot of low cap/low quality assets trading on the platform. How will Uni governance decide which tokens to dump vs hold? What asset should we consolidate earnings into? Should we invest into Uniswap pools or other yield opportunities? How will asset management work in practice, considering it may be infeasible to hold governance votes for each transaction?

Next Steps

It would be great to hear your perspective on these issues, or any other key challenges you see upcoming for Uniswap governance.

:unicorn:

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All important points @monet-supply, thanks for bring them up.

Handling assets accumulated from fees Once Uniswap turns on v2 or v3 fees, it will begin to accumulate protocol earnings in hundreds of separate tokens.

I suggest that we have a strategic asset allocation and rebalance exposure programatically based on the strategic targets. A treasury committee can set this allocation, which should be approved by governance. The committee can review the strategic target every quarter.

Assets can be divided into three tranches based on market cap, liquidity, months since launch, volatility, return potential, etc.

Here is what a sample classification could look like:

  • Low risk: stablecoins like DAI, USDC & interest bearing assets like yDAI, cUSDC
  • Medium risk: ETH, WETH, WBTC, UNI, and other bluechip DeFi tokens like SNX, COMP, AAVE, MKR, etc.
  • High risk: long tail of tokens outside the first two tranches that have lower liquidity

We can determine how much should be allocated across each tranche, e.g. 30% in low risk, 50% in medium risk, and 20% in high risk. We should also make sure that this allocation strategy aligns with Uniswap’s overall treasury allocation as well as its spending plans, such as the grants program.

Pros:

  • Projects will be less upset or surprised when Uniswap sells one token vs. another. We can point anyone to our stated policy.
  • We can maintain prudent asset allocation without a requiring too much active management.

Cons:

  • We may leave some alpha/upside on the table by not taking active views on some of the long-tail of tokens. For example, we might have accrued tokens in the next big crypto protocol but have insufficient exposure because of rebalancing.

Open to feedback and other ideas!

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@monet-supply I am obviously biased, but this exact challenge is what Yam Finance’s DAO House product was designed to address on behalf of DAOs, especially since DAO governance can often be slow and DAO Treasuries must be responsive to quickly changing market conditions while still maintaining on-chain DAO control. So there’s a very strong PMF/synergy here.

Also FYI, Sushiswap’s governance just approved placing a portion of their Treasury in DAO House for risk management and diversification purposes.

The point person for the product is @Feddas on Yam’s contributor team if you guys want to learn more. He may have already chatted with someone, but just wanted to put it on your radar given the context of the discussion here.

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Thanks for starting this thread.

To be perfectly honest at this point, what we need most is for the big delegates to wake up.

There have been TONS of dicussion in here but it never translates to proposals, and at this point people are just fed up.

So we actually need to find people who would be interested in submitting proposals after discussion. Otherwise, it will always be the same : eternal discussion with no end in sight.

The forum is also mostly unmoderated and seems to attract a lot of weirdos who want a new airdrop… this breaks the morale (in my case).

I think the Universities blockchain committees could help us here… Maybe Leshner ?

Where are our big delegates ? They’re all pretty much absent on this forum… from the very start.

8 Likes

Great write up @monet-supply!

In particular I think it’s prudent to activate the v2 fee switch ASAP. As you pointed out it will actively incentivize LP migration, and create a new revenue stream for the treasury. The sooner liquidity pools are built up, and well funded on v3 the better for everyone really.

Decisions on what to do with accrued assets, and the optimal fee strategy for v3; while still important, can be better fleshed out at a later time. Personally I would be in favor of moving assets strictly to stable coins and/or ETH to best preserve the treasury’s value when a bear market comes along.

Perhaps it’s best to break out the various pieces you’ve mentioned into separate tracks?

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I just posted another topic regarding fee switch utilization for new v3 pools. Think this is another way to make fees purposeful and beneficial to all.

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Hear me out first: what if the fee structure earning percentage fluctuated with the trading volume and LIquidity given at any given time. Lots of trade volume, lots of liquidity, low rewards for fees. High trade volume, low liquidity, more lp incentive. So on & so forth

It’s useless to have a bunch of little minnows begging begging begging for the fee switch when the whales will enable it when they are damn good and ready.

  1. Crush all competition with hyper capital efficiency
  2. LPs have nowhere else to go
  3. Profit (your precious fee switch)

Alright, now that we know the plan, please no more repetitious jabbering about the fee switch.

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Activating V2 fee switch wouldn’t necessarily incentivize LP migration from UNI V2 to UNI V3.

UNI V2 is still the best place to start a new project LP in the Ethereum ecosystem unless Uniswap competitors are willing to incentivize your project with their own token allocations.
I think at least until Uni V3 has better go-to solutions when it comes to outside liquidity mining programs, it’s better to keep the switch off in most cases.

Also, creating a revenue stream for the treasury wouldn’t be my highest priority at this point as it comes at a cost.
There’s a lot of money in the treasury that the governance doesn’t have a clear idea and consensus on what to do with. Adding some ETH there wouldn’t change that.
But it would change things for the new and existing projects now that they would know that their tokens are being autosold by Uniswap.

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Hello,

“Should we invest in Uniswap funds or other performance opportunities?”

Can you elaborate a little more on this proposal? From what I understand, the idea is to seek the highest return on the funds that we have accumulated. Obviously, this makes a lot of sense and it is logical that we go along that line.
It occurs to me that we could acquire an important BITCOIN package. Surely, this proposal may seem nonsense, make no sense, etc. My approach follows the logic of the traditional market, where we have many examples to follow (Elon Musk invests 1,500m in Bitcoin,) …

When we speak of distribution or return of benefits for the community, we understand it as an airdrop, UNI ?. I consider it as a traditional investment fund, which can be done in the form of an airdrop with UNI or by creating a specific token for it. Imagine a stable UNI-x token.

I do not know. Sorry if these ideas don’t make sense.

The future is here and it is ours!

It’s good to summarize the possibilities that are available for management. Thanks you.
At this point, more than choosing a specific action, any sign of activism would be positive for Uniswap.

We’ve had 3 proposals in 9 months, which is well below the industry’s standard. Part of it can be justified by the stealth launched of the core team, but not everything.

Now it’s the community’s time to shine (especially since the core team has publicly committed to now work alongside the community).

A good place to begin with might be treasury management as pointed by @HelloShreyas. There are various solutions, let’s here them out and vote on it.

2 Likes

Very good, this is the kind of prophecy machine that should be on the native blockchain, not the chainlink kind

this is totally true! I am not so much a trader but love the oportunity of providing liquidity which I regard as ‘passive trading’. Most of my liquidity is right now in uniswap v2 and balancer and ofc I might move some funds in the future. But fees alone, if not too high, wouldn’t make me move to another place, it’s also the expectation of trading volume/earning possibilities and also expectation of sustainability cause it’s expensive to move the funds. Right now I prefer to wait how uniswap v3 will evolve, also what kind of possibilities balancer v2 will give me and only when I see one place clearly superior to uniswap v2 and balancer v1 I will make my decission what to place where, but for sure I will consolidate to fewer pools to save on gas instead of splitting the liquidity to much.

When explorering the most traded pools in UNI v3, to my surprise many of then have a 1% fee set.

I would propose to setup a fee for the most traded 1% fee pools. As there is a lot of money made I believe at least 10% of the income should go to token holders.

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will need to have look for sure, although I was (or better to say I am) quite happy with the simple math of uniV2, not sure how long it takes till I will understand v3 enough to feel compfortable to set the parameters or judge were to go.

I would suggest turning on the fee switch and have higher fee for higher charging pools, so if 1% then it will be 0.1% for the pool, if 0.3% it will be 0.05% if 0.05% it will be 0.01%.

The reason to turn on the fee switch now is that v3 given a highly competitive position for uniswap, now for a 0.05% fee, uniswap will still be at the same position.

This can provide incentives for UNI holders including developers and investor to gain value for their work and capital and not just be a free protocol all the time. It is also better to turn on as v3 is just released and if the fee switch is turn on as a changes for v2 → v3, it will make sense and build habit for future LP providers.

For fees gain from v2 and v3 protocols, it will be best to just hold all fees and if possible create a function for UNI to be burned and releases the portion of tokens from the treasury, or to be later determine by UNI holders to do buy back from public market.

This create a situation where UNI start becoming an index token for all tokens, and if small tokens such as SHIB become popular UNI holders will earn some part of its gain, and it is also costly to sell small tokens when it is not yet valuable. Becoming an index token can also help the UNI value to be “Up only” if the crypto market is growing.

It is also important to consider how we can launch an on chain voting for it to happen.

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I don’t mind if we have the fee switch on or off, either I earn more on my liquidity as long as it’s turned off or my $UNI stake will appreciate more, but right now I am fine with both😉.

1 Like