Uniswap Treasury Report

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Authors: karpatkey, Franklin DAO, StableLab, and Arana Digital

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We are excited to share the Uniswap Treasury Working Group (UTWG) report, an in-depth examination of the Uniswap DAO’s treasury and how it may be prudently perceived and mobilized. This report is the culmination of five months of research, stakeholder engagement, and strategic modeling to address the challenges and opportunities facing one of the largest DAO treasuries in the ecosystem.

We believe that the DeFi community will find the details of this report valuable in helping it frame how DAOs can systematically approach treasury management. Uniswap itself is utilized as the spotlight case study. However, many of the highlighted principles and methodologies can be applied to other protocols as well.

In line with the vision of the DAO’s various stakeholders, we focused on two “north star” objectives: growth and sustainability. Note that this forum post is primarily meant to inform the DAO about where to access the report—it is hosted on the Notion link below. Reflections and comments regarding the report are welcome under this present forum post.

Access the Full Report Here

Since the report is lengthy, we’ve prepared a GPT to quickly answer your questions. Access the GPT for the report here.

Executive Summary

In correspondence with our findings, we provide a series of suggestions to the Uniswap DAO as to how its treasury can be mobilized, should the decision to mobilize be taken. In short, we recommend:

  1. Forming an oversight committee to gather and consolidate the various forms of reporting and key performance indicators (KPIs) from the various bodies and programs that operate as part of the DAO—and to prepare regular (e.g. annually, if not quarterly or monthly), aggregated reports of the DAO’s treasury activities.

  2. Adopting an accounting framework that properly reflects and discounts the value of unissued UNI tokens held in the DAO’s treasury, as well as the inflows and outflows associated with the utilization of the DAO’s UNI tokens.

  3. Focusing any mobilization efforts on two “north star” objectives, which best align the interests and goals of the DAO’s various stakeholders, while offering a realistic path to realizing them. The two objectives are:

  • Growth: the DAO should allocate its treasury resources to propel the continual adoption of Uniswap and deliver value to relevant stakeholders in the process; and

  • Sustainability: the DAO should be a self-sustaining entity, able to cover its future costs in perpetuity.

  1. Adopting a formal asset allocation framework to aid in the evaluation of strategic and tactical allocations of treasury assets, to both facilitate the DAO’s objectives and generate non-operating income to sustain its operations.

  2. Producing an investment policy statement to outline the agreed roles, principles, and guidelines that will be utilized in the management of the treasury and execution of its strategy.

  3. Allocating assets to a Stability Fund, to provide the necessary stable assets to handle the DAO’s operational needs and manage its exposure to risk assets.

  4. Allocating assets to strategic initiatives as part of native token management, such as protocol-owned liquidity and UNI-based incentives for the protocol, to both improve the experience for holders and users of the UNI token and facilitate the DAO’s own treasury management activities.

  5. Appointing dedicated treasury managers to execute the investment policy statement and assume general responsibility for aiding the DAO in its pursuit of the stated North Star objectives.

  6. Designing and implementing an effective selection process for any treasury managers, with clear scoping, ample opportunity for competitive proposals, and a rigorous framework for selection based on clearly-identifiable expectations.

  7. Devising the roles and permissions of treasury managers carefully to balance the DAO’s conflicting needs for decentralization and operational efficiency. Our research suggests that a fairly equal balance of these two factors is needed to maximize the utility of the arrangement for both the DAO and the treasury managers.

  8. Evaluating and implementing a range of mitigation strategies to address the ever-present principal-agent problem, and minimize the extent to which the interests of the DAO and its treasury managers are able to deviate from one another.

  9. Taking inspiration and insight from the broad range of historical examples of DAO treasury management arrangements, to avoid obvious pitfalls and make informed decisions about key design choices in any Uniswap treasury management arrangements.

The mobilization of the Uniswap treasury is a crucial matter for the DAO’s governance—and one that is not yet explicitly decided. Before any mobilization can occur, several governance phases must first take place to establish a clear mandate for mobilization, determine the preferred methods of execution, and designate the responsible parties to carry them out. That notwithstanding, this report proceeds on the premise of mobilization being agreed, given that a majority vote of the DAO supported research to that end. However, nothing in this report should be treated as a foregone conclusion, acting instead as guiding research for the DAO to make more informed decisions.

To preserve the integrity and usefulness of this report for research purposes, it intentionally omits specific details of any execution plan, including intermediate steps toward execution, timelines, or proposed allocations of treasury assets. Legal considerations are also not expounded on in this report and should be addressed prior to executing the mentioned mobilization strategies.

Brief Summary of Two Recommendations

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*Effective asset management is best conducted by contracting experienced treasury managers via an RFP process. Please carefully review the principal-agent considerations in the report.

Looking Ahead

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We look forward to hearing your thoughts and engaging in meaningful discussions on shaping the future of Uniswap’s treasury.

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“Thus, the question arises: can Uniswap sustain its liquidity depth and competitive position if the fee switch is activated? Based on the simulation models, it is evident that LPs may tolerate small reductions in yield—possibly rebalancing their positions into tighter liquidity ranges—but there exists a threshold beyond which LPs will leave the protocol entirely. The risk of triggering such a liquidity exodus must be carefully weighed against the potential revenue gains for the protocol.”

I am disappointed with this report. It highlights the risks mentioned above but then offers Protocol Owned Liquidity as its sole suggestion for treasury management. Historically, this approach has been viewed as dilutive, wasteful, and focused on short-term goals. UNI is a liquidity protocol, and owning its liquidity alienates its core LP users.

“Efficient liquidity management is paramount to the sustainability and growth of Uniswap’s ecosystem. Protocol-owned liquidity offers several strategic advantages. It aligns the interests of liquidity providers with the broader goals of the DAO by locking liquidity within decentralized exchanges and increasing the velocity of UNI. This in turn can result in better execution and better prices, which in turn drives more users, more volume, more fees to LPs, and more value to the token.”

  1. What are some examples of successful dilution of LPs to sell native tokens? There are many bad examples, such as OHM.

  2. Protocol Owned Liquidity in Uniswap’s v3 pool or other pools will drive away user LPs. Treasury owned liquidity directly competes with user owned liquidity, leading to lower returns for native LPs and benefiting the DAO/Treasury group instead. Uniswap is already a loss leader due to impermanent loss, and the fee switch would only exacerbate this flight of liquidity.

  3. Protocol Owned Liquidity is centralizing operations within the DAO at the expense of decentralization. I would argue that LPing with UNI is currently the only meaningful use of the token, aside from voting. This report seeks to dilute its providers under the guise of “creating stability.”

  4. One of the biggest weaknesses of the UNI token is its poor supply and borrowing yields. Why does the report not address using UNI as a supply and borrowing token to diversify and help bootstrap this part of the market?

To achieve the core objectives, the treasury should focus on:

  • Increasing volumes for UNI LP pools
  • Boosting trader engagement
  • Encouraging developer activity
  • Diversifying UNI holdings in the treasury
    Without diluting LPs.

For example, a mechanism could be designed around providing trading fee discounts to users who hold a certain amount of UNI tokens. This discount would be subsidized by the UNI treasury, and a small portion of every rebate would be swapped into USDC for the treasury.

If the treasury aims to emulate successful models, it should look at how centralized exchanges (CEXs) generate revenue and explore ways to “onchainify” those mechanisms. For instance, Binance’s token trading rebates, discounts for holding token, and loyalty programs.

Protocol Owned Liquidity should serve the ecosystem’s drivers, not dilute it. Otherwise, the protocol’s fee switch will become even more untenable.

“Gauntlet’s findings suggest that a 10% protocol fee would result in a 10.71% reduction in liquidity, which may seem modest at first glance but introduces a feedback loop with potentially more severe ramifications. As LPs withdraw liquidity in response to reduced yields, remaining LPs could benefit from higher fees per unit of liquidity—temporarily offsetting the yield decline. However, if too many LPs withdraw, the liquidity in the pool diminishes to a point where slippage for swappers increases, leading to a decline in trading volume. This reduction in volume further decreases LP yields, triggering additional liquidity withdrawals in a negative flywheel effect.”

Once again, I must express my disappointment with this report. Its focus was too heavily on unsuccessful implementations of Protocol Owned Liquidity, without offering viable alternatives. The case studies used either dilute or compete against existing users or reflect developer project bias, benefiting those personally involved in such programs, such as liquidity managers.

The Stablility Fund is a good idea. I believe it can funded with mechanism design rather than active treasury mangers, and without harming core operations of the protocol.

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Thanks for the detailed report @AbdullahUmar I appreciate the clarity in recommendations provided by the group as well as the 4 options for next steps which offers guidelines for further discussions.

General feedback:

  • In terms of responsibility of TMs, the report states: ‘Reporting regularly to the DAO on the performance of the treasury and maintaining accurate records of all transactions.’ This presents a conflict of interest.

If the TM has personal financial interests in specific assets or investments managed by the DAO, influencing their reporting to favor certain outcomes. Similarly, if the manager’s compensation is tied to treasury performance metrics, they might manipulate reports to achieve personal gain. The key issue would be any actions that bias the manager’s objectivity, transparency, or accuracy in fulfilling their duties.

Hence, I strongly suggest separating these roles and appointing a separate entity for reporting.

  • The asset universe risk curve is a rather LARPed metric. Centralized stables/RWAs could present challenges depending on the political regime, where as many assets under high risk spectrum maybe vapourware trading on memetic value. Memes and AI-agents have not been included in either side of the risk spectrum. My suggestion is to re-evaluate this spectrum every six months along with the IPS

  • LPing with UNI as one of the tokens is a loosing proposition in down market conditions. Since there is sufficient onchain liqudity, we do not need to deploy a full range position with ETH from the treasury. At the same time a concentrated position as recommend in this report also needs valuable WETH from the treasury. I’d recommend looking into a POL strategy which involves positioning single sided UNI liquidity at strategic price intervals and using the WETH earned to slowly build POL while withdrawing portion of the WETH at regular intervals.

Questions:

a. Is there any insight on how the stability fund will be generated? Is it simply TWAP selling UNI onchain? Or does it involve OTC sales, in which case the DAO needs a legal entity to manage this operation.

b. Are there benchmarks or peer comparisons influencing the recommended allocation strategies?

c. How did you project the fees under the ‘Revenue-Driven Alternative for the Stability Fun’?

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Appreciate you engaging with the report and providing constructive feedback, @Userisky. One of the key goals of posting the report on the forum is indeed starting a conversation and encouraging feedback from the larger community on the various options presented in terms of treasury mobilization.

We understand POL is a controversial topic and want to clarify that it’s just one of various options presented in the report, rather than the sole suggestion. Less than 5% of the report focused on POL. LPs are arguably the backbone of the protocol. The goal is by no means to disenfranchise them.

The reason why POL was included in the report is that it represents a widely-adopted tool in the current DeFi ecosystem, and as such, we felt it was worth discussing. The treasury being mobilized for numerous activities may lead to the disproportionate favoring of one stakeholder over another. We need to decide on the tradeoffs—and to what extent their existence is permissible. POL by the DAO for non-native token pools would likely not be a net benefit for LPs. Activation of the fee switch may not be a net benefit to LPs, especially if they don’t hold UNI. Staking UNI using the DAO’s treasury in the Unistaker is unfavorable to token holders since more fees would go to the DAO. Delegating voting power from the treasury is dilutive to delegates emboldened solely by retail token holders or VCs.

Hence, if UNI is used to LP, delegate, or stake, someone else will likely pay the price to an extent. These are all considerations we mentioned in the report. In designing any of these programs—like the upcoming treasury delegation program—a vital consideration is how such a program affects other stakeholders.

We believe there are ways to employ POL in a positive way, for example, using it strategically to bootstrap markets on new chain deployments as an additional element to Uniswap onboarding packages.

As mentioned in the report: “For Uniswap DAO in particular, bundling a POL initiative in concert with existing cross-chain deployment packages may make sense, or it can remain an independent endeavor.”

We are now on over 25 chains. These chains lack liquidity. The UAC (accountability committee) and UEII (the growth/grants group) teams negotiate deals with target chains to bootstrap liquidity for particular pools, but that’s often not enough. Upon entering a new market, POL can be effectively employed by the DAO to make sure certain pools are deep enough for users to trade. This can be nicely supplemented with incentives as well, however, as we know, much of the liquidity from incentives is mercenary. So, POL can act as a good buffer, while allowing the DAO to earn fees in the meantime—but the fees aren’t exactly the primary intention in new markets. You may ask—what if the DAO incentivizes liquidity provision but is also implementing a POL strat? Here, you can use tools like Merkl to blacklist certain LP wallets from receiving rewards. In this manner, the incentives are solely given to other LPs. You can also overweight incentives on pools that the DAO has POL implemented for, emulating a sort of rebate. Plus, these non-native token pools are more-so important for emerging chains, not for chains like Eth L1 or Arbitrum, for example.

Now, a large-scale POL initiative would likely be heavily biased on UNI pools on Eth L1. This is where you may disagree with us, especially if you are a UNI token holder who provides your UNI as liquidity. Then, yes, I must admit, there may be a degree of dilution, but these can also be paired with wallet-blacklisted incentives. It’s a discussion to what extent this should be implemented. But the fact stands—POL is a potential way to diversify out of UNI:

“Concentrated liquidity could also be an easy way to sell out of the UNI token by setting predetermined and acceptable price ranges where the DAO is willing to forgo the UNI for the other token in the LP pair like WETH or USDC…The treasury can also implement automated strategies to do this such as Ichi or Blir to manage such an effort without needing to invoke the full responsibilities of a treasury manager.”

An RFP process can be utilized to gather the best managers/tools for structuring this.

The POL section also mentions methods to make the relationship with LPs more symbiotic: “Incentive Alignment: Utilize current governance mechanisms to vote on priority Uniswap POL pools and incentivize them or incentivize them by applying a gauge system or FOO to optimize incentive distribution.”

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Blacklisting large LPs from the DAO side should already demonstrate how problematic this idea is. The DAO should remain as decentralized as possible for the sake of all stakeholders, regardless of the political climate.

Blacklisting will also be used as marketing by other protocols, which, of course, won’t implement this, such as Aerodrome and Fluid. Can you imagine the backlash to a small group of third party treasury managers blacklisting Large LP’s?

Points like this seem influenced by discussions I have seen in relation to LP service providers or active LP service protocol documentation. Another major concern is that this program could be taken over by certain special interest groups who benefit from programs like POL.

I read the cross-chain report section, hoping for more detail. Thank you for providing that information. Again, back to competition—how will this POL strategy not push sticky LPs to other DEXs seeking cross-chain like Fluid or Aerodrome? An LP would not want to compete with the protocol it’s trying to use. Aerodrome and Fluid can outperform Uniswap purely based on their models and the way they attract liquidity.

This is one of the main problems with proposals like this. The research looks at old solutions for new problems. The treasury is such a key piece of the Uniswap DAO. There should be many different proposed mechanism designs to innovate how it is used and how to stay competitive in a constantly changing DEX landscape. Antiquated solutions will lead the DAO down a path of obsolescence.

The report is 5% focused on POL as a solution and 95% focused on frameworks, vampire attacks, offboarding/onboarding, audits/accountability structures, etc. A report like this should be 100% about mechanism design, treasury managers vs smart contracts, how each design impacts different stakeholders, offchain vs onchain management, the risks of having the treasury managed by third parties, legal risks, etc. The report is written as if it has already been decided that third-party treasury managers are the best approach.

I recommend that this report be condensed into an abstraction about the history of DAO Treasury management and an overview of different structures/frameworks. A new report should be led by mechanism designers, hook developers, and security researchers.

Two questions:

  1. For this report, how many interviewed were direct Uniswap LPs, not LP service providers?

  2. What exactly is the purpose of the stability fund? Is it to replace selling UNI in bear markets? If the DAO treasury simply becomes a place for dilution for all stakeholders, to the benefit of special interests, then the long-term implications and risks are not fully explored in this report.

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The principle agent problem is well studied in law … the headache for the DAO comes from the fact that a) there is no formal legal entity to “own” the treasury (and regulatory burden) and thus the contracting party doesn’t exist (at mo) with no legal recourse. B) there is no clarity/consensus on the legal status of UNI (the native token problem).UF has a funded project on the legal status of ecosystem so that may provide some clues going forward.

The statement I have the most issue with is

Uniswap Governance (i.e., the DAO): A collective that operates the community treasury and basic protocol functions in a decentralized manner. The constituents of the DAO are delegates, and its steward is the Foundation.

A simplistic way is to map the core functions of the DAO onto traditional corporate structure. In that analogy

  1. Uniswap Foundation is the front office = disbursement of R&D/Dev/etc funds as per categories
  2. Legal entity holding the treasury is the back office = liquidity + stability (reserves) processes (growth as in VC investment is a specialist asset for growth … Xref Arbitrum Venture)
  3. Uniswap Accountability Board is the middle office = feedback loops, independent risk assessment, adjudicative functions?

So placing all “steward” functions onto the UF dimishes the role of the accountability committee which provides internal checks and balances.

The biggest white space is the public choice components of being the most prominent flag-bearer for DeFi AMM. There are draws upon treasury via (open-ended?) commitments to

  • advocacy (DeFi Education Fund),
  • calls to fund this or that lawsuit, or
  • coalitions to shift (negative) regulatory opinions

Technically speaking, this is a reserve, basically a pot of $$ for contingent legal liabilities … I expect at least one major extra-territorial challenge to AMMs within the coming decade to balkenise capital flows (cf Nigeria attempts to paint Binance as criminal racketeer) so a focus on principle-agent without taking into account risk of overly centralisation and regutory capture will underestimate cost of resettling the reserves in case things go south. It can be done (nexxus mutual switched from UK to Panama) but you need to anticipate such events.

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The expertise required for real-world large scale treasury ops is not easy to come by. Just look at the traffice on the Arbitrum Venture Fund and that’s only one asset class. The split between internal vs external staffing is a valid concern. Innovation (eg algo-stablisation bots) needs to be balanced with trying to get such ideas past regulators and liability if things go wrong. Non-trivial.

Congrats to the committee for their hard work. If I wanted to add a 3rd North Star it would be (global) legitimacy trying to get DeFi acceptance into closed economies .

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