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