Uniswap’s UNI token jumped over 7% on Dec. 2 after a governance proposal calling for a vote to reserve a portion of trading fees was posted.
If it passes, it will only apply to three pools on Uniswap V3 — an ETH-USDC pool which charges 0.05% on trades, a DAI-ETH pool at the 0.3% fee tier, and a USDC-ETH pool at the 1% tier.
One-tenth of the trading fees from each of those pools would flow to Uniswap’s treasury — the post on Uniswap’s governance forum doesn’t explicitly specify a plan for what will happen to the retained fees.
Of course, that’s not stopping people from buying UNI — DeFi enthusiasts have long speculated that holders of the UNI token will one day be eligible to receive some portion of the fees charged on Uniswap trades — with the token pumping, it’s clear that at least some investors believe the proposal is a step towards providing some sort of yield to UNI holders.
Regulatory and Legal Considerations
Some observers noted that the proposal sidesteps the legal and regulatory concerns associated with sharing protocol revenue with UNI holders.
Indeed, the Uniswap Foundation released a brief acknowledging that “the regulatory and private litigation climate for DeFi in the U.S. has been incredibly fast-moving and challenging.”
The fees on Uniswap trades currently go to liquidity providers (LPs), who are users who deposit assets on automated market makers like Uniswap. Even if the proposal passes, LPs will retain 90% of the fees charged on the three target pools.
The proposed change is a “pilot program,” according to the forum post, and aims to assess the impact of setting aside one-tenth of fees on trade execution. The program would last for 120 days.
Uniswap is the largest decentralized exchange in DeFi and has processed over $500M in volume on all but three days over the last month, according to The Defiant Terminal.
The underlying question of the proposal is how LPs will react when one-tenth of their fee revenue is taken away — there’s the potential for them to move liquidity elsewhere in response to the change, which would increase slippage and subsequently reduce trade execution for the three target pools.
But the exact effects of the changes to fee structure are unknown, which is why the forum post’s authors, Leighton Cusack, co-founder of PoolTogether, a no-loss savings protocol, and Guillaume Lambert, an assistant professor of applied physics at Cornell and DeFi founder, are calling the proposal “an experiment.”
“The metric to measure [the] success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success,” their post reads.
Whether the experiment moves forward will be up to UNI holders, who will vote on a “Governance Proposal,” which is the third and final stage in the decentralized exchange’s governance process, in the next 14 days.
Uniswap has had an eventful week — the project also announced its NFT marketplace on Nov. 30.