When will Uniswap, DeFi’s leading decentralized exchange in terms of trading volume, start to make money for itself?
It’s a question that people have asked since Uniswap V2, the second iteration of the protocol, was launched in May 2020. V2 included code to capture .05% of trading volume, but that function, also known as the “fee switch”, has never been activated.
A governance post and subsequent proposal by Leighton Cusack, co-founder of PoolTogether, a no-loss savings protocol, has pushed the fee switch discussion back into the spotlight.
So far, the response from the Uniswap community has been overwhelmingly positive. In the first stage of Uniswap governance, UNI holders have voted “yes” with 3.5M UNI tokens with only 54 voting against as of July 20.
User monetsupply, who’s also a prominent governance delegate for lending protocol MakerDAO, accounted for 3.5M votes, with the remaining “yes” votes not large enough to make a dent in the final tally.
Cusack outlines a somewhat cautious approach to the fee switch. His proposal targets Uniswap V3, which launched May 2021, and would redirect 10% of two major pools’ liquidity provider (LP) fees. The recipient of that cut is yet to be determined and is a major part of ironing out the fee switch’s details.
Cusack is proposing the switch be turned on for the USDC/ETH 0.05% pool and the USDC/USDT 0.01% pool. The move would redirect 10% of the trading fees generated by those pools.
The proposed pools are no small potatoes. At $261.1M in total value locked (TVL), the USDC/ETH 0.05% pool is Uniswap V3’s fourth largest as of July 20. With $5.1B in weekly volume, however, it’s actually Uniswap’s most active.
At $135.3M, the USDC/USDT .01% pool is Uniswap V3’s seventh largest in terms of TVL and the fourth largest in terms of weekly volume with $604M.
While many have assumed that turning on the fee switch would mean that UNI holders would receive the fees, as is the case with rival DEX Sushiswap, Cusack emphasized that turning on the switch and deciding where the funds would go are two separate decisions.
Wide Range Of Tokens
Getty Hill, the co-founder of GFX Labs, a company which has authored four of the fourteen successful Uniswap proposals including a particularly influential one which added the one basis point fee tier, supports turning the fee switch on.
According to Hill though, it gets complicated after that. “Turning [the fee switch] on is the easy part,” the GFX Labs co-founder told The Defiant. “Collecting the fees and exchanging them for UNI and USDC is the hard part. There is a lot of infrastructure that needs to get built out for it to be successful.”
As Uniswap trading fees are denominated in whatever assets are changing hands, figuring out how to change those assets into a stablecoin or other assets as decided by UNI governance, is complex.
Hill also sees regulatory risk as a major hurdle. Right now, LPs earn 100% of the fees on Uniswap, arguably making the decentralized exchange a public good. If the fee switch is turned on and the protocol is generating revenue, the project may start to look like a traditional company.
Uniswap has three stages of governance. The first, a temperature check, appears all but decided. Hill sees the fee switch proposal as likely to pass the second stage, called a Consensus Check, as well.
The third stage, a Governance Proposal, is the true hurdle. Unlike the first two stages that require only 25,000 UNI or 50,000 UNI respectively to proceed, a majority vote with 40M UNI is needed to enact a proposal.
In all, the fee switch proposal appears to be more of a beginning than an end. Cusack himself isn’t wedded to the details of the fee switch but thinks it’s important to start the discussion.
“The stakes are so high [that] I think people have been hesitant to open up the discussion and I wanted to catalyze some action,” the PoolTogether co-founder told The Defiant. “It’s been on my mind a while so it was more a matter of taking the time to actually put the thoughts down and get things moving.”
Indeed, Uniswap is generally seen as a leader of DeFi. The project popularized the automated market maker model, executed one of the earliest retroactive airdrops, and was early to partner with Layer 2s like Optimism.
Now, UNI voters have a chance to continue to drive DeFi forward as they hammer away at the details of the fee switch.