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Uniswap Governance Update

Updated: Sep 11

In this short note, we summarize our understanding of Uniswap's latest progress surrounding the fee switch.

TL;DR

  • The community has a consensus on pushing the fee switch forward. Previous votes were defeated because a16z and Uniswap Foundation have reservations about accumulating fee income directly with Uniswap.

  • a16z and the Uniswap Foundation are building a "fee distribution mechanism" akin to UNI staking. Their new proposal can drop at any time.

  • Once that a16z/UF proposal drops, it will most likely pass quickly and set everything in motion.

  • While we can not predict exactly when, hints suggest the proposal could drop any time soon.

No legal argument The intention is to share our observations and give our readers an update on "how things are going". Explicitly, while we will describe the legal concerns driving this current debate, we will not attempt to make a legal argument one way or another.

Background

Inside the original smart contract of Uniswap V2 and V3, there is a governance-updatable variable called "fee switch", where the protocol can choose to turn on or off. The fee switch, if turned on, will direct a portion of transaction fees towards the Uniswap protocol. Currently, with the switch off, LPs collect 100% of the transaction fees.

  • In V2, the fee switch is fixed at 1/6 (16.7%) of all fees. Governance can only control "on" or "off".

  • In V3, governance can choose a number between 20% and 5%.


Across DeFi, most other fee-generating protocols accrue a portion of their fees towards a treasury or its governance token. The list includes AAVE, Sushiswap, Maker, GMX, GNS, Frax, and many more. So why doesn't Uniswap and how is it pushing forward with this?

Timeline


  • 2022.02: The initial discussions around the fee switch started on Uniswap Governance.

  • 2022.07: An indicative "Temperature Check" was passed to explore the fee switch question further.

  • 2022.12: Leighton, founder of PoolTogether, submitted a formal fee switch pilot proposal to experiment on Uniswap V3 on Polygon. But a16z and Uniswap Foundation (we consider UF very closely aligned with Paradigm) both opposed the proposal. a16z and UF's main objection was the tax implications if Uniswap is to accumulate some form of taxable "income". The vote was ultimately delayed and never took place.

  • 2022.12-2023.05: a16z, Uniswap Foundation, and other stakeholders actively researched the legal and technical options.

  • 2023.03: Uniswap Foundation posted their finding on how to "mitigate compliance uncertainties related to the fee switch". We believe that what the UF suggested, albeit still vague, a conceptually similar to some form of UNI staking:

  • "After a thorough review, we believe that the best path forward may be to implement new mechanisms for distributing protocol fees to specific persons, for instance to those who have “opted-in” by taking some action to benefit the Protocol."

  • 2023.05: GFX Labs proposed an experimental fee switch again (still in a few select pools on Polygon/Unsiwap V3).

  • a16z voted against this proposal

  • Porter from a16z: "We understand the desire to turn on the Uniswap fee switch, but we think it’s necessary to take into consideration the nuanced factors in how it’s done. We are actively researching different methods and technical implementations that create a programmatic flow of funds to users and UNI holders who opt-in. We are preparing to provide an update next month on possible solutions. In the interim, while we appreciate GFX’s efforts here, we do not support this proposal and will vote against it based on the reasons above."

  • 2023.06: The GFX Fee switch vote was rejected. a16z used a part of its voting power to narrowly defeat the proposal by a plurality.

  • Now: the community awaits a16z's proposal. While Porter said "next month" back in May, but there has not been an update as of September 2023.


Power Distribution

TLDR: It's all up to a16z and Uniswap Foundation to drop the next step.


The June 2023 Vote



  • A total of ~40M votes were cast.

  • 22M votes were in favor of some kind of fee switch (split between 10% and 20%)

  • “No Fee” won by a plurality with 18M Votes.


You might think "they should just vote again and get the majority"? I did too. Until I realized the "No" camp has much more power than the 18M shown here.


a16z and Uniswap Foundation's Voting Power




While a number of smaller players voted in favor of the fee switch, a16z and Uniswap Foundation have decisive governance influence on this issue.

  • a16z and Uniswap Foundation have so far acted in tandem on this issue.

  • We estimate that a16z holds at least 55M of UNI voting power and the Uniswap team has another 100+M UNI. (We assume that the Uniswap team-held tokens will vote according to UF's preferences. )

  • The yes voters have mobilized 22M UNI votes in favor of UNI token.

  • There are another ~80M UNI tokens whose holders have been active in the governance forum, but didn't cast a vote on the fee switch. But even if Yes-voters mobilize all 80M UNI (unlikely), it's not enough to overcome a16z and UF's objection.


Emerging Consensus


To be clear, a16z and Uniswap Foundation are never against the fee switch itself. They voted no because they don't want to do it now in the form GFX proposed. Specifically, as we recall from Uniswap Foundation (Devin Walsh) and a16z (Porter Smith)'s posts:

  • Devin Walsh: We belive the best path forward [is] some new mechanisms for distributing protocol fees to specific persons, for instance to those who have “opted-in” by taking some action to benefit the Protocol.

  • Porter Smith: [We're building] technical implementations that create a programmatic flow of funds to users and UNI holders who opt-in


Our take: a16z, Uniswap Labs, and Paradigm are creating some sort of UNI staking mechanism behind closed doors. This project probably involves their engineers and product managers, as well as lawyers and tax consultants. We have no visibility as to when they will drop the plan. But once announced, the plan will likely set everything into fast mode and get passed quite quickly. With the recent positive developments in the U.S. regulatory environment and Porter's May 2023 comment "next month", there's a material chance the plan can drop at any time. We're staying alert.


 

Author:

Asa

Research Lead, Maverick Crypto


Correspondence:

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Email: asa@maverickcrypto.xyz

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Twitter: @GMMaverickCap

Learn more about Maverick: https://www.maverickcrypto.xyz/

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