In one hour, it surged over 65%, marking a new milestone for Uniswap, the world's largest decentralized trading platform
Governance tokens have begun to transform.Author: BlockBeats
On the evening of February 23, Uniswap developer and head of foundation governance Erin Koen tweeted, "The most important week in Uniswap protocol governance history?" along with a proposal to upgrade the Uniswap protocol governance system, stating, "I believe we should upgrade the protocol so that its fee mechanism rewards UNI token holders who stake and delegate their tokens." This tweet garnered over 100,000 views in less than 4 hours after it was posted.
Subsequently, the Uniswap Foundation also published a post stating that the Snapshot vote for the "Activate Uniswap Protocol Governance" proposal will be released on March 1, 2024, and the on-chain vote will be released on March 8, 2024.
In the hour that followed, UNI surged over 65% from around $7, breaking through $12. "UNI is finally empowered" became a focal point of community discussion.
Why is the new proposal worth paying attention to?
According to reports, this proposal suggests upgrading the Uniswap protocol, with proposed changes including:
Upgrading the Uniswap protocol governance to allow for permissionless and programmatic collection of protocol fees;
Proportionally distributing any protocol fees to UNI token holders who have staked and delegated their voting rights;
Allowing governance to continue controlling core parameters: which pools require fees and the size of those fees.
Among these, the proposal to proportionally distribute protocol fees to UNI token holders has garnered significant attention from the community. It is well-known that previously, UNI tokens only had governance functions, and the substantial fees generated by the Uniswap protocol were unrelated to UNI holders.
The two new smart contracts involved in this proposal are V3FactoryOwner.sol21 and UniStaker.sol22. The full text of the proposal can be referenced in [RFC] - Activate Uniswap Protocol Governance.
V3FactoryOwner.sol allows for programmatic and permissionless collection of protocol fees and includes an incentive mechanism to convert these fees into a universal ERC20 for distribution to stakers who have deposited UNI into UniStaker.sol. For this contract to function, it needs to become the owner of the Uniswap V3 Factory.
UniStaker.sol is modeled after Synthetix's StakeRewards.sol6 but expands the functionality of that contract in two key ways: 1) it requires staking accounts to delegate their tokens, and 2) it supports (but does not require) staking accounts to distribute staking rewards to any other accounts.
If the vote passes, the owner of the mainnet Uniswap V3 Factory will be updated to deploy V3FactoryOwner.sol, enabling the aforementioned programmatic fee collection mechanism. According to the proposal, the next steps are:
February 23: According to governance procedures, this post will remain open for dialogue for at least 7 days.
February 23: The Code4rena audit competition begins and will last for 10 days.
March 1 (next Friday): After the Code4rena competition ends, the Uniswap Foundation will release a snapshot containing the options "Yes, upgrade the owner of Uniswap V3 Factory," "No, do not upgrade the owner of Uniswap V3 Factory," and "Abstain." Any mitigations, instances of V3FactoryOwner, and UniStaker will be deployed and verified on Etherscan.
March 7: Assuming the snapshot is successful, the Uniswap Foundation will release an on-chain vote, which, if successfully executed, will call the setOwner function of the Uniswap V3 Factory and pass the v3 Factory Owner address to it.
The Immunefi bug bounty will take effect before the successful on-chain vote concludes. Details of this bounty (including links) will be provided before the proposed on-chain vote.
These dates may change based on audit results and community discussions. Assuming the on-chain vote is successful, the community will have the option to collect fees. To this end, Gauntlet is preparing a proposed rollout process, which will be published on the forum. Fees will only begin to be collected and distributed according to the contracts adopted in this proposal after completing that separate governance process.
How significant is the fee conversion to UNI empowerment?
In simple terms, this proposal means that Uniswap will finally achieve "fee conversion." The "fee conversion" has long been a challenge for Uniswap; Uniswap V3 went live in May 2021, but this feature had not been activated until now.
In Uniswap, whether a proposal passes requires going through three key stages: temperature check, consensus check, and governance proposal. The first two stages are off-chain votes aimed at gauging interest and feedback on a specific proposal. The final stage is an on-chain vote, which will lead to changes in Uniswap protocol parameters, such as the upcoming vote on fee conversion. Related reading: What happens when Uniswap opens the fee switch?
One of the main reasons Uniswap has not activated this feature is that Uniswap Labs has deliberately distanced itself from the Uniswap protocol in its operations. BlockBeats previously analyzed in Uniswap, the most successful American internet Fintech company under the Web3 bonus that the UNI token was initially different from other DEX governance tokens, as it was originally positioned merely as a tool to counter the market share pressure from SushiSwap's vampire attack on Uniswap. Therefore, as a highly visible DEX, UNI has been cautious in its empowerment due to unstable regulatory conditions.
Since UNI had not been empowered previously, the participation of UNI holders in governance votes and protocol activities has significantly decreased. It is reported that currently, less than 10% of circulating UNI is used to vote on given proposals. Additionally, a large portion of existing delegations is "stale." As of February 1, 2024, among the top 30 representatives by voting power, 14 had not voted on the last 10 proposals, and only 7 had ever created a proposal.
The realization of "fee conversion" will not only invigorate existing UNI holders but also attract a new batch of participants to engage in governance. Moreover, since existing delegators will need to re-delegate to stake their tokens, "stale" existing delegations may shift to representatives who have proven their commitment to supporting the protocol.
The investment return rate of the new proposal for UNI has also sparked heated discussions in the community. According to community member @wangkk2020's rough calculations, Uniswap's bear market LP annual fee income is $867 million. If the protocol income is collected at 1/5, the annual protocol income would be $173 million. Currently, with UNI priced at $11.6, the fully diluted market cap is $12 billion, and the circulating market cap is $7 billion. If we calculate based on a 50% staking rate of the circulating market cap, the annual investment return rate would be 1.73/35=4.94%. If trading volume doubles or more with the bull market and the popularity of web3, the annual investment return rate could exceed 10%.
According to CryptoFees data showing, Uniswap generated $2.14 million in fees in the past 24 hours. Additionally, Dune data shows that since the implementation of the new fee policy on October 17, 2023, Uniswap's front-end trading fee income has reached $3,564,354. After this protocol upgrade, it is foreseeable that the high return on investment through Uniswap will attract a large number of users to hold UNI.
Of course, legal risks are also worth noting. In the four years since UNI was launched, there has been virtually no action, one of the main reasons being regulation. After all, so many predecessors have fallen victim to U.S. regulation, and the world's largest decentralized exchange would also fear that its token might be targeted by regulators for certain issues, which is why UNI has long been a mere ornament.
However, this transformation into dividends still raises regulatory concerns within the community. From another perspective, as one of the most well-structured teams in the Web3 space, after four years of exploration, they likely have ways to address regulatory issues, which is why they are taking the next step. If feasible, it seems that the industry could find a new balance between token issuance and regulation.
Once empowerment is realized, how high can UNI go? The community is still observing; as of the time of writing, UNI has fallen from a high of $12 to $10.5, with the 24-hour increase narrowing to 44%, and the downward trend has not yet stopped. The community also realizes that despite choosing to compromise for the development of the protocol, Uniswap is still a "company" controlled by many investors. Whether token empowerment and staking incentives can lift UNI into a new bull market wealth code remains to be seen over time.
