Uniswap protocol fee allocation proposal ignites the market, what impact will it have on the future of DeFi?

Author|defioasis, Wu Says Blockchain

On the evening of February 23, Erin Koen, the Governance Lead of the Uniswap Foundation, initiated a proposal on the Uniswap governance forum, suggesting a fee mechanism to reward UNI token holders who have delegated and staked their tokens. Since Uniswap announced its token airdrop in mid to late September 2020, there has been ongoing discussion about whether UNI should capture protocol fees to enhance token utility, but most discussions have ended without resolution. The proposal put forward by the head of the Uniswap Foundation formally places the utility of the UNI token on the governance agenda, sparking excitement among many holders and driving up the prices of UNI and several other DeFi protocol tokens.

First, it is important to clarify that this proposal is made by representatives of the Uniswap Foundation, which is not the same as Uniswap Labs. Uniswap Labs is responsible for the development, maintenance, updates, and upgrades of the Uniswap protocol, playing a core role in technical development and innovation. Essentially, Uniswap Labs is a commercial company. The Uniswap Foundation primarily focuses on the governance and community development of the Uniswap protocol and is a non-profit organization. Uniswap Labs tends to consider issues from a protocol/company perspective, while the Uniswap Foundation represents community interests to some extent. It is noticeable that Uniswap Labs' official Twitter did not mention or retweet this matter, and even the founder of the Uniswap protocol, Hayden, has not participated in much discussion.

Second, it is necessary to clarify what protocol fees are. Currently, there are two types of fees: front-end fees and LP fees. Front-end fees refer to the 0.15% fee charged for executing trades through the Uniswap Labs front end, starting in mid-October 2023, which is collected from the official Uniswap front end and paid to Uniswap Labs; Hayden stated that the purpose of collecting this fee is to provide funding for the sustainable operation of Uniswap Labs. LP fees are the fees from Uniswap pools, paid by traders to LPs, such as the 0.3% fee charged by the pool WBTC/ETH, which has the highest TVL in Uniswap V3. The proposal clearly states that protocol fees are a portion of LP fees, which can be 0, 1/4, 1/5, 1/6, 1/7, 1/8, 1/9, or 1/10 (currently set to 0), and the specific fraction can be adjusted through governance.

According to data from Token Terminal on February 25, Uniswap's annualized LP fees are approximately $626 million. If the proposal passes and 1/10 to 1/4 of the LP fees are allocated as protocol fees to UNI holders, then UNI holders could receive approximately $62.62 million to $156.5 million in annualized dividends. Currently, the market capitalization of UNI is about $8 billion, resulting in a market cap to annualized dividend ratio of approximately 51.1 to 127.8. Of course, this is just a simple calculation reference and not an investment basis.

Finally, this proposal is still in the proposal and community discussion stage, and whether it will pass depends on the final voting results from the community and UNI delegators representing multiple interests. The Uniswap Foundation believes that if there are no major obstacles, a Snapshot vote is expected to be released on March 1, followed by an on-chain vote on March 8. As an early investor in Uniswap, a16z may play a key role in the future voting on this proposal. According to Arkham data, addresses marked as a16z (and suspected a16z) may control approximately 60 million UNI.

Of course, everything is still up in the air; whether the proposal will pass remains uncertain, but it has opened the door to attempts at transforming into a utility token. Even if this proposal ultimately fails, it is believed that other institutions or individuals will continue to strive for UNI's transformation into a utility token; and if the proposal passes, the extent to which it will eat into LP profits as dividends for token holders, as well as how to better balance the interests of UNI holders and LPs as the protocol evolves, will become new governance points.

Over the years, Uniswap has become a representative of the entire Crypto industry after BTC and ETH. Now that the foundation has officially proposed empowering UNI, this may be influenced by the victories of Grayscale and Ripple, the smooth passage of spot BTC ETFs, and a relatively more lenient regulatory environment in the U.S. At the same time, this may also serve as a model for other protocol developers or teams, especially in the U.S. For instance, Pacman, the founder of Blur and Blast, expressed recognition of the proposal put forward by the Uniswap Foundation and hopes that Blur can learn from this experience. (Note: The NFT trading market Blur's token BLUR, like UNI, is a governance token without empowerment.)

Whether it is UNI or BLUR, the protocols they represent are leaders in their respective fields. Uniswap occupies about 60% of the market share in the DEX space, not only boasting excellent technological innovation and market influence but also making an indelible contribution to the development of the Crypto industry, which remains the core focus of our continued attention. For Uniswap, empowering UNI may only be the icing on the cake, while the upcoming v4 hook may be even more exciting.