The Uniswap governance forum is once again debating whether to activate the protocol’s ‘fee switch,’ which would finally see revenue accruing to DeFi’s leading decentralized exchange.
This isn’t the DAO’s first attempt to utilize the feature, with previous efforts hampered by regulatory concerns.
Currently, traders’ swap fees go directly to the liquidity providers (LPs) who supply pooled tokens necessary for trading. LPs can choose to deposit into pools with fee tiers of between 0.01% and 1% in Uni V3, or a flat 0.3% in Uni v2. The fee switch would siphon off some of these fees, returning them to Uniswap itself.
The protocol currently makes no revenue despite daily volumes which routinely top $1 billion and a total value locked (TVL) of more than $4 billion across six blockchains.
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This latest proposal, authored by GFX Labs, was brought to the DAO governance forums on May 10. The suggestion is to activate the switch with a fifth of swap fees being rerouted, though exact amounts remain up for discussion.
Weighing the pros and cons
Benefits of the move include bolstering and diversifying the project’s treasury, which is entirely made up of the UNI tokens allocated to it at launch. While the DAO holds one of the DeFi’s largest treasuries, the dual benefit of covering expenses via fees, whilst not diluting the token’s circulating supply, would ensure that Uniswap remains well funded into the future.
Future benefits could also include the distribution of protocol revenues to UNI holders, though this would require its own governance debate.
Pushback against the initiative has focused on a variety of points. These range from its potential to diminish Uniswap’s purpose as a public good, and the lack of a plan for how to use the extra funds, to simply wasting an opportunity to pump the token price whilst stuck in a bear market.
The reasoning against the proposal which has gained the most traction, however, revolves around the legal implications. Uniswap Labs, Uniswap’s legal wrapper, as well as some larger UNI holders, are based in the US, so it comes as no surprise that certain stakeholders may wish to tread carefully.
The main worry appears to be that the fee switch may incur tax obligations for the DAO (an unincorporated organization) and that any future accrual of revenue to UNI holders would equate to dividends, which would attract the attention of the SEC.
However, DAO members based outside the US have also voiced frustrations stemming from a supposedly autonomous protocol being influenced by a specific country’s regulatory environment.
With regulators out for blood in an embattled crypto industry, staying out of the limelight has so far been a priority for many of DeFi’s major players.
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Past attempts have been less than successful
Previous attempts to turn on the potential revenue stream have been much-debated and, thus far, fruitless.
While both V2 and V3 contracts are immutable, their code contains the provision for on-chain governance to determine whether to collect fees, within certain bounds.
Over the past two years, there have been multiple calls to activate the fee switch, but differences of opinion on how to implement the move, as well as legal uncertainty, have ended in stalemate.
After V3’s launch in 2021, discussions began on flicking the V2 switch but fizzled out when there was no firm response regarding the legal implications.
Then, last summer, the idea of a pilot program picked up more momentum, even passing a Snapshot vote to check if there was sufficient appetite before supposedly moving to on-chain voting. However, after being postponed until December, the campaign eventually stalled in the face of uncertainties around taxes.
So, the question is, will things be different this time? Unfortunately, GFX Labs doesn’t have an answer. According to the Uniswap governance forum:
“GFX Labs is not equipped to address the regulatory implications of this proposal. While GFX Labs is based in the USA, the protocol is not based in any one country and has token holders and users globally. We encourage token holders with concerns to voice them and vote with their tokens for their desired outcome.”