🦄 Overview
On 23 Feb 2024, Erin Koen (Governance Lead for Uniswap) submitted a proposal to upgrade the scope of Uniswap Protocol Governance. Among these ideas was the use of a fee mechanism to reward $UNI token holders that have staked and delegated their tokens.
$UNI rose sharply by >50% in response to the news, with the DeFi community having already speculated for many years over when the fee switch would be turned on for $UNI stakers.
🦄 Current Fee Structures on Uniswap
AMM DEXs like @Uniswap and @SushiSwap rely on liquidity pools to facilitate permissionless trading — of which these Liquidity Providers (“LPs”) are rewarded with LP fees for their liquidity.
LP fees are 0.3% of trading volume on Uniswap v2 pools, while LP fees on Uniswap v3 pools range from 0.05 — 1.00% of trading volume.
🦄 Protocol Fee Generation
Up until now, Uniswap has had no protocol fees — with all fees being paid only to LPs. Some believe that this is due to regulatory concerns in the U.S., where returning yield back to tokenholders would make $UNI more security-like per the Howey Test.
However, within Uniswap documentation — we do see some hints of Uniswap eventually charging a 0.05% fee on trading volume in the future.
🦄 Fee Sharing for $UNI Stakers
To compute an approx. APY for $UNI stakers, we consider the below parameters:
- 0.05% Protocol Fee, shared only with $UNI Stakers
- Vary % of $UNI Staked
- Vary % of Fees Shared
In a realistic scenario where 50% of $UNI is staked and with a 50% fee share, this comes up to a modest 0.9% APY for $UNI holders at current prices.
In a bull scenario where 10% of $UNI is staked and with a 50% fee share, this comes up to a respectable 4.6% APY for $UNI holders at current prices.
🦄 What’s next for $UNI Holders?
The proposal primarily seeks to upgrade the scope of Uniswap Protocol Governance, with further details of the fee switch notably being absent from the proposal. While the proposal highlights that the Uniswap team have the fee switch in mind, it may take time to implement this.
Some have also pointed out that this move by Uniswap may kickstart the next DeFi Summer, seeing a re-rating of OG DeFi coins — as more of them follow in Uniswap’s footsteps to return fees back to token holders.
However, concerns remain about $UNI becoming security-like — and as such subject to regulatory scrutiny by U.S. regulators, who have jurisdiction where most of the Uniswap team are based.
