On Friday, the Uniswap Foundation announced it was delaying a key vote on whether to upgrade the protocol’s governance structure and fee mechanism to better reward holders of the UNI governance token. The nonprofit cited concerns from a “stakeholder,” thought to have been an equity investor in the organization behind the largest Ethereum-based decentralized exchange.
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“Over the last week, a stakeholder raised a new issue relating to this work that requires additional diligence on our end to fully vet. Due to the immutable nature and sensitivity of our proposed upgrade, we have made the difficult decision to postpone posting this vote,” the foundation wrote on X (formerly Twitter).
Although the foundation said the decision was “unexpected” and apologized for the situation, this is far from the first delay to a vote on whether to engage the “fee switch” that would direct a modest amount of protocol trading fees to token holders. It is also far from the only time that the interests of token holders have seemingly been at odds with those of other “stakeholders” in Uniswap.
“We will keep the community apprised of any material changes and will update you all once we feel more certain about future timeframes,” the foundation added.
Uniswap issued the UNI token in the aftermath of “DeFi Summer” in 2020 to stave off what was known as a “vampire attack” by Sushiswap, which launched with the governance token SUSHI and quickly began to attract liquidity. Sushiswap was seen as relatively more community-aligned given that it was managed by a DAO and directed trading fees to token holders.
Version 2 of Uniswap contained code that would enable the 0.3% of trading fees paid to liquidity providers (or those who contribute tokens to be traded on the decentralized exchange) to be split, with 0.25% going to LPs and the remaining .05% to UNI token holders. But the “fee switch” was never activated.
Talks again arose about fee switch activation with the launch of Uniswap V3. GFX Labs, maker of the Oku, a front end interface for Uniswap, proposed a plan that would test out the protocol fee distribution on a few pools on Uniswap V2 that received a lot of attention. But talks ultimately fizzled out, due in part to concerns that activation might drive LPs and liquidity away from the platform, as well as legal fears.
See also: Uniswap’s Hayden Adams: From Ethereum Idealist to Business Realist
One of the main worries at the time was that the fee switch could have tax and securities law implications for UniDAO given that it would essentially be paying a type of revenue-based dividend to token holders.
It’s unclear exactly what concerns Uniswap Foundation was responding to when deciding to once again delay the vote. Gabriel Shapiro, a prominent legal expert in crypto, wrote that this is another example of a DeFi protocol treating token holders as “second class” citizens whose desires are subordinated to a smaller group of stakeholders.
Similar arguments were made late last year when Uniswap Labs imposed a 0.15% trading fee on its frontend website and wallet – the first time the development group sought to directly monetize its work. The fee only applied to products maintained by Uniswap Labs, not the exchange protocol itself, but did come after a $165 million raise.
There is no reason to be completely cynical here, and suggest that the hardcoded fee switch to reward UNI token holders will never be implemented. Uniswap Labs and UNI token holders are distinct entities with their own interests; ideally both would be aligned to do what’s best for the protocol itself
But if there is a lesson to be learned across DeFi, it’s that token holders do not always get the final say.