Uniswap Dividend Proposal Coming, Can We Invest In a New Empowerment?

[TL；DR]:

On the evening of February 23, the Uniswap Foundation released a proposal aimed at granting LP fee dividends to UNI, which quickly caused the token UNI to soar by over 50%.

According to the latest data, the current Uniswap annualized LP fee is approximately $626M. Once the proposal is approved, UNI holders are expected to receive an annualized dividend of $62M - $156M, which will greatly boost the current market price of UNI.

This proposal is likely to remain as game ridden as previous attempts to grant dividends, but it is still worth looking forward to.

Introduction

On the evening of February 23, a proposal to reward UNI token stakers with Uniswap fees quickly spread to the crypto market, and the token UNI surged by 50% upon hearing the news. Therefore, whether this proposal is feasible and whether it will have a positive impact on DeFi industry tokens that only govern but do not vote will be further explored in this article.

DEX Leader Uniswap (UNI) Saw a Surge in Dividend Proposal

On the evening of February 23, Erin Koen, the governance leader of the Uniswap Foundation, posted a proposal at the Uniswap Governance Forum, proposing the introduction of a fee mechanism to reward holders who have already entrusted and staked their UNI tokens.

Impacted by this news, Uniswap’s governance token UNI achieved a growth rate of over 50% in a short period of time, becoming a popular token. According to the Gate.io market, UNI prices quickly climbed from around $7 to $11 and reached a high of nearly $12.6 in the following hour. As of the writing date, UNI prices have retreated to around $10.5.

Source: Gate.io

In fact, when it comes to UNI, we need to explain Uniswap, a groundbreaking crypto protocol. Uniswap is a decentralized exchange (DEX) based on the Automated Market Maker (AMM) mechanism, created by Siemens engineer Hayden Adams in November 2018.

This exchange allows unauthorized creation of liquidity pools for any ERC20 token, and automatic determination of asset prices through a constant product formula, achieving efficient and seamless token trading. Users interact with liquidity pools, and providers adjust prices dynamically based on the supply and demand of the pool, earning fees from it.

Despite Uniswap’s expanding and stable position on the DEX track, the price of its token UNI has remained at the bottom for a long time, mainly due to its rudimentary token economics. In the early stages of Uni’s creation, a total of one billion tokens were issued and distributed to community members, team members, investors, and consultants. However, after the tokens were issued, they were only granted governance rights, including the right to suggest and vote on protocol changes and fund allocation. This leaves the token with no practical use other than participating in community governance, resulting in its price hovering at the bottom for a long time.

The proposal to increase dividends for UNI token holders this time is clearly a significant improvement in the economics of the token, and as a result, the token has received a 50% increase in feedback from this positive effect.

Detailed Explanation of Key Points of Dividend Proposal: LP

Uniswap developer and foundation governance leader Erin Koen (@eek637) released his proposal on the evening of February 23 hoping for a large-scale upgrade of Uniswap protocol governance to incentivize active participation in delegation.

Source: @UniswapFND

From the official introduction, this proposal aims to address the issues of free riding and indifference in current governance, and increase representative participation. The specific suggestions are as follows:

Optimize the protocol governance mechanism of Uniswap to achieve automation and barrier free collection of protocol fees.

Fairly distribute the collected agreement fees to those holders who have staked UNI tokens and authorized their voting rights in accordance with established proportions.

Maintain control of core parameters by the governance team, including determining which fund pools need to pay fees and the specific amount of fees.

If successful, it will attract new clients and transfer “outdated” authorization to representatives who actively support the agreement, while technological implementation involves protocol governance upgrades, cost allocation, and core parameter control. The rhythm arrangement includes 7 days of open dialogue, 10 days of Code4rena review competition, snapshot voting and on-chain voting.

It should be noted that there are two types of fees on Uniswap, among which the front-end fee will be charged 0.15% through Uniswap Labs front-end transactions starting from mid October 2023, for the sustainable operation of Uniswap Labs; Another type is LP fees, which are derived from transaction fees in Uniswap pools, such as WBTC/ETH pool fees of 0.3%.

This proposal is aimed at LP expenses, which include 1/10 to 1/4 of LP expenses as agreement fees and are allocated to UNI holders through governance adjustments. According to the latest data, the current Uniswap annualized LP fee is approximately $626M. Once the proposal is approved, UNI holders are expected to receive an annualized dividend of $62M - $156M, which will greatly boost the current market price of UNI.

The Proposal is Difficult to Achieve Overnight, But the Prospects are Still Promising

In fact, Uniswap, as the leader of DEX, has been firmly consolidating its industry position with product innovation. Uniswap launched the V3 version in May 2021 and plans to release the V4 version after the upcoming Duncan upgrade. The hooks feature introduced in the V4 version endows Uni with programmability, significantly improving the flexible combination and efficiency control of the fund pool, and further enhancing the capital value of the project.

This may be an important prerequisite for Uniswap Foundation to submit dividend proposals to capture the wealth effect for tokens at present, but it can be foreseen that this proposal is likely to remain as game ridden as previous attempts to grant dividends.

Firstly, for a long time in the past, the Uniswap project team has been cautious about the profit sharing proposal, fearing that it may harm the interests of liquidity providers. Therefore, many similar proposals have been abandoned in the end.

The proposal was only unilaterally proposed by the Uniswap Foundation, and the Uniswap project team did not even forward the information. It is not difficult to see that everyone’s differences are significant.

Furthermore, the holders of UNI tokens are mainly large investment institutions like a16z, which means that the results of governance voting proposals may still be influenced by these venture capital institutions.

In addition, the US SEC has filed lawsuits against multiple crypto investment institutions over token securitization issues, and Uniswap narrowly won a lawsuit last year. If Uniswap passes the profit sharing governance proposal, it may lead to enforcement actions by the US official UNI as the definition of security categories, which will greatly affect the listing plan of Uniswap Labs.

Source: @mikewawszczak

Therefore, from the current situation, the approval of this proposal is still full of uncertainty. In balancing the interests of UNI holders and LPs, regulatory enforcement actions and the pursuit of decentralization and exemption from licenses, as well as the rights and interests of large investment institutions and small and medium-sized investors, there is still a need to test the balance between project parties and communities.

Going further, this is undoubtedly an attempt to transform pure governance tokens into utility tokens, which may bring a wave of enthusiasm to DeFi and even the entire crypto field. In the past two days, Frax Finance announced that it will emulate Uniswap and the proposed income distribution plan will be implemented within 10 days.

Finally, the results of the on-chain voting are yet to be announced on March 8. Let’s wait and see.