Cover image: Uniswap

In the previous episode of our series, we discussed the just concluded Arbitrum Short-Term Incentive Program (STIP).

In this episode, we'll be taking a close look at one more proposal that has the tendency to change the direction of the Decentralized Finance (DeFi) sector. Though the proposal has been successful, its long-term effect is yet to be seen.

A little introduction, Founded by Hayden Adams (remember Haycoin), Uniswap is a Decentralized Exchange on the Ethereum network that utilizes Automatic Market Making (AMM) to enable traders to trade cryptocurrencies without needing a middle-man. An Automated Market-Making (AMM) system allows anyone to add liquidity to the protocol and earn fees for facilitating trades. This is a sharp contrast to the Centralized Exchanges that serve as an intermediary to traders through its Order Books. Its governance token is UNI.

What is the proposal trying to convey?

According to GFX Labs, this proposal sought to add protocol fees across all Uniswap V3 pools. It further states that fees earned will be used to buy an asset(s) designated by the UNI community. This means that users of Uniswap will have to pay a fee that is ⅕ of the pool fee when they use the protocol, Furthermore, the proposal is to be first implemented on Uniswap V3 Polygon. Once this is successful, another proposal will be made to implement it on Ethereum.

Benefits to the community and UNI holders.

Prior to this proposal, the Uniswap platform did not generate revenue, as Liquidity providers and token holders gain income from activities on the platform. The proposal is a bid to generate revenue for Uniswap as a platform and as an organization (DAO). It goes further to state that Liquidity Providers (LP) are institutional market makers, similar to what is obtained in Centralized Exchanges. The perceived benefits to the community include;

Revenue generation for the community and UNI holders. According to the proposal, given that;

“ Uniswap v2 and v3 are Uniswap’s primary protocols. Uniswap v3 Ethereum has about $2.4b in total value locked (TVL) and has daily volumes between $11b-$400m. Uniswap v2 has about $1.1b in TVL and averages approximately $75m in daily volume. the protocol fees will generate a proposed $52m in 6 months and over $100m per annum.”

The tables below give us more numerical information (approximate)

Table 1.1: TVL & 24hr Volume across other Uniswap V3 deployments.

Table 1.2: Breakdown of proposed protocol fees to be generated at different pool fee levels and the corresponding 6-month Protocol Fee Revenue.

A fair allocation of the revenue (depending on community votes).
This proposal could act as an incentive for existing investors to increase their holdings and also usher in new investors who would find this attractive.
There’s a tendency for the UNI token will increase in price.

Benefits/effects to the ecosystem.

Uniswap takes a large chunk of the market share with a Total Value Locked (TVL) of over $3 billion and a daily trading volume of $588 million, compared to its closest, Pancake swap AMM at $1.086 billion and $114.53 million respectively (Source: DeiLlama.

Uniswap is a leading DEx in the DeFi ecosystem, and is constantly evolving (as seen in V1 to V4) and setting the pace for other DExs . There’s a possibility that other DExs will adopt this approach, as we have already seen a massive fork of V3 upon its license expiration. . This decision could have a huge impact on the ecosystem.