The Chronicles of Uniswap: the Token, the Switch, and the Wardrobe

Key Insights

• UNI token holders have voted in support of a recent proposal to direct a portion of trading fees to the Uniswap treasury.
• The debate now shifts to how the “fee switch” should be designed and implemented.
• Messari analysts are split on whether this is a good or bad decision for Uniswap’s future.

In the beginning, there was Uniswap. Bancor introduced the concept of the automated market maker (AMM), but Uniswap perfected its implementation with its simple X*Y=K design. Liquidity providers created pair-based markets for ERC-20 tokens and were compensated with fees from hungry traders. Uniswap itself was maintained by a small group of core developers. All was peaceful.

And then SushiSwap appeared. Chef Nomi’s now infamous move to fork Uniswap’s codebase, add a governance token (SUSHI), and distribute a portion of trading fees back to the protocol, altered Uniswap’s trajectory – Uniswap conducted a retroactive airdrop for its governance token (UNI) just one month later. While Uniswap quickly decentralized to match SushiSwap’s structure, the community refrained from adopting a similar fee model for the UNI governance token. To this day, 100% of Uniswap trading fees are retained by its liquidity providers (LPs), leaving UNI token holders with nothing but a threat to enact the “fee switch” and siphon a portion of trading revenue to token holders.

Uniswap’s fee switch has attracted speculative debate from every corner of DeFi. Does the protocol need to extract revenue from its customers? Would the fee switch push LPs to other protocols? How would the protocol use the revenue? The answers to these questions will soon be revealed in real time. With near-unanimous support (largely from the wallet of popular delegate monetsupply.eth), UNI governance signaled its support for flipping the fee switch. The debate now shifts towards the practical design of the fee switch itself.