UNI Fee Switch Inches Closer To Reality

Given that the Uniswap Foundation posted this proposal, we view that it has a significantly higher chance of passing than previous fee switch proposals. It is unlikely that the Foundation would have posted it without knowing that they have backing from significant UNI token holders or delegates. The market has evidently priced this in, with UNI appreciating ~50% since this proposal was posted on the forums.

Our analysis shows that if a 10% take rate (10% of pool fees not distributed to LPs) were to be implemented for tokens where the Uniswap interface fee switch is also enabled (ETH/WETH/various stables), then $13.6M would have been distributed to UNI holders who have delegated and staked their tokens in 2023. A 5% take rate would have yielded $6.8M, while a 15% take rate would have yielded $20.4M in 2023.

Taking an optimistic view, where every single pool that collects fees is eligible, and if one were to use data since December 2021, then at a 10% take rate, the fee switch would have distributed $141M in fees to date. At a 50% circulating stake rate and a $8.5B Map, this would equate to ~3.3% APR. Our view is that if there is no lock period, the stake rate could be relatively high, as there are many large institutional UNI holders, and there are not many instances within DeFi where UNI tokens can be productively leveraged. As a point of reference, 24% of DAI is deposited in the DSR module, and we view this as the lower bound because of the many other yield opportunities available for DAI.

Using January 2024 Uniswap data and assuming a 50% UNI stake rate and that every single pool that collects fees has a 15% take rate, then at an $8.5B MCap, the APR would be ~2.6%. As seen, a bull market and vastly increased Uniswap volume could drive the APR significantly higher. However, one should note that a 2.6% APR is relatively inconsequential, especially in a bull market. One could comment that Ethereum has a relatively similar staking yield but still sees billions being staked. However, staked ETH and LSTs have much more utility (money, DeFi integrations, ability to lever the staking trade through money markets, etc.)

By all traditional valuation metrics, Uniswap would look incredibly expensive from a Circulating P/E perspective. Simply applying a 10% take rate on January 2024 data, the protocol would have a MCap/Annualized Earnings multiple of 76x, hardly a steal compared to MKR’s YTD MCap/Annualized Earnings multiple of 21x. However, Uniswap and its token holders have long waited for a fee switch to be enabled. Mentally, the UNI token finally has utility in the form of revenue distribution instead of solely being a governance token. In addition, there are further catalysts on the roadmap in the form of UniswapX’s continued growth and the launch of Uniswap V4 later in Q3. Thus, we believe there is further upside for the token in dollar terms, but that upside is capped in relative terms.

Another area that we would pay close attention to is blue chip DeFi tokens that have historically been interested in a fee switch but have not enabled one yet. We view that other protocols with a significant amount of revenue may follow suit and could similarly experience a re-rating higher. Some DeFi 1.0 projects have already shown weak signs of this, following UNI as the price increased e.g AAVE, CRV, SNX, etc.  The strongest candidate for a fee switch right now would be LDO.