Uniswap Protocol Fee Proposal Fails to Pass

Uniswap Protocol Fee Proposal Fails to Pass

On June 1, a proposal to introduce protocol fees for Uniswap decentralized exchange was voted down, according to the proposal’s official webpage. The outcome of the vote meant that liquidity providers (LPs) could continue earning all revenue from swaps. The proposal failed narrowly, with 45.32% of votes going to the “no fee” camp, and 42.34% voting to charge LPs one-fifth of the fees they receive from users. 12.3% voted to enact a fee charge of one-tenth, and 0.04% voted to charge one-sixth. The result meant that the “no fee” camp won by a plurality. If supporters of the protocol fee had united behind a specific fee percentage, they may have been successful. The vote was a preliminary ballot, and further refinements may be offered in the future as discussion continues.

Uniswap is governed by the Uniswap Decentralized Autonomous Organization (Uniswap DAO), which consists of holders of the Uniswap (UNI) token. The exchange currently charges crypto traders fees ranging from 0.01% to 1% of each swap, depending on the particular pool they use. However, these fees go to the liquidity providers or market makers who provide crypto to be traded. The UNI token holders, who theoretically own the protocol, do not receive any of these fees.

Supporters and Opponents of the Protocol Fee Proposal

In the proposal’s official forum page, supporters argued that Uniswap has matured as an exchange and no longer needs to offer full rebates to liquidity providers. The proposal’s author, GFX Labs, posted a list of fees from Uniswap and competitors Coinbase and Binance, arguing that Uniswap’s subsidies to LPs will still make it the best place for them to do business. GFX Labs stated that “Uniswap is in a strong position to turn on protocol fees and prove that the protocol can generate significant revenues. We need to reaffirm that liquidity providers are protocol users and do not need full rebates.”

Opponents of the proposal argued that charging a fee would cause tax and regulatory headaches for UNI holders. Porter Smith, a deal partner for venture capital fund A16z, stated that fees should not be enacted until one of two things happen: either Uniswap governance becomes an incorporated legal entity, or a decentralized “flow of funds” is developed to send revenue directly to UNI holders. Smith said, “In the absence of a legal entity, it is important to reduce tax risk by using a programmatic flow of funds directly to token holders who are performing work on behalf of the DAO. A programmatic flow of funds could help ensure the taxable obligation rests with those users instead of the DAO.”

Uniswap DAO has members in multiple jurisdictions worldwide and is not registered as a business in any country, as is the case with most DAOs. The exchange began on the Ethereum network but has been trying to expand into additional networks recently. On April 14, the DAO voted to deploy Uniswap to the Polygon zero-knowledge Ethereum Virtual Machine (zkEVM) network. On May 17, it voted to launch a Moonbeam Polkadot parachain version as well.

Uniswap’s DAO vote on protocol fees demonstrates the complexity of implementing changes in a decentralized system. While supporters of the fee argued that Uniswap no longer needs to offer full rebates to liquidity providers, opponents of the fee highlighted the tax and regulatory implications for UNI holders. As Uniswap continues to evolve and expand into additional networks, it will be interesting to see how its DAO navigates these challenges in the future.


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