Uniswap (UNI) wants holders to share in revenue — what does that mean?
As part of a pilot, Uniswap is exploring letting UNI holders share in the proceeds from its DEX.
As part of a pilot program, Uniswap aims to let UNI holders share in the proceeds from its DEX. This is what lies behind the plan and the risks involved.
Uniswap is the largest decentralized exchange (DEX) in the crypto space. With the DeFi protocol, users can securely trade cryptocurrencies peer-to-peer without a central intermediary. To provide this service, Uniswap relies on a so-called liquidity pool model, where users supply liquidity to a pool controlled by a smart contract. In return, liquidity providers receive a share of the trading fees users pay when they use the liquidity pools to swap coins.
Over the past 30 days, Uniswap has generated more than $34 million in fees, with a portion going to the liquidity providers on Uniswap. This makes Uniswap the second-largest protocol in the crypto space in terms of fees, behind Ethereum. UNI token holders, however, have not received a cent of this income so far — but that is exactly what is about to change.
This is what Uniswap has planned
In July this year, several members of the Uniswap community proposed changing the fee model and the UNI token design. After much back-and-forth discussion and several revised proposals, Uniswap now wants to start a pilot project in which a portion of the fees is directed directly to UNI token holders. Concretely, roughly 10 percent of the fees generated by Uniswap's ETH-USDT, DAI-ETH and USDC-ETH trading pairs would flow directly to UNI token holders.
The switch will not raise trading fees for users, but a small portion of what is currently paid to liquidity providers will be retained. According to the developers of the decentralized exchange, the test run is considered successful if transaction conditions on the DEX are not negatively affected.
A likely consequence of the change is that liquidity providers on the DEX will earn less income. The issue could be that liquidity providers decide to withdraw their capital from the exchange to move to other DEXes where they receive higher fees. This could in turn lead to a reduction in Uniswap's liquidity and swaps becoming less effective than before the switch.
UNI in the US authorities' crosshairs soon?
Additionally, UNI could become a target for authorities in the US due to the new token design. Since the DeFi protocol would require UNI holders to directly participate in the DEX's earnings, UNI could be classified as a security in the US as a result of this change. This could in turn negatively affect members of the Uniswap community, Uniswap Labs, and the Uniswap Foundation. Those involved in drafting the test run could also be affected.
Despite the risks, reactions to the proposal are currently predominantly positive. Therefore, the pilot is expected to start in the coming weeks. UNI holders should be able to vote on the change this week. Read also: Green light for Uniswap Foundation
