Uniswap Foundation proposes rewarding engaged UNI token holders to invigorate governance and strengthen the protocol.
The Uniswap Foundation (UF) has put forward a new proposal aimed at incentivizing active and engaged UNI token holders. This proposal seeks to overhaul the fee distribution mechanism within the Uniswap protocol, with a focus on distributing a portion of fees to its community.
Following the announcement of this proposal, the UNI token has surged by 45% in the past 24 hours, as per data from CoinGecko. This surge has propelled the token to the 16th position in terms of market capitalization, now standing at $8.3 billion.
The proposal, authored by Erin Koen, UF’s Governance Lead, highlights the foundation's concerns regarding 'free-riding and apathy' within the Uniswap ecosystem, viewing them as potential threats. The foundation aims to breathe new life into governance mechanisms through these proposed changes.
“Decentralized, resilient, and engaged governance is imperative to the long-term health and success of the Protocol. We believe this upgrade will strengthen and invigorate Uniswap governance,” stated the foundation in a recent announcement.
Despite being the leading decentralized exchange by volume, less than 10% of circulating UNI tokens are actively used in governance votes. In the past day alone, Uniswap recorded approximately $877 million in token trades.
If approved, the proposal entails the deployment of two new smart contracts: V3FactoryOwner.sol 38 and UniStaker.sol 39. The V3FactoryOwner contract would facilitate the collection of protocol fees in a permissionless manner. These fees would then be distributed to UNI holders who stake and delegate through UniStaker. It's important to note that governance would retain control over fee levels and eligible pools.
Following a security audit by Code4rena, a Snapshot vote is scheduled for March 1, 2024, followed by an on-chain vote on March 8, 2024. However, these dates are subject to change based on audit results and community feedback, according to the foundation.
The UF anticipates a potential surge in new delegations should the proposal pass. Therefore, they advise all holders to thoroughly research and select delegates whose past voting patterns align with their preferences.
With UNI trading at approximately $11, there is considerable anticipation surrounding the upcoming votes in early March. The successful passage of this proposal would mark a significant milestone for Uniswap, further decentralizing governance and fostering community involvement.
While incentivizing engaged governance may offer long-term benefits for Uniswap, delegates must also consider potential impacts on liquidity. Gauntlet, in a recent simulation, analyzed the introduction of fees, predicting that most liquidity would remain intact even with moderate fees.
“The impact on volume, TVL, and revenue depends significantly on the fee applied. In the most conservative case allowed by the v3 fee contracts, Gauntlet predicts that a flat 10% protocol fee would lead to a loss of 10.71% in liquidity, a 10.71% reduction in MEV volume, and a 0.75% decrease in core trading volume when factoring in the flywheel effect,” the report states.
Recent developments from Uniswap also include a partnership with ENS domains to offer uni.eth domain names, claimable through its mobile app. Additionally, Uniswap v2 has been canonically deployed on Arbitrum, Polygon, Optimism, Base, Binance Smart Chain, and Avalanche. This canonical deployment enables users to seamlessly swap and create liquidity pools across these six new chains directly from Uniswap’s interface.