Uniswap DAO to activate ‘fee switch,’ burn almost $600m UNI token

Uniswap DAO voted on Christmas Day to flip its long-awaited “fee switch.”

That means some revenue from the Uniswap protocol will now be used to boost the value of the protocol’s token, UNI.

Investors had long clamoured to activate the so-called fee switch, which could direct a portion of protocol revenue to tokenholders, tying UNI’s value to the success of the Uniswap protocol.

Uniswap is the largest decentralised exchange on Ethereum, and it is also active on 39 other chains, according to DefiLlama. It has processed more than $60 billion in transactions over the past 30 days.

But activation had long been delayed by Uniswap leadership, which feared such a move would draw scrutiny from financial regulators.

That changed earlier this year, when the Uniswap Foundation proposed “UNIfication” — a suite of changes that would activate the fee switch, destroy 100 million UNI tokens, end the collection of fees on a Uniswap interface, set in motion the Foundation’s closure, and more.

The proposal passed with near unanimity — of 125 million votes cast, fewer than 1,000 were in opposition.

Rather than send revenue directly to tokenholders, the fee switch proposed by UNIfication will send that revenue to a “token jar.” UNI holders would be able to destroy their UNI tokens and, in turn, withdraw an equivalent amount of crypto from the token jar.

That would reduce the UNI supply and, in theory, boost the remaining tokens’ value.

The vote will also result in the destruction of 100 million UNI tokens, worth almost $600 million at Friday’s prices. That’s the amount of tokens that would have been burned had the proposed fee switch been implemented since Uniswap’s inception several years ago.

Today, liquidity providers get a cut of every transaction on Uniswap. It’s a lucrative business: users have paid more than $50 million in swap fees over the past 30 days, according to DefiLlama data.

The fee switch will maintain the current swap fees. But it will divert between one quarter and one-sixth of those fees to a smart contract known as the token jar. Anyone who burns UNI tokens — using a smart contract called “fire pit” — would be able to withdraw an equivalent amount of crypto from the token jar.

In order to compensate liquidity providers, the DAO approved development of a new feature, the Protocol Fee Discount Auction. That would “add a new source of protocol fees by internalizing MEV that would otherwise go to searchers or validators,” according to the UNIfication proposal.

The proposal activates the fee switch on pools in Uniswap v2 and Uniswap v3, which comprise as much as 95% of liquidity provider fees collected from Uniswap transactions that settle on Ethereum mainnet.

Votes to activate the fee switch on Uniswap v4 and other blockchains would come at a later date.

Voters also approved on Thursday the eventual closure of the Uniswap Foundation, a nonprofit funded by the DAO and tasked with driving the protocol’s growth.

A majority of Foundation staff will move to Uniswap Labs, a for-profit company. Labs will assume several responsibilities currently under the Foundation’s purview, including ecosystem support and funding, governance support, and developer relations.

Remaining Foundation employees will administer the nonprofit’s $100 million grants program. Afterward, the Foundation will fold.

Uniswap Labs, meanwhile, will cease to collect fees from interfaces that allow non-technical traders to use the Uniswap protocol. Those interfaces include a Labs-built website and crypto wallet.

UNI was flat after the vote ended on Thursday. It was trading just under $6 as of noon New York time on Friday.

Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can reach him at [email protected].