Uniswap Fee Distribution: A Legal Breakthrough for DeFi?

Bitpush News
5 min readFeb 25, 2024

Even though decentralized finance protocols are meant to operate in a decentralized and trustless manner, many still find themselves forced to operate within the restrictive confines of government regulators. Uniswap, the most well-known DeFi protocol, is no different and may embody this principle better than any other project. However, a recent announcement from the Uniswap Foundation’s governance lead proposes that UNI token holders receive trading fees from swaps on the platform. Let’s explore why this is significant, what could have changed in the legal environment, and the future consequences of this decision.

Uniswap is one of the biggest and most established decentralized exchanges in the Ethereum ecosystem, with over $1 trillion in total volume and over $5 billion in total value locked on the protocol’s deployments across 13 chains and Layer 2s. In 2020, they made history by airdropping the UNI token to platform users, which has since revolutionized token distribution in the cryptocurrency industry.

Since its release, the value of the UNI token has strictly been its use in voting on decisions made by the Uniswap DAO. UNI token holders can either vote themselves or delegate their vote to established entities to control decisions related to distributing grants and managing the DAO treasury, deploying other changes and modifications to the trading fees. Notably, one missing aspect was a direct correlation between the UNI token and the value accrual of the Uniswap platform — no amount of volume would substantially provide more value to UNI holders.

Also in 2020, Sushiswap and other competitors began attempting to siphon users and token holders away from Uniswap by offering greater incentives to liquidity providers and this fee-generating capability for SUSHI token holders. Specifically, SUSHI holders can stake their tokens and earn 0.05% of the 0.3% trading fee on every transaction, which is currently estimated to be a 3% APY. This has frustrated UNI holders for years, and there have been constant complaints about UNI’s non-existent tokenomics.

Uniswap was hesitant to turn on the fee switch primarily because of regulatory reasons. Uniswap Labs, the company behind the protocol, is based in New York and is subject to state and federal laws around offering and operating securities and exchanges. For the past few years, the prevailing legal opinion was that a fee switch, effectively a dividend on the UNI token, would make the token a security and thus subject to regulation by the United States Securities and Exchange Commission. Uniswap Labs had previously gotten around this by levying a fee on users trading using the uniswap.org website, with a 0.15% fee going directly to the Uniswap Labs company, not UNI token holders. This was an extremely controversial move and frustrated a lot of UNI holders, who justifiably thought that the UNI token would never have a value accrual method.

Unexpectedly, it seems that Uniswap has changed its tone, as evidenced by a recent proposal from its governance lead, Erin Koen. In a Uniswap Governance forum post, Koen recommends an overhaul of the governance system that would provide active UNI voters and delegators with revenues generated from the protocol. This is a monumental moment for DeFi, as Uniswap has been seen as one of the most regulatory-compliant protocols and relatively conservative in its decision-making. Off this news, UNI increased by over 40%, and several other DeFi protocols, including Compound Finance’s COMP and Blur’s BLUR tokens, increased in value drastically, with token holders anticipating similar revenue sharing now as an option.

The reason for this drastic shift in strategy has been a point of speculation. One potential reason could be that there was a development in the SEC’s case against Coinbase, in which they allege that several assets listed on the exchange, but not UNI, are securities. This rumor has been further fueled by tweets from influencers and cryptic tweets from insiders.

Another possibility is that Uniswap Labs decided to take a risk and go forward with the fee switch, possibly after receiving new legal counsel that made them more confident in the decision. Given that the proposal alone pumped UNI’s market capitalization by multiple billions of dollars, there is clearly demand for real yield in DeFi projects, and recent legal wins from XRP and the launch of the Bitcoin ETF may have them feeling more confident about any legal battle that might ensue.

After the UNI announcement, there will likely be several other original DeFi protocols that follow with similar proposals, including Aave and Compound. This could be the watershed moment for regulatory-conservative DeFi protocols to begin offering real yield on their tokens, making them closer to owning existing assets like shares in a bank or traditional asset exchange. Only time will tell if this results in stricter regulation for the DeFi industry, but for the time being it is a massive win for DeFi token holders and the general maturity and value of the industry.

By Lincoln Murr

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