When it comes to DeFi, many people immediately think of Uniswap. It is the pioneer of AMM and a tool for making money in the crypto space. I won’t repeat the project introduction and principles too much. A simple understanding can be found in the videos I have made. Before this, I was very curious about how Uniswap survives under the pressure of the new round of Perp DEX and Solana DEX. I was also curious whether the UNI token should discuss the 'switch' again in the current environment of regulatory relaxation. UNI has been criticized for lacking utility, only having governance rights, and continuously releasing UNI rewards to LPs. The UNI token has been considered quite underwhelming since the DeFi Summer. However, Uniswap has always prepared the 'fee switch' option in V3 and V4, which is a game changer for Uniswap.
Before discussing the fee switch, we need to familiarize ourselves with the organizational structure of Uniswap. These three organizations should be viewed separately, and the following text will need to differentiate them:
- Uniswap DAO (governance)
The DAO is a governance system composed of UNI token holders, capable of allocating treasury funds and approving new product directions.
- Uniswap Foundation
It is the foundation of Uniswap, executing the voting results of the DAO, managing part of the DAO's treasury, and responsible for legal compliance.
- Uniswap Labs
Labs is a for-profit company responsible for developing the Uniswap protocol, front-end, wallets, chains, and other products. The lab can be seen as a company; they want to make profits but are subject to management by the foundation.
So what is the fee switch?
We know that when trading on Uniswap, there are transaction fees that can be divided into three parts: gas fees, swap fees, and interface fees. Currently, Uniswap distributes swap fees to LP providers. For example, when adding liquidity to V3/V4 pools, different levels of 0.01%, 0.05%, 0.3%, and 1% can be set. These swap fees fully belong to LPs. The switch is embedded in the contract code. Once the fee switch is turned on, Uniswap DAO will take a portion of these fees to the DAO's treasury, likely as value capture for UNI tokens, possibly in the form of earning dividends by staking UNI tokens.
Has Uniswap Labs already charged a 0.25% interface fee between non-USD, Euro, BTC, and ETH? Only 'wstETH-ETH', 'USDT-USDC', and 'WBTC-cbBTC' are not charged, but 'ETH-USDC' incurs the corresponding fees.
However, this part of the fee is not counted in the aforementioned swap fees and is charged to traders, all of which belong to Labs. The so-called fee switch is aimed at LP fees, with options for 1/4, 1/5, 1/6, 1/7, 1/8, 1/9, 1/10.
According to the current total UNI of 1 billion, the annual yield from swap fees is around 800 million (these data are all public). Once the fee switch is activated, the annual returns for different selected options and staking ratios are shown in the diagram below. Based on my personal guess of a 1/10 extraction ratio with a 50% staking rate, the return for one UNI is 0.16 USD a year, with an annualized rate of 2.29%. However, since UNI has not yet been fully released, the actual figures should be higher than the data listed below.
However, there are two difficulties to discuss regarding the 'fee switch':
1. After the switch is turned on, LPs feel they earn less and are reluctant to provide liquidity. 2. After the switch is turned on, is it fair for the protocol to share the profits with UNI stakers? Regarding point 1, I have reviewed a lot of information and concluded that LPs are not easily driven away; they are sticky for the protocol. Uniswap has already accumulated a large number of users and trading volume, and those LPs may not find alternative protocols with higher yields after they exit. Moreover, since UNI tokens have not yet fully vested, LPs can still earn UNI tokens, which means they can receive dividends. Why would LPs not want to participate?
In fact, in July 2022, Uniswap proposed the 'fee switch' plan, which involved a 1/10 LP fee extraction for 'ETH-USDT', 'DAI-ETH', and 'USDC-ETH'. This proposal ultimately did not get enough votes and was scrapped, mainly due to severe controversy at the time and strict regulation, and Uniswap officials did not support it. Regarding point 2, on March 7 last year, a vote to support the switch that should have gained overwhelming approval did not proceed. The reason became clear within a month: the SEC issued a warning to Uniswap Labs.
It can be seen that the SEC's regulation has prevented UNI from activating the switch and distributing dividends. However, the new SEC administration has completely changed this landscape:
On June 9, the new chairman Paul stated that DeFi represents the American spirit and respects self-custody. On June 13, the SEC repealed several proposals from the previous chairman Gary that restricted DeFi. The passage of the stablecoin bill and the compliance of tokenized stocks, along with the right to dividends, signal this.
This is a signal of regulatory relaxation this fall, with the real main event (the declaration bill) coming soon. This bill will define whether this revenue-generating token is classified as a commodity or a security. When perceived individually, those with revenue-sharing will be defined as securities, while those without will be classified as commodities, each subject to separate regulation. At that time, these protocols holding billions in the treasury will be an exciting highlight, and the big moment is truly coming!
So far, back to the main point, how much is UNI actually worth?
If we take 800 million odd extracted over a year at 1/10 (the worst case), it sounds like the treasury could earn 80 million a year. The current FDV of Uniswap is 7 billion, with a PE of 87.5; compared to our recent industry benchmarks, a PE of 200 doesn't seem high at all.
, given that Bat 16 is the current pricing compared to CRCL. If we calculate based on the exchange rate, the worst APR of 1.53% for UNI would significantly outperform NASDAQ jets. Therefore, opening dividends would absolutely classify UNI as a high-quality asset. This is equivalent to Uniswap's fundamentals. I compared Uniswap's trading volume with the DeFi summer of 2021 and found that the trading volume of UNI has not declined but has shown a growth trend. Isn't that strange? I usually don’t use Uniswap much, but why is its trading volume so high? That’s because you can see EVM swap tools like 1inch and OKX DEX, which are also connected to Uniswap's interface. This might explain why Uniswap doesn't get much direct traffic, but it quietly reaps the rewards behind the scenes.
Of course, the biggest beneficiary of opening dividends would be Labs, as they hold 17.3% of UNI tokens. They can not only collect the 0.25% interface fee but also enjoy the dividends from UNI tokens. Therefore, Labs has no reason not to promote dividends.
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