This post is co-written with @guil-lambert
In July of 2022 a proposal was put forward to pilot turning on the "fee switch" for a small set of Uniswap protocol pools. A temperature check passed and a consensus check also passed voting.
During the process, many people voiced a desire to have more time to research this proposal before voting. In light of that, the vote was postponed until December 1st. This pause led to helpful research from Alastor as well as input from the newly created Uniswap Foundation.
Now that it's December 2nd, the vote is moving forward! The purpose of this post is to re-iterate key points of the proposal and next steps so the community can be ready!
The rationale behind the proposal remains the same. For clarity, we are stating a few of the key points here but it's recommended to read the original post.
This proposal is solely designed to test the impact of the "fee switch" on protocol usage. The proposal does not dictate how any tokens retained during this period are used (or if they ever will be used). The proposal does not create any expectation the retained tokens will be paid out to UNI token holders. On the contrary, this proposal advocates that if future proposals use accrued tokens, that use be restricted to public good purposes for the community and to grow the Uniswap protocol.
This proposal is truly designed as a pilot program intended to evaluate the impact of turning on the fee switch on trade execution.
Turning on the fee switch will not increase fees for people using the protocol to swap. It will simply retain a small portion of what is currently being paid out to liquidity providers.
To limit the potential impact of the pilot program on liquidity providers, we are proposing to activate the lowest possible settings for the "Fee switch" (1/10) on a limited subset of pairs (ETH-stablecoin “sister pools”) and for a limited time (120 days).
The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success.
We thank the Alsator team for the thorough and comprehensive “Uniswap Fee Switch Report” which has been released earlier this month (link to the report: https://drive.google.com/file/d/1Dr_gGY8YIZxcl-fooyafA6tK1yLi94n5/view). The key takeaways from the report are that the fee switch should be designed to grow both volumes and market share of the Uniswap protocol. We wholeheartedly agree with this goal and we are sure most UNI stakeholders will be guided by similar principles.
However, we chose not to follow their recommendation to not turn on the fee switch for any of the “lower fee tier” pools. Their report argued that doing so could decrease Uniswap’s volume and market share, but at this point we are frankly unsure if anyone knows whether that would be the case.
They also made the observation that “sophisticated” LPs often sit in lower fee tiers, which by association also suggest that the retail-level LPs sit in the higher fee tiers. Hence, only targeting the higher fee tiers could disproportionately impact smaller players. We believe the community would agree that the fee switch should not negatively impact retail users while at the same time favor sophisticated LPs.
In addition, several users raised concerns about turning on the fee switch for the ETH-Dai 5bps pool. As per the Alastor report, the ETH-Dai pairs collectively have the least amount of liquidity amongst the ETH-stablecoin pairs, and we agree that targeting the ETH-Dai 5bps fee tier, which has the most volume, could negatively impact liquidity providers at all levels.
We thus decided to follow @alanalevin suggestion to use the ETH-USDT-0.05% as a possible alternative to the ETH-Dai-0.05% pool.
Therefore, we propose to set Fee parameter to 1/10 for the following pairs:
All accrued protocol fees will remain “uncollected” inside each pool smart contract until governance agrees on best use for funds via a vote.
The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success. Note that this criteria explicitly does not consider the impact of the fee switch on liquidity provider returns.
More intangibly, we hope this proposal helps catalyze robust discussion and work around Uniswap, the world’s most successful decentralized finance protocol. We hope this work is broad and creative, showing the world what new models of coordination are possible.
We anticipate the on-chain vote going live in the next 14 days. We are currently doing technical diligence to ensure the proposal itself is formatted correctly. We will post this code when it is ready for additional review by the community
The authors of this post hold no UNI tokens nor have any price exposure to UNI via alternative methods (i.e. margin, leveraged trading, etc.).
This post is co-written with @guil-lambert
In July of 2022 a proposal was put forward to pilot turning on the "fee switch" for a small set of Uniswap protocol pools. A temperature check passed and a consensus check also passed voting.
During the process, many people voiced a desire to have more time to research this proposal before voting. In light of that, the vote was postponed until December 1st. This pause led to helpful research from Alastor as well as input from the newly created Uniswap Foundation.
Now that it's December 2nd, the vote is moving forward! The purpose of this post is to re-iterate key points of the proposal and next steps so the community can be ready!
The rationale behind the proposal remains the same. For clarity, we are stating a few of the key points here but it's recommended to read the original post.
This proposal is solely designed to test the impact of the "fee switch" on protocol usage. The proposal does not dictate how any tokens retained during this period are used (or if they ever will be used). The proposal does not create any expectation the retained tokens will be paid out to UNI token holders. On the contrary, this proposal advocates that if future proposals use accrued tokens, that use be restricted to public good purposes for the community and to grow the Uniswap protocol.
This proposal is truly designed as a pilot program intended to evaluate the impact of turning on the fee switch on trade execution.
Turning on the fee switch will not increase fees for people using the protocol to swap. It will simply retain a small portion of what is currently being paid out to liquidity providers.
To limit the potential impact of the pilot program on liquidity providers, we are proposing to activate the lowest possible settings for the "Fee switch" (1/10) on a limited subset of pairs (ETH-stablecoin “sister pools”) and for a limited time (120 days).
The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success.
We thank the Alsator team for the thorough and comprehensive “Uniswap Fee Switch Report” which has been released earlier this month (link to the report: https://drive.google.com/file/d/1Dr_gGY8YIZxcl-fooyafA6tK1yLi94n5/view). The key takeaways from the report are that the fee switch should be designed to grow both volumes and market share of the Uniswap protocol. We wholeheartedly agree with this goal and we are sure most UNI stakeholders will be guided by similar principles.
However, we chose not to follow their recommendation to not turn on the fee switch for any of the “lower fee tier” pools. Their report argued that doing so could decrease Uniswap’s volume and market share, but at this point we are frankly unsure if anyone knows whether that would be the case.
They also made the observation that “sophisticated” LPs often sit in lower fee tiers, which by association also suggest that the retail-level LPs sit in the higher fee tiers. Hence, only targeting the higher fee tiers could disproportionately impact smaller players. We believe the community would agree that the fee switch should not negatively impact retail users while at the same time favor sophisticated LPs.
In addition, several users raised concerns about turning on the fee switch for the ETH-Dai 5bps pool. As per the Alastor report, the ETH-Dai pairs collectively have the least amount of liquidity amongst the ETH-stablecoin pairs, and we agree that targeting the ETH-Dai 5bps fee tier, which has the most volume, could negatively impact liquidity providers at all levels.
We thus decided to follow @alanalevin suggestion to use the ETH-USDT-0.05% as a possible alternative to the ETH-Dai-0.05% pool.
Therefore, we propose to set Fee parameter to 1/10 for the following pairs:
All accrued protocol fees will remain “uncollected” inside each pool smart contract until governance agrees on best use for funds via a vote.
The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success. Note that this criteria explicitly does not consider the impact of the fee switch on liquidity provider returns.
More intangibly, we hope this proposal helps catalyze robust discussion and work around Uniswap, the world’s most successful decentralized finance protocol. We hope this work is broad and creative, showing the world what new models of coordination are possible.
We anticipate the on-chain vote going live in the next 14 days. We are currently doing technical diligence to ensure the proposal itself is formatted correctly. We will post this code when it is ready for additional review by the community
The authors of this post hold no UNI tokens nor have any price exposure to UNI via alternative methods (i.e. margin, leveraged trading, etc.).
honestly, this is disappointing
honestly, this is disappointing
Is there an ETA for this?
I will do a wild guesstimate: 2-4 weeks until a proposal is posted. Then discussion, q&a etc another 2-6 weeks. Then move to vote. Vote, another week. Then implementation and legal entity setup is in the hands of the UF. I imagine this process itself will take several months. I would say between 2-4 months. Once the entity is set up, fee switch pilot will be put to a vote. 1 week for voting. Then proposal will be implemented (not guaranteed). I would say this will again take a minimum of 2-3 months. So I think at least 6-10 months just for the fee switch pilot to be up and running (it has already been 6 months since the original proposal by Leighton). Then we have another long road ahead of us for the actual fee switch. Not to mention fees ever accruing to token holders (off-topic for this, I know).
Is there an ETA for this?
I will do a wild guesstimate: 2-4 weeks until a proposal is posted. Then discussion, q&a etc another 2-6 weeks. Then move to vote. Vote, another week. Then implementation and legal entity setup is in the hands of the UF. I imagine this process itself will take several months. I would say between 2-4 months. Once the entity is set up, fee switch pilot will be put to a vote. 1 week for voting. Then proposal will be implemented (not guaranteed). I would say this will again take a minimum of 2-3 months. So I think at least 6-10 months just for the fee switch pilot to be up and running (it has already been 6 months since the original proposal by Leighton). Then we have another long road ahead of us for the actual fee switch. Not to mention fees ever accruing to token holders (off-topic for this, I know).
As someone who decided to buy UNI in June 2022, when chatter of fee switch finally began to heat up again, the lack of urgency with which this process has moved forward has left me quite surprised. How can this process be improved?
Unfortunate to see this being deferred to yet another vote. @Leighton writes:
"Our understanding from talking to stakeholders is there will be a thoughtful proposal on options to create an entity to handle this in a few weeks. From there, an option can be chosen and proposal can proceed with that aspect de-risked and we will put forward a vote!"
Unfortunate to see this being deferred to yet another vote. @Leighton writes:
"Our understanding from talking to stakeholders is there will be a thoughtful proposal on options to create an entity to handle this in a few weeks. From there, an option can be chosen and proposal can proceed with that aspect de-risked and we will put forward a vote!"
Any update on the entity creation? Can anyone create a proposal for entity creation? If so, I will be more than happy to do this.
One of the big question marks of the Fee Switch is market share impact. Eventually, it comes down to users attrition, or viewed from the opposite stance: Stickiness.
And because of the occurrence of triangular inter-pool trading within Uniswap pools, measuring and understanding stickiness is challenging.
One of the big question marks of the Fee Switch is market share impact. Eventually, it comes down to users attrition, or viewed from the opposite stance: Stickiness.
And because of the occurrence of triangular inter-pool trading within Uniswap pools, measuring and understanding stickiness is challenging.
Even though we could still imply it from the other pools (used for triangular spillovers) change in activity post-switch vs historical levels, it’s difficult to disentangle what share of that activity would be resulting from which pool among the three activated pools.
Stickiness (of trading and liquidity) is very pool-specific.
From our analysis ETH-DAI 0.05% and ETH-USDC 1% would not be too impacted by this side effect. The former a bit more than the latter due to whale behaviour.
However ETH-USDT 0.3% seems more prone, with JIT playing a role on liquidity and Curve on trading volume.
Overall outcome is clearly agent-driven so the experimentation will benefit from incorporating behavioural analysis through simulation.
Read our full analysis on our Medium post
Difficult to convice LP, if it's not clear how will these retained fee be utilize.
It's wouldn't work if you just take my money away, and nothing promised. Leave room for corruption and suspicious.
Suggest, first, to be more clearer on how the retained fee will be used.
One potential approach to avoid tax issues with the fees collected by the feeswitch is to burn the fees. By burning the fees, we can ensure that the fees are not subject to taxation, as they would no longer exist and therefore could not be considered taxable income for the purpose of this pilot. An alternative approach to avoid tax issues would be to donate funds accrued to a tax-exempt charity recognized by the IRS. This would allow the funds to be put to a better purpose and may potentially provide tax benefits.
This approach could provide a way for the Uniswap community to maintain the integrity and decentralization of the platform, while also addressing the optics of potential tax implications into launching a feeswitch "experiment". However, it is important to note that the above approaches may also have drawbacks and limitations, and it should be carefully considered before being implemented.
Alana and Derek here with Variant. We’ve been following the fee switch discussion over the past few months, and wanted to provide an update on our perspective.
First, we’re still strongly intellectually aligned with the proposal: we think experimentation with protocol parameters, such as the fee switch, is good and needed. We commend @Leighton for putting forward the initial proposal and spurring what we consider to be a very productive discussion. We also appreciate that Leighton and @guil-lambert incorporated our feedback on potential testing pools in the final proposal. As previously mentioned, in the long run we believe the fee switch can not only drive fundamental value to the UNI token, but also be used as growth capital for the protocol to secure its position as the leading DEX in web3.
Think that a DAO-linked legal entity to achieve tax compliance (first) and eventually registration is the way forward to enable DeFi as a real alternative market infrastructure and draw a line vs the CeFi mess.
Very interested in your work here for Uniswap and other protocols. If the timeline is Jan-Feb, probably worth to delay the vote again.
interesting idea :slight_smile:
When you say opt-in, is there a reason why the example idea only mentions LPs opting in? Do you not see this being available to any UNI holder that doesn't provide liquidity?
This is my first post on the governance forum, so hello Uniswap community :smiley: . There is a massive gorilla in the room which has not yet been mentioned on this thread, the business license of the v3 core contracts expires on April 1st 2023, which is less than 120 days from today. If the proposal to test the fee switch for 120 days were to pass 8 days from now when the voting happens, ~100 of the test days would be with the BUSL active, and ~20 days of fully open source v3 core. My proposal is to set the start date of the 120 day test to be January 31st 2023. This test would have 60 days with no other range liquidity alternatives for LP's to migrate to, and then 60 days with v3 core fully open sourced where there may be a competitive fork that draws LP's.
Is there an ETA for this?
I will do a wild guesstimate: 2-4 weeks until a proposal is posted. Then discussion, q&a etc another 2-6 weeks. Then move to vote. Vote, another week. Then implementation and legal entity setup is in the hands of the UF. I imagine this process itself will take several months. I would say between 2-4 months. Once the entity is set up, fee switch pilot will be put to a vote. 1 week for voting. Then proposal will be implemented (not guaranteed). I would say this will again take a minimum of 2-3 months. So I think at least 6-10 months just for the fee switch pilot to be up and running (it has already been 6 months since the original proposal by Leighton). Then we have another long road ahead of us for the actual fee switch. Not to mention fees ever accruing to token holders (off-topic for this, I know).
Is there an ETA for this?
I will do a wild guesstimate: 2-4 weeks until a proposal is posted. Then discussion, q&a etc another 2-6 weeks. Then move to vote. Vote, another week. Then implementation and legal entity setup is in the hands of the UF. I imagine this process itself will take several months. I would say between 2-4 months. Once the entity is set up, fee switch pilot will be put to a vote. 1 week for voting. Then proposal will be implemented (not guaranteed). I would say this will again take a minimum of 2-3 months. So I think at least 6-10 months just for the fee switch pilot to be up and running (it has already been 6 months since the original proposal by Leighton). Then we have another long road ahead of us for the actual fee switch. Not to mention fees ever accruing to token holders (off-topic for this, I know).
As someone who decided to buy UNI in June 2022, when chatter of fee switch finally began to heat up again, the lack of urgency with which this process has moved forward has left me quite surprised. How can this process be improved?
Unfortunate to see this being deferred to yet another vote. @Leighton writes:
"Our understanding from talking to stakeholders is there will be a thoughtful proposal on options to create an entity to handle this in a few weeks. From there, an option can be chosen and proposal can proceed with that aspect de-risked and we will put forward a vote!"
Unfortunate to see this being deferred to yet another vote. @Leighton writes:
"Our understanding from talking to stakeholders is there will be a thoughtful proposal on options to create an entity to handle this in a few weeks. From there, an option can be chosen and proposal can proceed with that aspect de-risked and we will put forward a vote!"
Any update on the entity creation? Can anyone create a proposal for entity creation? If so, I will be more than happy to do this.
One of the big question marks of the Fee Switch is market share impact. Eventually, it comes down to users attrition, or viewed from the opposite stance: Stickiness.
And because of the occurrence of triangular inter-pool trading within Uniswap pools, measuring and understanding stickiness is challenging.
One of the big question marks of the Fee Switch is market share impact. Eventually, it comes down to users attrition, or viewed from the opposite stance: Stickiness.
And because of the occurrence of triangular inter-pool trading within Uniswap pools, measuring and understanding stickiness is challenging.
Even though we could still imply it from the other pools (used for triangular spillovers) change in activity post-switch vs historical levels, it’s difficult to disentangle what share of that activity would be resulting from which pool among the three activated pools.
Stickiness (of trading and liquidity) is very pool-specific.
From our analysis ETH-DAI 0.05% and ETH-USDC 1% would not be too impacted by this side effect. The former a bit more than the latter due to whale behaviour.
However ETH-USDT 0.3% seems more prone, with JIT playing a role on liquidity and Curve on trading volume.
Overall outcome is clearly agent-driven so the experimentation will benefit from incorporating behavioural analysis through simulation.
Read our full analysis on our Medium post
Difficult to convice LP, if it's not clear how will these retained fee be utilize.
It's wouldn't work if you just take my money away, and nothing promised. Leave room for corruption and suspicious.
Suggest, first, to be more clearer on how the retained fee will be used.
One potential approach to avoid tax issues with the fees collected by the feeswitch is to burn the fees. By burning the fees, we can ensure that the fees are not subject to taxation, as they would no longer exist and therefore could not be considered taxable income for the purpose of this pilot. An alternative approach to avoid tax issues would be to donate funds accrued to a tax-exempt charity recognized by the IRS. This would allow the funds to be put to a better purpose and may potentially provide tax benefits.
This approach could provide a way for the Uniswap community to maintain the integrity and decentralization of the platform, while also addressing the optics of potential tax implications into launching a feeswitch "experiment". However, it is important to note that the above approaches may also have drawbacks and limitations, and it should be carefully considered before being implemented.
Alana and Derek here with Variant. We’ve been following the fee switch discussion over the past few months, and wanted to provide an update on our perspective.
First, we’re still strongly intellectually aligned with the proposal: we think experimentation with protocol parameters, such as the fee switch, is good and needed. We commend @Leighton for putting forward the initial proposal and spurring what we consider to be a very productive discussion. We also appreciate that Leighton and @guil-lambert incorporated our feedback on potential testing pools in the final proposal. As previously mentioned, in the long run we believe the fee switch can not only drive fundamental value to the UNI token, but also be used as growth capital for the protocol to secure its position as the leading DEX in web3.
Think that a DAO-linked legal entity to achieve tax compliance (first) and eventually registration is the way forward to enable DeFi as a real alternative market infrastructure and draw a line vs the CeFi mess.
Very interested in your work here for Uniswap and other protocols. If the timeline is Jan-Feb, probably worth to delay the vote again.
interesting idea :slight_smile:
When you say opt-in, is there a reason why the example idea only mentions LPs opting in? Do you not see this being available to any UNI holder that doesn't provide liquidity?
This is my first post on the governance forum, so hello Uniswap community :smiley: . There is a massive gorilla in the room which has not yet been mentioned on this thread, the business license of the v3 core contracts expires on April 1st 2023, which is less than 120 days from today. If the proposal to test the fee switch for 120 days were to pass 8 days from now when the voting happens, ~100 of the test days would be with the BUSL active, and ~20 days of fully open source v3 core. My proposal is to set the start date of the 120 day test to be January 31st 2023. This test would have 60 days with no other range liquidity alternatives for LP's to migrate to, and then 60 days with v3 core fully open sourced where there may be a competitive fork that draws LP's.
Alana and Derek here with Variant. We’ve been following the fee switch discussion over the past few months, and wanted to provide an update on our perspective.
First, we’re still strongly intellectually aligned with the proposal: we think experimentation with protocol parameters, such as the fee switch, is good and needed. We commend @Leighton for putting forward the initial proposal and spurring what we consider to be a very productive discussion. We also appreciate that Leighton and @guil-lambert incorporated our feedback on potential testing pools in the final proposal. As previously mentioned, in the long run we believe the fee switch can not only drive fundamental value to the UNI token, but also be used as growth capital for the protocol to secure its position as the leading DEX in web3.
We also recognize that a number of valid legal and regulatory considerations have been raised throughout this process. Our view is that the best way to drive progress on these issues is to move forward with the proposed experimentation. Action begets action. These considerations were only raised because there was an initiative to push forward with the fee switch. Thus, we believe that approval of the fee switch experimentation will similarly catalyze deeper engagement on tax, legal, and other regulatory issues from Uniswap stakeholders. Delaying action, on the other hand, risks an endless cycle of further postponements.
Framed another way: high-growth projects often succeed by shipping and experimenting. This proposal embodies one way that Uniswap can continue to “ship”, which we believe is necessary for the protocol to continue innovating and to maintain its leading market position. As a result, we’re supportive of moving forward with the proposed fee switch experimentation.
Finally, to be clear, we agree that the tax and regulatory considerations raised by a16z and others are important. Specifically, we are aligned that the community needs to ultimately find and implement solutions to tax compliance, and will benefit from greater clarity on both legal entities for tax obligations as well as liabilities as they relate to token holders, regardless of whether the fee switch proposal is approved. As @devinwalsh mentioned, the Uniswap Foundation has already begun to engage the community on this front and we see an opportunity for further work that advances to actionable, open source implementation details for the community to act upon.
This post was authored by Alana Levin and Derek Walkush, investment partners at Variant. Variant is an investor in the UNI token. See disclosures.
Thanks @Porter.
It would be great to have more clarity on your timeline for "evaluating a plan that will address each element."
Hi Uniswap Community, Almanak is a web3 simulation platform that enhances decision makers with risk management tooling across DAOs. We have been following the discussion around the fee switch & its testing since the very beginning (thank you @guil-lambert for your efforts) and would like to drop additional comments regarding our most recent observations.
Hi Uniswap Community, Almanak is a web3 simulation platform that enhances decision makers with risk management tooling across DAOs. We have been following the discussion around the fee switch & its testing since the very beginning (thank you @guil-lambert for your efforts) and would like to drop additional comments regarding our most recent observations.
We would like to suggest a set of meaningful metrics to interpret the results of the fee switch implementation in a correct and digestible way:
Trading execution (slippage + fees) is a relevant and important metric, yet does not reflect the impact on the pools and the protocol Optimal trading execution is one of the key topics for a majority of trades on DEXes driven by MEV bots and market makers. Both use pools with high liquidity to limit the impact of slippage on their profit margin. Offering the best execution price and highest return will loom more volume to the pools. Yet trading execution is not a tangible metric to track as it only tells the story of executed trades rather than the ones that were not, which equals to lost volume.
Tracking pool and market share combined with liquidity flows could be top-line metrics to implement to understand the impact more clearly, supported by bottom-line dimensions such as liquidity retention and shifts We agree with the general direction @msilb7 highlighted: not only should the pool volume of each pool tier be reflected but additionally the overall Uniswap v3 market share of the trading pairs. We suggest further refining what specific metrics to use and their respective units. The metric set will highlight the impact of liquidity not being available on the respective Uniswap pools but on other DEXes, which then aggregates more trades and a higher market share. Note that the metrics would have the following units:
Benchmarking/Validating the fee switch approach is currently not tackled Even though the Uniswap community opted to trial the fee switch on live pools, we support the idea of shedding light on the “what if?” question. Comparing the different notions of challenging macroeconomic environments is not trivial and validating how a fee switch will fare with different constraints is in the community’s interest to not only rely on this test on selected pools. Ongoing research led by the Uniswap community can help to define volume and liquidity capacities to be simulated. The overarching environment can be populated by trained agents on these specific metrics, executing actions when the simulation is running. Actions will either result in trades, deposits of liquidity or respective withdrawals as well as interacting with other exchanges to represent the competitive environment..
We propose to use the above group of metrics to be tracked along the experiment for a clear communication and alignment of goals across the community. The variety of metrics covers both the impact of external factors (missing volume on Uniswap transferred to other DEXes) and internal observations (where did liquidity flow). We additionally add the respective units and specifically define what to track and what not to.
Introduction of Benchmarking/Validating framework in additional to tracking/testing of the fee switch to validate the current fee switch implementation in simulation environment. This environment represents an additional layer of validation whether or not to implement the fee switch.**
I'm struggling to get my head around this tax argument. What makes Uniswap protocol taking a share of fees different from pretty much every other defi protocol doing so?
Larry from Reverie here.
First off, I really like the idea of running experiments with the fee switch. That’s because over the long run, I view protocol fees as the principal way for the protocol to support itself in a sustainable manner.
Having said that, I think we need to understand the tax impact before we turn on the fee switch.
Larry from Reverie here.
First off, I really like the idea of running experiments with the fee switch. That’s because over the long run, I view protocol fees as the principal way for the protocol to support itself in a sustainable manner.
Having said that, I think we need to understand the tax impact before we turn on the fee switch.
Simply put, turning fees on will generate revenue for the protocol (even if the accrued fees are not paid out to tokenholders). As I see it, the known unknown is “who will cover the potential tax bill on profits generated by the protocol?”
Before we have a better answer to this question, I don’t think it’s wise to turn on the protocol fee switch.
We appreciate the initiative from @leighton and @guil-lambert moving this pilot program forward. In general, Alastor supports moving forward with a fee switch pilot program, even if it doesn't necessarily match our specific recommendations verbatim. A few additional thoughts from the Alastor side of things:
Regarding Pilot Pools - While we stand by our stance that implementing the fee switch on lower fee tier pools creates perverse incentives for LPs relative to the overall goals of the community, we are not against including one of these pools in a pilot to test this thesis. That said, we would recommend using the 0.05% ETH-DAI pool rather than 0.05% ETH-USDT pool as the 0.05% test case. Our rationale:
We appreciate the initiative from @leighton and @guil-lambert moving this pilot program forward. In general, Alastor supports moving forward with a fee switch pilot program, even if it doesn't necessarily match our specific recommendations verbatim. A few additional thoughts from the Alastor side of things:
Regarding Pilot Pools - While we stand by our stance that implementing the fee switch on lower fee tier pools creates perverse incentives for LPs relative to the overall goals of the community, we are not against including one of these pools in a pilot to test this thesis. That said, we would recommend using the 0.05% ETH-DAI pool rather than 0.05% ETH-USDT pool as the 0.05% test case. Our rationale:
ETH-USDT makes up the largest ETH-Stable spot-trading market in the world today (~3x the volume of ETH-USDC across both DEX/CEX competitors), of all ETH pairs Uniswap should be targeting this volume rather than disincentivizing its most efficient liquidity
Relatedly, Uniswap decentralized market share in ETH-USDT is much lower than that of the other two ETH-Stable pairs being considered (~50% against, versus >90% in both ETH-USDC and ETH-DAI)
While the ETH-DAI pools do indeed have smaller TVL than ETH-USDT, they are similar when normalized against volume serviced
Ultimately, we believe that it would behoove the community to utilize ETH-USDT as the primary test case to see if market share can truly be improved by utilizing the fee switch as an LP incentivization tool given the market share runway that currently exists.
Regarding Tracking & Measurement - To echo @msilb7, we would strongly encourage defining decentralized volume market share as the primary measurement of success for this pilot. We also would recommend (at a bare minimum) tracking order volume prior to and during the pilot program as well as tracking TVL flow, on both an aggregate and on an individual level in the days and weeks following implementation. It is important that the ramifications of this pilot not simply be considered anecdotally.
yeah At the end of the day, we first and foremost want to focus on studying the impact of the fee switch on trade execution for swappers , and not on its impact on LP revenue.
Hello Uniswap community. Let me start by saying I support this proposal as written. It represents a first step towards learning how to safely charge fees on Uniswap. There is still plenty more work to be done after using intelligence gained from the trial.
This is a pilot. The decision should come down to:
Hello Uniswap community. Let me start by saying I support this proposal as written. It represents a first step towards learning how to safely charge fees on Uniswap. There is still plenty more work to be done after using intelligence gained from the trial.
This is a pilot. The decision should come down to:
The focus of this proposal is narrow.
The proposal is solely designed to test the impact of the “fee switch” on protocol usage.
Observing the reaction of liquidity capital (taking broader market conditions into account) will be useful in assessing how bearable fees are on Uniswap v3. I have little confidence that anyone knows how LP’s will react. Uniswap is a marketplace. There are extremely complex dynamics affecting behaviors.
If fees do turn significant capital away from these pools (or spread out over wider ticks, who knows) then it is worth learning that and improving in future tests. The only way to truly find out is in a live simulation. There is also a predefined end to the pilot. Importantly, the default is not to continue indefinitely.
As I see it the costs are the risk that one or both of the following happen:
The recent average TVL of these three pools together is approximately $70mm TVL combined relative to Uniswap v3 Ethereum’s $2.6bn. This represents 2.7% of TVL compared to an average standard deviation of the change in TVL of around 5%. The benefit of learning the effect on the Uniswap protocol in a controlled, time limited trial is worth risking a small percentage of this TVL.
let it do,i agree...just do it
Hi Uniswap community. I’d like to share my thoughts on this proposal as I think it is a very important moment for Uniswap. I come here as someone who wants to see DeFi succeed and sees Uniswap as integral to this. The research by Alastor and the Uniswap Foundation has been excellent and should be used to continue to drive discussions on the fee switch, but I think now is the wrong time to execute this proposal.
First, I feel for the Uniswap community who may be hurting due to price action of the UNI token. The crypto markets are down and the Uni token is as well. It is natural to want to pursue changes when things seem like they are not going well. In this situation, however, I think that inaction is the best action.
Hi Uniswap community. I’d like to share my thoughts on this proposal as I think it is a very important moment for Uniswap. I come here as someone who wants to see DeFi succeed and sees Uniswap as integral to this. The research by Alastor and the Uniswap Foundation has been excellent and should be used to continue to drive discussions on the fee switch, but I think now is the wrong time to execute this proposal.
First, I feel for the Uniswap community who may be hurting due to price action of the UNI token. The crypto markets are down and the Uni token is as well. It is natural to want to pursue changes when things seem like they are not going well. In this situation, however, I think that inaction is the best action.
There are two core reasons why I think this is not a good idea. First, I think a fee switch would be counterproductive to the objectives identified by Alastor. I fully agree that TVL, market share, and trading volume growth should be the Uniswap Protocol’s top priorities in this phase of its lifetime. While we may identify that the fee switch does not or has minimal negative impact on these metrics for certain pools, taxing LPs certainly cannot help here. I see only downside across the core KPIs.
The other reason is that this proposal could have very serious and unpredictable negative externalities for the Uniswap community. The Uniswap Foundation’s brief discusses the severe lack of clarity for DeFi in the U.S. It is very possible that this proposal could negatively impact community members like Uniswap Labs, the Uniswap Foundation, and even individuals in the community. I don’t think the proposed exploration is justifiable amidst these uncertainties.
The community treasury is large and there is no lack of funding for growth initiatives. There is no need to risk stifling growth or any other consequences right now.
Today UNI is the single most valuable DeFi governance token by market capitalization. This isn’t because of the prospect of immediate cash flows. It is because the token marks ownership in a decentralized community for the single most revolutionary and useful protocol in all of DeFi. The Uniswap vision is far bigger than a fee switch. It should not be jeopardized or hindered at this point in the protocol’s lifetime for the exploration of unnecessary fees.
Disclosure I do not hold any UNI nor do I have any exposure to UNI. This is not financial or legal advice. I am only providing my thoughts on this unprecedented initiative and will support the Uniswap community in its decision.
Hey (personal opinions), super interested to see this experiment go live. Love that the approach is to test this small and evaluate.
Proposal Success Metrics: The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success. Note that this criteria explicitly does not consider the impact of the fee switch on liquidity provider returns.
Hey (personal opinions), super interested to see this experiment go live. Love that the approach is to test this small and evaluate.
Proposal Success Metrics: The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success. Note that this criteria explicitly does not consider the impact of the fee switch on liquidity provider returns.
Throwing out some other ideas to evaluate for the eventual analysis:
Is this good/bad/non-consequential for the Uniswap product?
Does this matter for token holders?
I'm sure this is being considered, but it would be great to see another Grants Competition to analyze this!
with the collapse of CEX, it's great timing and opportunity for Uni to move forward, to stand on the center of DeFi. A good incentive to Uni token will bring much more awareness and attentention from blockchain community, CEX user will move to Uni more willingly, we can expect a trading volumn increase significently persentage wise. And benifit the LP with more trading fees eventually.
This seems like it would make sense for the definition of “trading execution.” Need something formulaic that can be measured (and verified) before and after the fee switch is turned on. Would make sense to measure the 120 day period leading up to the fee switch change (+120 days following the experiment) and compare those results to the 120 day period where it is turned on.
Alana and Derek here with Variant. We’ve been following the fee switch discussion over the past few months, and wanted to provide an update on our perspective.
First, we’re still strongly intellectually aligned with the proposal: we think experimentation with protocol parameters, such as the fee switch, is good and needed. We commend @Leighton for putting forward the initial proposal and spurring what we consider to be a very productive discussion. We also appreciate that Leighton and @guil-lambert incorporated our feedback on potential testing pools in the final proposal. As previously mentioned, in the long run we believe the fee switch can not only drive fundamental value to the UNI token, but also be used as growth capital for the protocol to secure its position as the leading DEX in web3.
We also recognize that a number of valid legal and regulatory considerations have been raised throughout this process. Our view is that the best way to drive progress on these issues is to move forward with the proposed experimentation. Action begets action. These considerations were only raised because there was an initiative to push forward with the fee switch. Thus, we believe that approval of the fee switch experimentation will similarly catalyze deeper engagement on tax, legal, and other regulatory issues from Uniswap stakeholders. Delaying action, on the other hand, risks an endless cycle of further postponements.
Framed another way: high-growth projects often succeed by shipping and experimenting. This proposal embodies one way that Uniswap can continue to “ship”, which we believe is necessary for the protocol to continue innovating and to maintain its leading market position. As a result, we’re supportive of moving forward with the proposed fee switch experimentation.
Finally, to be clear, we agree that the tax and regulatory considerations raised by a16z and others are important. Specifically, we are aligned that the community needs to ultimately find and implement solutions to tax compliance, and will benefit from greater clarity on both legal entities for tax obligations as well as liabilities as they relate to token holders, regardless of whether the fee switch proposal is approved. As @devinwalsh mentioned, the Uniswap Foundation has already begun to engage the community on this front and we see an opportunity for further work that advances to actionable, open source implementation details for the community to act upon.
This post was authored by Alana Levin and Derek Walkush, investment partners at Variant. Variant is an investor in the UNI token. See disclosures.
Thanks @Porter.
It would be great to have more clarity on your timeline for "evaluating a plan that will address each element."
Hi Uniswap Community, Almanak is a web3 simulation platform that enhances decision makers with risk management tooling across DAOs. We have been following the discussion around the fee switch & its testing since the very beginning (thank you @guil-lambert for your efforts) and would like to drop additional comments regarding our most recent observations.
Hi Uniswap Community, Almanak is a web3 simulation platform that enhances decision makers with risk management tooling across DAOs. We have been following the discussion around the fee switch & its testing since the very beginning (thank you @guil-lambert for your efforts) and would like to drop additional comments regarding our most recent observations.
We would like to suggest a set of meaningful metrics to interpret the results of the fee switch implementation in a correct and digestible way:
Trading execution (slippage + fees) is a relevant and important metric, yet does not reflect the impact on the pools and the protocol Optimal trading execution is one of the key topics for a majority of trades on DEXes driven by MEV bots and market makers. Both use pools with high liquidity to limit the impact of slippage on their profit margin. Offering the best execution price and highest return will loom more volume to the pools. Yet trading execution is not a tangible metric to track as it only tells the story of executed trades rather than the ones that were not, which equals to lost volume.
Tracking pool and market share combined with liquidity flows could be top-line metrics to implement to understand the impact more clearly, supported by bottom-line dimensions such as liquidity retention and shifts We agree with the general direction @msilb7 highlighted: not only should the pool volume of each pool tier be reflected but additionally the overall Uniswap v3 market share of the trading pairs. We suggest further refining what specific metrics to use and their respective units. The metric set will highlight the impact of liquidity not being available on the respective Uniswap pools but on other DEXes, which then aggregates more trades and a higher market share. Note that the metrics would have the following units:
Benchmarking/Validating the fee switch approach is currently not tackled Even though the Uniswap community opted to trial the fee switch on live pools, we support the idea of shedding light on the “what if?” question. Comparing the different notions of challenging macroeconomic environments is not trivial and validating how a fee switch will fare with different constraints is in the community’s interest to not only rely on this test on selected pools. Ongoing research led by the Uniswap community can help to define volume and liquidity capacities to be simulated. The overarching environment can be populated by trained agents on these specific metrics, executing actions when the simulation is running. Actions will either result in trades, deposits of liquidity or respective withdrawals as well as interacting with other exchanges to represent the competitive environment..
We propose to use the above group of metrics to be tracked along the experiment for a clear communication and alignment of goals across the community. The variety of metrics covers both the impact of external factors (missing volume on Uniswap transferred to other DEXes) and internal observations (where did liquidity flow). We additionally add the respective units and specifically define what to track and what not to.
Introduction of Benchmarking/Validating framework in additional to tracking/testing of the fee switch to validate the current fee switch implementation in simulation environment. This environment represents an additional layer of validation whether or not to implement the fee switch.**
I'm struggling to get my head around this tax argument. What makes Uniswap protocol taking a share of fees different from pretty much every other defi protocol doing so?
Larry from Reverie here.
First off, I really like the idea of running experiments with the fee switch. That’s because over the long run, I view protocol fees as the principal way for the protocol to support itself in a sustainable manner.
Having said that, I think we need to understand the tax impact before we turn on the fee switch.
Larry from Reverie here.
First off, I really like the idea of running experiments with the fee switch. That’s because over the long run, I view protocol fees as the principal way for the protocol to support itself in a sustainable manner.
Having said that, I think we need to understand the tax impact before we turn on the fee switch.
Simply put, turning fees on will generate revenue for the protocol (even if the accrued fees are not paid out to tokenholders). As I see it, the known unknown is “who will cover the potential tax bill on profits generated by the protocol?”
Before we have a better answer to this question, I don’t think it’s wise to turn on the protocol fee switch.
We appreciate the initiative from @leighton and @guil-lambert moving this pilot program forward. In general, Alastor supports moving forward with a fee switch pilot program, even if it doesn't necessarily match our specific recommendations verbatim. A few additional thoughts from the Alastor side of things:
Regarding Pilot Pools - While we stand by our stance that implementing the fee switch on lower fee tier pools creates perverse incentives for LPs relative to the overall goals of the community, we are not against including one of these pools in a pilot to test this thesis. That said, we would recommend using the 0.05% ETH-DAI pool rather than 0.05% ETH-USDT pool as the 0.05% test case. Our rationale:
We appreciate the initiative from @leighton and @guil-lambert moving this pilot program forward. In general, Alastor supports moving forward with a fee switch pilot program, even if it doesn't necessarily match our specific recommendations verbatim. A few additional thoughts from the Alastor side of things:
Regarding Pilot Pools - While we stand by our stance that implementing the fee switch on lower fee tier pools creates perverse incentives for LPs relative to the overall goals of the community, we are not against including one of these pools in a pilot to test this thesis. That said, we would recommend using the 0.05% ETH-DAI pool rather than 0.05% ETH-USDT pool as the 0.05% test case. Our rationale:
ETH-USDT makes up the largest ETH-Stable spot-trading market in the world today (~3x the volume of ETH-USDC across both DEX/CEX competitors), of all ETH pairs Uniswap should be targeting this volume rather than disincentivizing its most efficient liquidity
Relatedly, Uniswap decentralized market share in ETH-USDT is much lower than that of the other two ETH-Stable pairs being considered (~50% against, versus >90% in both ETH-USDC and ETH-DAI)
While the ETH-DAI pools do indeed have smaller TVL than ETH-USDT, they are similar when normalized against volume serviced
Ultimately, we believe that it would behoove the community to utilize ETH-USDT as the primary test case to see if market share can truly be improved by utilizing the fee switch as an LP incentivization tool given the market share runway that currently exists.
Regarding Tracking & Measurement - To echo @msilb7, we would strongly encourage defining decentralized volume market share as the primary measurement of success for this pilot. We also would recommend (at a bare minimum) tracking order volume prior to and during the pilot program as well as tracking TVL flow, on both an aggregate and on an individual level in the days and weeks following implementation. It is important that the ramifications of this pilot not simply be considered anecdotally.
yeah At the end of the day, we first and foremost want to focus on studying the impact of the fee switch on trade execution for swappers , and not on its impact on LP revenue.
Hello Uniswap community. Let me start by saying I support this proposal as written. It represents a first step towards learning how to safely charge fees on Uniswap. There is still plenty more work to be done after using intelligence gained from the trial.
This is a pilot. The decision should come down to:
Hello Uniswap community. Let me start by saying I support this proposal as written. It represents a first step towards learning how to safely charge fees on Uniswap. There is still plenty more work to be done after using intelligence gained from the trial.
This is a pilot. The decision should come down to:
The focus of this proposal is narrow.
The proposal is solely designed to test the impact of the “fee switch” on protocol usage.
Observing the reaction of liquidity capital (taking broader market conditions into account) will be useful in assessing how bearable fees are on Uniswap v3. I have little confidence that anyone knows how LP’s will react. Uniswap is a marketplace. There are extremely complex dynamics affecting behaviors.
If fees do turn significant capital away from these pools (or spread out over wider ticks, who knows) then it is worth learning that and improving in future tests. The only way to truly find out is in a live simulation. There is also a predefined end to the pilot. Importantly, the default is not to continue indefinitely.
As I see it the costs are the risk that one or both of the following happen:
The recent average TVL of these three pools together is approximately $70mm TVL combined relative to Uniswap v3 Ethereum’s $2.6bn. This represents 2.7% of TVL compared to an average standard deviation of the change in TVL of around 5%. The benefit of learning the effect on the Uniswap protocol in a controlled, time limited trial is worth risking a small percentage of this TVL.
let it do,i agree...just do it
Hi Uniswap community. I’d like to share my thoughts on this proposal as I think it is a very important moment for Uniswap. I come here as someone who wants to see DeFi succeed and sees Uniswap as integral to this. The research by Alastor and the Uniswap Foundation has been excellent and should be used to continue to drive discussions on the fee switch, but I think now is the wrong time to execute this proposal.
First, I feel for the Uniswap community who may be hurting due to price action of the UNI token. The crypto markets are down and the Uni token is as well. It is natural to want to pursue changes when things seem like they are not going well. In this situation, however, I think that inaction is the best action.
Hi Uniswap community. I’d like to share my thoughts on this proposal as I think it is a very important moment for Uniswap. I come here as someone who wants to see DeFi succeed and sees Uniswap as integral to this. The research by Alastor and the Uniswap Foundation has been excellent and should be used to continue to drive discussions on the fee switch, but I think now is the wrong time to execute this proposal.
First, I feel for the Uniswap community who may be hurting due to price action of the UNI token. The crypto markets are down and the Uni token is as well. It is natural to want to pursue changes when things seem like they are not going well. In this situation, however, I think that inaction is the best action.
There are two core reasons why I think this is not a good idea. First, I think a fee switch would be counterproductive to the objectives identified by Alastor. I fully agree that TVL, market share, and trading volume growth should be the Uniswap Protocol’s top priorities in this phase of its lifetime. While we may identify that the fee switch does not or has minimal negative impact on these metrics for certain pools, taxing LPs certainly cannot help here. I see only downside across the core KPIs.
The other reason is that this proposal could have very serious and unpredictable negative externalities for the Uniswap community. The Uniswap Foundation’s brief discusses the severe lack of clarity for DeFi in the U.S. It is very possible that this proposal could negatively impact community members like Uniswap Labs, the Uniswap Foundation, and even individuals in the community. I don’t think the proposed exploration is justifiable amidst these uncertainties.
The community treasury is large and there is no lack of funding for growth initiatives. There is no need to risk stifling growth or any other consequences right now.
Today UNI is the single most valuable DeFi governance token by market capitalization. This isn’t because of the prospect of immediate cash flows. It is because the token marks ownership in a decentralized community for the single most revolutionary and useful protocol in all of DeFi. The Uniswap vision is far bigger than a fee switch. It should not be jeopardized or hindered at this point in the protocol’s lifetime for the exploration of unnecessary fees.
Disclosure I do not hold any UNI nor do I have any exposure to UNI. This is not financial or legal advice. I am only providing my thoughts on this unprecedented initiative and will support the Uniswap community in its decision.
Hey (personal opinions), super interested to see this experiment go live. Love that the approach is to test this small and evaluate.
Proposal Success Metrics: The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success. Note that this criteria explicitly does not consider the impact of the fee switch on liquidity provider returns.
Hey (personal opinions), super interested to see this experiment go live. Love that the approach is to test this small and evaluate.
Proposal Success Metrics: The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success. Note that this criteria explicitly does not consider the impact of the fee switch on liquidity provider returns.
Throwing out some other ideas to evaluate for the eventual analysis:
Is this good/bad/non-consequential for the Uniswap product?
Does this matter for token holders?
I'm sure this is being considered, but it would be great to see another Grants Competition to analyze this!
with the collapse of CEX, it's great timing and opportunity for Uni to move forward, to stand on the center of DeFi. A good incentive to Uni token will bring much more awareness and attentention from blockchain community, CEX user will move to Uni more willingly, we can expect a trading volumn increase significently persentage wise. And benifit the LP with more trading fees eventually.
This seems like it would make sense for the definition of “trading execution.” Need something formulaic that can be measured (and verified) before and after the fee switch is turned on. Would make sense to measure the 120 day period leading up to the fee switch change (+120 days following the experiment) and compare those results to the 120 day period where it is turned on.
ty! and sry did not see that linked by OP... That post is helpful in understanding the thought process that went into the proposal and how it addresses those concerns. I realize there's been very little guidance on either tax or regs, at least in the US, so there's unlikely to be definitive answers in the short term. I think that leaving the fees "uncollected" is a very sensible way to reduce some of those risks while still assessing impact on trading activity.
The immediately answer from LPs will say “no”, since this switch will cut off immediately.
But are they really gonna to do so? Taking economically, A rational LPs will only do it if they can find a better alternatives, which I consider would be very difficult.
It could be another protocol, or another Uni pool but which haven’t selected for this trail.
The immediately answer from LPs will say “no”, since this switch will cut off immediately.
But are they really gonna to do so? Taking economically, A rational LPs will only do it if they can find a better alternatives, which I consider would be very difficult.
It could be another protocol, or another Uni pool but which haven’t selected for this trail.
If the first case happen, then UniSwap has a competitor, we need be careful; if it’s the 2nd cases, there are not much to worries, UniSwap is still the best protocol to stay.
One more thing, those smart LPs, they are wise enough to keep some Uni token in pocket if they going to vote yes. An immediate return on token will surpass the LP income at least a medium long period of time.
Has the Uniswap Foundation or any other parties provided any analysis on tax or regulatory considerations for this pilot?
I know this was a concern brought up by a16z and others a few months ago and seemed to be one of the main reasons for those not in favor. Just wondering what progress has been made.
Please explain, how I (as a liquidity provider) will benefit from earning 10-25% less fees?
Please define how you will evaluate the following “ trading execution is not diminished”.
any update ? I think UNI fee switch could be a catalyst for Uniswap ecosystem
It could be available broadly, that example just intended to show there could be boosted rewards for those that do both.
Hey @will_leas - late January or early February.
ty! and sry did not see that linked by OP... That post is helpful in understanding the thought process that went into the proposal and how it addresses those concerns. I realize there's been very little guidance on either tax or regs, at least in the US, so there's unlikely to be definitive answers in the short term. I think that leaving the fees "uncollected" is a very sensible way to reduce some of those risks while still assessing impact on trading activity.
The immediately answer from LPs will say “no”, since this switch will cut off immediately.
But are they really gonna to do so? Taking economically, A rational LPs will only do it if they can find a better alternatives, which I consider would be very difficult.
It could be another protocol, or another Uni pool but which haven’t selected for this trail.
The immediately answer from LPs will say “no”, since this switch will cut off immediately.
But are they really gonna to do so? Taking economically, A rational LPs will only do it if they can find a better alternatives, which I consider would be very difficult.
It could be another protocol, or another Uni pool but which haven’t selected for this trail.
If the first case happen, then UniSwap has a competitor, we need be careful; if it’s the 2nd cases, there are not much to worries, UniSwap is still the best protocol to stay.
One more thing, those smart LPs, they are wise enough to keep some Uni token in pocket if they going to vote yes. An immediate return on token will surpass the LP income at least a medium long period of time.
Has the Uniswap Foundation or any other parties provided any analysis on tax or regulatory considerations for this pilot?
I know this was a concern brought up by a16z and others a few months ago and seemed to be one of the main reasons for those not in favor. Just wondering what progress has been made.
Please explain, how I (as a liquidity provider) will benefit from earning 10-25% less fees?
Please define how you will evaluate the following “ trading execution is not diminished”.
any update ? I think UNI fee switch could be a catalyst for Uniswap ecosystem
It could be available broadly, that example just intended to show there could be boosted rewards for those that do both.
Hey @will_leas - late January or early February.
I think incentivizing LP's by having to opt in through staking UNI is perhaps not the right direction.
Here is a thought on organization structure:
I think incentivizing LP's by having to opt in through staking UNI is perhaps not the right direction.
Here is a thought on organization structure:
What if the collected fee's from the fee switch are claimed by the users who are trading on Uniswap as a gas fee rebate? For example, User A makes a swap, it costs that user 3 dollars in gas. In the act of the swap, a small % of the accumulated (fee switch) fee's is claimed/directed to the gas fee's of the swap transaction (and it doesnt have to be 100% of the gas cost, can be 30% etc of the cost for more users). Better yet, if the claimed fee's were auto swaped into UNI token in the process of rebating to the user. It further decentralises UNI distribution to the user's of Uniswap.
This organizational structure would not see the protocol gaining revenues (more so of a community pool) since the fee's would be used as a cost rebate to the user (the user is opting in to paying the tax on the gas rebate vs the protocol)?
This alternative use for the fee switch designates it as a public good to the user's of the protocol, and benefits LP's through increased user acqusition/volume.
Hey everyone,
Miles and Porter here with a16z. Thanks to @Leighton and @guil-lambert for their proactive stance on the fee switch discussions. From our perspective, the risks associated with turning on the fee switch generally fall into three brackets and could be addressed as follows:
Hey everyone,
Miles and Porter here with a16z. Thanks to @Leighton and @guil-lambert for their proactive stance on the fee switch discussions. From our perspective, the risks associated with turning on the fee switch generally fall into three brackets and could be addressed as follows:
Risks Associated with Commissions - Generally, there are regulatory risks associated with taking commissions on the trading of assets, though as indicated in the Uniswap Foundation's post, most of these can likely be addressed by limiting commissions to trading pairs with an unambiguous status as not a security.
Risks Associated with UNI Token - The protocol accruing profits from trading also impacts the analysis as to whether any transactions of UNI tokens could be deemed to be transactions involving investment contracts requiring the application of U.S. securities laws. However, given the significant decentralization of the Uniswap protocol, we do not believe it would be reasonable for anyone to be dependent on the managerial or entrepreneurial efforts of any party associated with the Uniswap protocol. Further, if profits are not directly distributed to UNI token holders, the complications and impact of such a proposal could be greatly reduced.
Risks Associated with Organizational Structure - If the fee switch is turned on, then the DAO could have control over accruing profits, which could have implications for tax purposes. We believe a very narrowly tailored legal entity structure (relating only to the profits accrual and use of those funds) could potentially be used to enable the DAO to pay any required tax obligations and could provide DAO members with limited liability protections. The additional goals of any such structure would be to maximize flexibility of the DAO, enable UNI members to opt out from participation in such structure, limit the impact of the structure on the DAO's broader activities and regulatory positioning, and preserve the ability of the DAO to dissolve such structure if an alternative approach became available.
We're actively working to assess the above risks as well as a potential entity structure that meets the organizational requirements, and we're interested in hearing other perspectives and proposed solutions for the risks identified above.
However, for this specific discussion, we ultimately cannot support (and will vote against) any proposal that fails to account for these factors. While we appreciate the efforts to drive the fee switch forward and believe this proposal solves the first two issues, in its current form it does not address the third one - an organizational structure for tax purposes.
Even though the proposal is labeled as a “test run only” it would set in motion potential organizational and tax issues. We believe the risk from the proposal outweighs the potential benefits. We are evaluating a plan that will address each element (including the organizational issue), but that process will continue to take time. As that analysis continues, we think patience is warranted to get the full legal and regulatory analysis correct before proceeding further. In light of all that has happened in the web3 sector this year, we believe it is fundamentally necessary for Uniswap DAO to lead the industry on a pathway that shows that DeFi can exist and operate in a legally compliant manner.
On a final note, one other way to potentially avoid many of the risks associated with the fee switch would be to implement a system that accrues fees to UNI token holders who actively “opt-in.” In this scenario, LPs would stake UNI and their LP tokens to receive boosted rewards from the liquidity pools in which they are providing liquidity. This has the added benefit of incentivizing liquidity providing and directly rewarding the parties that actively participate to keep Uniswap running. We recognize there are a number of technical hurdles prior to implementation, including fee claiming, fee management, and multi-chain fee switches, but we think this option should be explored further in parallel to the general fee switch discussion.
We can be reached here on the forums or on Twitter for those with additional questions!
Best,
Miles and Porter
I just want to point out a few questions that I have, I hope you guys can answer them. We have analyzed the Uniswap largest pools, and most of the liquidity provided is done by a few actors, some of which are providing liquidity although they are out of range =( see:
161944 (USDC/ETH 0.3%) 9M 368120 (USDC/ETH 0.3%)10M 314029 (USDC/ETH 0.3%) 6M 259042 (USDC/ETH 0.3%) 12M More than 20% of the pool is filled by 4 LP
I just want to point out a few questions that I have, I hope you guys can answer them. We have analyzed the Uniswap largest pools, and most of the liquidity provided is done by a few actors, some of which are providing liquidity although they are out of range =( see:
161944 (USDC/ETH 0.3%) 9M 368120 (USDC/ETH 0.3%)10M 314029 (USDC/ETH 0.3%) 6M 259042 (USDC/ETH 0.3%) 12M More than 20% of the pool is filled by 4 LP
360541 (USDC/ETH 1%)10M 50% of the pool is filled by one LP - Maybe good to ask him if ok - But I guess as you guys chose that pool you probably have already discussed with them. If not, that would be a mistake.
etc...
As a large Uniswap LP (https://gov.uniswap.org/t/rfc-the-optimism-uniswap-protocol-liquidity-mining-program/17820/20?u=research), we are delighted if you put a 1/10 fee in the protocol to foster innovation, increase utility and VOLUME for the platform, we believe this is absolutely amazing, please put the fee switch on, for every pool we LP, please! We will vote for this!
My main question is "how to actively but organically increase volume on Uniswap?" Short term LM incentives are not a long-term viable solution IMO.
BMV - Bring More Volume - Why do people trade on DEX? Who trades on DEX? How do people trade on DEX? Isn't the DEX volume mostly automated? Isn't DEX volume mostly related to Arbitrage and MEV opportunities? Is there a competition between CEX and DEX or are they complementary and one needs the other for it to work properly ? Do CEX use DEXes? If not, why not?
I think the discussion should be centered around this rather than knowing if LP will stay or leave because of the fee switch. If fees increase 50% thanks to Fee Switch, why would LP care about a 10% tax on top of this. If volume decreases drastically because of Fee Switch, then LP might need to derisk and exit LPing even if the tax was 0.5%.
Hope that little grain of salt helps =)
Looking forward to discuss.
I think incentivizing LP's by having to opt in through staking UNI is perhaps not the right direction.
Here is a thought on organization structure:
I think incentivizing LP's by having to opt in through staking UNI is perhaps not the right direction.
Here is a thought on organization structure:
What if the collected fee's from the fee switch are claimed by the users who are trading on Uniswap as a gas fee rebate? For example, User A makes a swap, it costs that user 3 dollars in gas. In the act of the swap, a small % of the accumulated (fee switch) fee's is claimed/directed to the gas fee's of the swap transaction (and it doesnt have to be 100% of the gas cost, can be 30% etc of the cost for more users). Better yet, if the claimed fee's were auto swaped into UNI token in the process of rebating to the user. It further decentralises UNI distribution to the user's of Uniswap.
This organizational structure would not see the protocol gaining revenues (more so of a community pool) since the fee's would be used as a cost rebate to the user (the user is opting in to paying the tax on the gas rebate vs the protocol)?
This alternative use for the fee switch designates it as a public good to the user's of the protocol, and benefits LP's through increased user acqusition/volume.
Hey everyone,
Miles and Porter here with a16z. Thanks to @Leighton and @guil-lambert for their proactive stance on the fee switch discussions. From our perspective, the risks associated with turning on the fee switch generally fall into three brackets and could be addressed as follows:
Hey everyone,
Miles and Porter here with a16z. Thanks to @Leighton and @guil-lambert for their proactive stance on the fee switch discussions. From our perspective, the risks associated with turning on the fee switch generally fall into three brackets and could be addressed as follows:
Risks Associated with Commissions - Generally, there are regulatory risks associated with taking commissions on the trading of assets, though as indicated in the Uniswap Foundation's post, most of these can likely be addressed by limiting commissions to trading pairs with an unambiguous status as not a security.
Risks Associated with UNI Token - The protocol accruing profits from trading also impacts the analysis as to whether any transactions of UNI tokens could be deemed to be transactions involving investment contracts requiring the application of U.S. securities laws. However, given the significant decentralization of the Uniswap protocol, we do not believe it would be reasonable for anyone to be dependent on the managerial or entrepreneurial efforts of any party associated with the Uniswap protocol. Further, if profits are not directly distributed to UNI token holders, the complications and impact of such a proposal could be greatly reduced.
Risks Associated with Organizational Structure - If the fee switch is turned on, then the DAO could have control over accruing profits, which could have implications for tax purposes. We believe a very narrowly tailored legal entity structure (relating only to the profits accrual and use of those funds) could potentially be used to enable the DAO to pay any required tax obligations and could provide DAO members with limited liability protections. The additional goals of any such structure would be to maximize flexibility of the DAO, enable UNI members to opt out from participation in such structure, limit the impact of the structure on the DAO's broader activities and regulatory positioning, and preserve the ability of the DAO to dissolve such structure if an alternative approach became available.
We're actively working to assess the above risks as well as a potential entity structure that meets the organizational requirements, and we're interested in hearing other perspectives and proposed solutions for the risks identified above.
However, for this specific discussion, we ultimately cannot support (and will vote against) any proposal that fails to account for these factors. While we appreciate the efforts to drive the fee switch forward and believe this proposal solves the first two issues, in its current form it does not address the third one - an organizational structure for tax purposes.
Even though the proposal is labeled as a “test run only” it would set in motion potential organizational and tax issues. We believe the risk from the proposal outweighs the potential benefits. We are evaluating a plan that will address each element (including the organizational issue), but that process will continue to take time. As that analysis continues, we think patience is warranted to get the full legal and regulatory analysis correct before proceeding further. In light of all that has happened in the web3 sector this year, we believe it is fundamentally necessary for Uniswap DAO to lead the industry on a pathway that shows that DeFi can exist and operate in a legally compliant manner.
On a final note, one other way to potentially avoid many of the risks associated with the fee switch would be to implement a system that accrues fees to UNI token holders who actively “opt-in.” In this scenario, LPs would stake UNI and their LP tokens to receive boosted rewards from the liquidity pools in which they are providing liquidity. This has the added benefit of incentivizing liquidity providing and directly rewarding the parties that actively participate to keep Uniswap running. We recognize there are a number of technical hurdles prior to implementation, including fee claiming, fee management, and multi-chain fee switches, but we think this option should be explored further in parallel to the general fee switch discussion.
We can be reached here on the forums or on Twitter for those with additional questions!
Best,
Miles and Porter
I just want to point out a few questions that I have, I hope you guys can answer them. We have analyzed the Uniswap largest pools, and most of the liquidity provided is done by a few actors, some of which are providing liquidity although they are out of range =( see:
161944 (USDC/ETH 0.3%) 9M 368120 (USDC/ETH 0.3%)10M 314029 (USDC/ETH 0.3%) 6M 259042 (USDC/ETH 0.3%) 12M More than 20% of the pool is filled by 4 LP
I just want to point out a few questions that I have, I hope you guys can answer them. We have analyzed the Uniswap largest pools, and most of the liquidity provided is done by a few actors, some of which are providing liquidity although they are out of range =( see:
161944 (USDC/ETH 0.3%) 9M 368120 (USDC/ETH 0.3%)10M 314029 (USDC/ETH 0.3%) 6M 259042 (USDC/ETH 0.3%) 12M More than 20% of the pool is filled by 4 LP
360541 (USDC/ETH 1%)10M 50% of the pool is filled by one LP - Maybe good to ask him if ok - But I guess as you guys chose that pool you probably have already discussed with them. If not, that would be a mistake.
etc...
As a large Uniswap LP (https://gov.uniswap.org/t/rfc-the-optimism-uniswap-protocol-liquidity-mining-program/17820/20?u=research), we are delighted if you put a 1/10 fee in the protocol to foster innovation, increase utility and VOLUME for the platform, we believe this is absolutely amazing, please put the fee switch on, for every pool we LP, please! We will vote for this!
My main question is "how to actively but organically increase volume on Uniswap?" Short term LM incentives are not a long-term viable solution IMO.
BMV - Bring More Volume - Why do people trade on DEX? Who trades on DEX? How do people trade on DEX? Isn't the DEX volume mostly automated? Isn't DEX volume mostly related to Arbitrage and MEV opportunities? Is there a competition between CEX and DEX or are they complementary and one needs the other for it to work properly ? Do CEX use DEXes? If not, why not?
I think the discussion should be centered around this rather than knowing if LP will stay or leave because of the fee switch. If fees increase 50% thanks to Fee Switch, why would LP care about a 10% tax on top of this. If volume decreases drastically because of Fee Switch, then LP might need to derisk and exit LPing even if the tax was 0.5%.
Hope that little grain of salt helps =)
Looking forward to discuss.
TL;DR
TL;DR
The Foundation has taken on this work as part of its broader mission to advance thinking around key aspects of decentralized finance. To the extent any community member might be affected by the issues discussed, they should consult with their own advisor.
Introduction
In late December, @Leighton wrote that the vote on the fee switch proposal would be delayed in order to try and address some compliance uncertainties highlighted by the community.
In the time since, the Uniswap Foundation has engaged in discussions with a diverse set of advisors knowledgeable in this area to explore how the community might address these uncertainties. In this post, we update the community on our assessment. We also discuss an opportunity that was highlighted by this work, to conduct research into and then implement enhancements to the Protocol’s fee accrual and distribution mechanisms, and to the design of the UNI token itself.
UF Analysis
Current tax laws in the US do not provide clarity on how the fees from a smart contract protocol, that can be directed to a DAO, should be treated. Although legislation has been introduced to address the issue, it has not passed Congress or been signed into law. The Treasury Department and the Internal Revenue Service (the “IRS”) have not issued guidance (or made any kind of public statement) as to the tax treatment of DAOs generally.
The UF, amongst other options, explored whether any prevalent legal entity structures could adequately address the aforementioned uncertainties. After extensive review, and while acknowledging the advantages of many of the structures we reviewed, we found that none of the structures were compatible with the specific organizational structure and needs of the Uniswap DAO.
Specifically, we highlight the extent of the Uniswap DAO’s decentralization. The Uniswap DAO currently comprises more than 370,000 token holders located across a large and unknowable number of jurisdictions. Many token holders are anonymous. Governance participation is highly fluid, and spread across the globe. These factors make it virtually impossible to choose a legal entity structure which provides a practically feasible and long-term solution for the purpose of this proposal, without limiting or putting at risk one or more core underlying attributes of the Uniswap DAO.
We will also note that, even if the community were to hypothetically opt into a particular legal entity option, or set up a separate legal entity for this purpose, it is not clear to what extent that step would be effective in addressing the aforementioned uncertainties, as these structures are untested in the context of large DAOs like Uniswap’s.
That being said, we want to make clear that this determination was made with the Uniswap DAO’s specific needs and makeup in mind. This is not intended to be a general assessment to be used by other DAOs. Alternatively, traditional legal entity structures may be suitable for other DAOs and in other situations, as many DAOs have already chosen to adopt these traditional entity structures with success. For those reading this post who are interested in learning about these structures, we invite you to review Paradigm’s DAO Legal Entity Matrix, and A16z’s Legal Framework for Decentralized Autonomous Organizations Part I and Part II.
UF Recommendation & Way Forward
Following a holistic analysis, we do not feel comfortable recommending the creation of a traditional legal entity structure, if the proposal were to be approved right now.
As pointed out by others before, the community should remain cognizant that doing so means the compliance uncertainties in question would remain unanswered if the proposal were to be approved today. This may present potential risks to the DAO and its token holders, particularly in the current environment of heightened regulatory scrutiny.
With this background in mind, we encourage the community to consider other alternative options. We have considered, for instance, an alternative strategy which would involve setting aside a portion of fees to a separate “reserve” smart contract to cover potential legal costs and liabilities that the DAO may be exposed to in the future. However, this approach may not alleviate the aforementioned compliance concerns.
As we detail in this follow-up post, much of our research and many of our discussions over the past several weeks have led us to the conclusion that implementing a programmatic distribution of fees directly to persons, for instance to those who have “opted in” through taking some beneficial action for the Protocol, may be a superior path forward. This kind of mechanism would represent a significant mitigation of risk for the Uniswap DAO because tax obligations would rightfully be the responsibility of the individual in their respective jurisdiction, among other potential benefits. If properly designed, this mechanism could further incentivize productive behavior to support the Protocol.
In the same vein, we have had many discussions with stakeholders who are excited to research new methods for accruing fees to the DAO, and to innovate upon the applications of the UNI token to support the protocol. This is an exciting area for future exploration, and has the potential to support the future growth, decentralization, and sustainability of the Uniswap Protocol. Please read our more detailed follow up post for more information, and ways to contribute to the conversation.
For those interested in contributing:
The Uniswap Foundation supports a community of individuals and organizations dedicated to a more open, fair and decentralized financial system through education around and broader adoption of blockchain technologies and smart contract-based decentralized protocols.
This post does not constitute, and is not intended to constitute, any kind of legal advice, and readers are not to construe the contents of this brief as legal, business, tax, accounting, investment, or other advice. Each UNI token holder should consult its own advisers as to legal, business, tax, accounting, and other related matters concerning the proposal in light of such token holder’s particular circumstances.
Providing an update here. As @Leighton wrote back in December, the vote on the fee switch proposal would be delayed for a short period of time in order for some uncertainties to be addressed. Specifically, he cited community feedback to “[put] in place a legal entity structure to alleviate concerns some delegates have around potential tax implications for the pilot”.
Since then, the UF has been working with a set of advisors to put together a proposal which aims to address that uncertainty. To do that, we identified the requirements for an entity type for the DAO, assessed several entity types against that criteria, and selected an entity type which we believe will best serve the DAO’s needs. Right now, we are in the process of finalizing our proposal. This finalization will entail more detailed analyses of all known implications of our proposal for the DAO, as well as finalizing a process for implementation. That implementation process will, among other steps, entail time for community discussion as well as Q&A.
Providing an update here. As @Leighton wrote back in December, the vote on the fee switch proposal would be delayed for a short period of time in order for some uncertainties to be addressed. Specifically, he cited community feedback to “[put] in place a legal entity structure to alleviate concerns some delegates have around potential tax implications for the pilot”.
Since then, the UF has been working with a set of advisors to put together a proposal which aims to address that uncertainty. To do that, we identified the requirements for an entity type for the DAO, assessed several entity types against that criteria, and selected an entity type which we believe will best serve the DAO’s needs. Right now, we are in the process of finalizing our proposal. This finalization will entail more detailed analyses of all known implications of our proposal for the DAO, as well as finalizing a process for implementation. That implementation process will, among other steps, entail time for community discussion as well as Q&A.
We are working out these details and hope to have the proposal posted on the forum in ~2-3 weeks.
The UF is working on an update here and should have a post with more details over the next few days!
We are very thankful for the robust discussion that has happened over the past two weeks. Although @guil-lambert and I have not responded to every comment, we have read them!
In the responses, two general positions have emerged. The first position has been best articulated by @alanalevin. This position acknowledges there are potential regulatory risks with the proposal but ultimately advocates moving forward now. Recognizing some uncertainty will never be settled and "action begets action".
We are very thankful for the robust discussion that has happened over the past two weeks. Although @guil-lambert and I have not responded to every comment, we have read them!
In the responses, two general positions have emerged. The first position has been best articulated by @alanalevin. This position acknowledges there are potential regulatory risks with the proposal but ultimately advocates moving forward now. Recognizing some uncertainty will never be settled and "action begets action".
The alternative position advocated by @Porter and others is to further de-risk some specific regulatory issues before moving forward. The most prominent of these being the concern some delegates have that fees generated could be considered taxable income.
Outside of these regulatory concerns, @Jack_Longarzo also did a good job articulating some of the broader risks any misstep could have on the largest DeFi protocol. We believe this is a very important point.
Similarly to previous discussions, the simple posting and planning for the vote also generated a high level of engagement from new and existing stakeholders which we are very happy to see.
In reading the feedback and having conversations over the last 2 weeks our view is that this proposal can be meaningfully de-risked in a short amount time. That can happen by putting in place a legal entity structure to alleviate concerns some delegates have around potential tax implications for the pilot. Our understanding from talking to stakeholders is there will be a thoughtful proposal on options to create an entity to handle this in a few weeks. From there, an option can be chosen and proposal can proceed with that aspect de-risked and we will put forward a vote!
That will enable us to move forward with the pilot in a unified way. We also believe this will set a much stronger foundation so that if the pilot is successful, there can be a path to transition from a pilot to larger implementation aligned with protocol growth (see @Porter last paragraph for one possible way that could look).
We know additional waiting will be painful to many but we truly believe for the good of Uniswap and DeFi as a whole it is crucial for us to set the best possible example.
Pains me to say it but Avantgarde will be voting No on this iteration.
While I appreciate the decoupling of the "does this change the product" question from the "what are we going to do with the fees" question, I think it's impossible and ultimately irresponsible to ignore the other potential negative externalities in the name of experimentation.
Pains me to say it but Avantgarde will be voting No on this iteration.
While I appreciate the decoupling of the "does this change the product" question from the "what are we going to do with the fees" question, I think it's impossible and ultimately irresponsible to ignore the other potential negative externalities in the name of experimentation.
Ultimately, turning on the fee switch will bring the protocol into the regulatory crosshairs and to do so without a plan for how we'll answer when the various authorities come around asking questions is folly. Both @Porter's post and the UF brief touch briefly on potential vectors of liability for various stakeholders and both indicate that work is ongoing to mitigate those liabilities. Let's wait for the output of that work before moving forward.
This conversation - while it may not actually result in these fees getting turned on this time - has been super valuable in galvanizing the community around the idea that the fee switch should be turned on in some form or fashion. Kudos to @Leighton for getting it started and for the various people and teams who have gone deep into the data to figure out where this experiment should take place.
On a final note, one other way to potentially avoid many of the risks associated with the fee switch would be to implement a system that accrues fees to UNI token holders who actively “opt-in.”
Can you please explain what you mean by "actively opt-in"?
Are you referring to LPs going through some sort of KYC process?
At GFX, we’ve been working towards getting the Fee Switch turned on for more than a year and, over the last several months, have been slowly gathering opinions from delegates and UNI holders. Our general observation has been that most UNI holders are interested in seeing the protocol monetized. The differences in opinion tend to come from when and how the protocol should be monetized. Some believe it should be put off until Uniswap gains greater market share, while others believe that monetizing the protocol today could rekindle interest in the protocol, governance, and UNI. Over the last six months, there has been a jump in interest in getting the switch activated, and now how has become the main question.
The how (implementation) generally consists of the flowing questions (ignoring v2 to simplify this):
We (Blockchain @ Michigan) are in favor of moving forward with the fee switch pilot. The community must understand that this implementation is merely a 120 day test on a select few pools with the lowest % fee collection possible. The tradeoff of not going forward with experimentation is stifling governance/revenue model innovation.
As for success metrics, we should make those more clear to remove any confusion. @guil-lambert’s comment on tracking the ETH-stable trades via the SwapRouter before and after fee switch would be a good addition.
Hi @PatrickOD, we posted this brief earlier today on legal and regulatory considerations: https://uniswapfoundation.mirror.xyz/H-6W3RJ8IyZSixtBEZaLmSHUlAupLDh9eCZ_t6UUPo8
Excellent question!
We expect some LPs will remove liquidity from the fees switched pools to another pool. This is totally understandable and expected to happen. But how would that liquidity affect the execution price?
Excellent question!
We expect some LPs will remove liquidity from the fees switched pools to another pool. This is totally understandable and expected to happen. But how would that liquidity affect the execution price?
In other words, if liquidity is moved from the 30bps pool to an identical price range in the 5bps pool, would that increase the slippage for the average trade? The swap router could alleviate some of the inefficiencies by re-directing trades to the "most liquid" pool, but I'd say the actual impact of that liquidity re-deployment is largely unknown.
"Trade execution" could thus be monitored by tracking the (slippage+fees)/tradeSize for all ETH-stablecoin trades that went through the SwapRouter before and after the fee switch. This would basically track whether the "effective" liquidity of the whole protocol went up/down or stayed the same. We're open to other ideas as well.
At the end of the day, we first and foremost want to focus on studying the impact of the fee switch on trade execution for swappers, and not on its impact on LP revenue.
TL;DR
TL;DR
The Foundation has taken on this work as part of its broader mission to advance thinking around key aspects of decentralized finance. To the extent any community member might be affected by the issues discussed, they should consult with their own advisor.
Introduction
In late December, @Leighton wrote that the vote on the fee switch proposal would be delayed in order to try and address some compliance uncertainties highlighted by the community.
In the time since, the Uniswap Foundation has engaged in discussions with a diverse set of advisors knowledgeable in this area to explore how the community might address these uncertainties. In this post, we update the community on our assessment. We also discuss an opportunity that was highlighted by this work, to conduct research into and then implement enhancements to the Protocol’s fee accrual and distribution mechanisms, and to the design of the UNI token itself.
UF Analysis
Current tax laws in the US do not provide clarity on how the fees from a smart contract protocol, that can be directed to a DAO, should be treated. Although legislation has been introduced to address the issue, it has not passed Congress or been signed into law. The Treasury Department and the Internal Revenue Service (the “IRS”) have not issued guidance (or made any kind of public statement) as to the tax treatment of DAOs generally.
The UF, amongst other options, explored whether any prevalent legal entity structures could adequately address the aforementioned uncertainties. After extensive review, and while acknowledging the advantages of many of the structures we reviewed, we found that none of the structures were compatible with the specific organizational structure and needs of the Uniswap DAO.
Specifically, we highlight the extent of the Uniswap DAO’s decentralization. The Uniswap DAO currently comprises more than 370,000 token holders located across a large and unknowable number of jurisdictions. Many token holders are anonymous. Governance participation is highly fluid, and spread across the globe. These factors make it virtually impossible to choose a legal entity structure which provides a practically feasible and long-term solution for the purpose of this proposal, without limiting or putting at risk one or more core underlying attributes of the Uniswap DAO.
We will also note that, even if the community were to hypothetically opt into a particular legal entity option, or set up a separate legal entity for this purpose, it is not clear to what extent that step would be effective in addressing the aforementioned uncertainties, as these structures are untested in the context of large DAOs like Uniswap’s.
That being said, we want to make clear that this determination was made with the Uniswap DAO’s specific needs and makeup in mind. This is not intended to be a general assessment to be used by other DAOs. Alternatively, traditional legal entity structures may be suitable for other DAOs and in other situations, as many DAOs have already chosen to adopt these traditional entity structures with success. For those reading this post who are interested in learning about these structures, we invite you to review Paradigm’s DAO Legal Entity Matrix, and A16z’s Legal Framework for Decentralized Autonomous Organizations Part I and Part II.
UF Recommendation & Way Forward
Following a holistic analysis, we do not feel comfortable recommending the creation of a traditional legal entity structure, if the proposal were to be approved right now.
As pointed out by others before, the community should remain cognizant that doing so means the compliance uncertainties in question would remain unanswered if the proposal were to be approved today. This may present potential risks to the DAO and its token holders, particularly in the current environment of heightened regulatory scrutiny.
With this background in mind, we encourage the community to consider other alternative options. We have considered, for instance, an alternative strategy which would involve setting aside a portion of fees to a separate “reserve” smart contract to cover potential legal costs and liabilities that the DAO may be exposed to in the future. However, this approach may not alleviate the aforementioned compliance concerns.
As we detail in this follow-up post, much of our research and many of our discussions over the past several weeks have led us to the conclusion that implementing a programmatic distribution of fees directly to persons, for instance to those who have “opted in” through taking some beneficial action for the Protocol, may be a superior path forward. This kind of mechanism would represent a significant mitigation of risk for the Uniswap DAO because tax obligations would rightfully be the responsibility of the individual in their respective jurisdiction, among other potential benefits. If properly designed, this mechanism could further incentivize productive behavior to support the Protocol.
In the same vein, we have had many discussions with stakeholders who are excited to research new methods for accruing fees to the DAO, and to innovate upon the applications of the UNI token to support the protocol. This is an exciting area for future exploration, and has the potential to support the future growth, decentralization, and sustainability of the Uniswap Protocol. Please read our more detailed follow up post for more information, and ways to contribute to the conversation.
For those interested in contributing:
The Uniswap Foundation supports a community of individuals and organizations dedicated to a more open, fair and decentralized financial system through education around and broader adoption of blockchain technologies and smart contract-based decentralized protocols.
This post does not constitute, and is not intended to constitute, any kind of legal advice, and readers are not to construe the contents of this brief as legal, business, tax, accounting, investment, or other advice. Each UNI token holder should consult its own advisers as to legal, business, tax, accounting, and other related matters concerning the proposal in light of such token holder’s particular circumstances.
Providing an update here. As @Leighton wrote back in December, the vote on the fee switch proposal would be delayed for a short period of time in order for some uncertainties to be addressed. Specifically, he cited community feedback to “[put] in place a legal entity structure to alleviate concerns some delegates have around potential tax implications for the pilot”.
Since then, the UF has been working with a set of advisors to put together a proposal which aims to address that uncertainty. To do that, we identified the requirements for an entity type for the DAO, assessed several entity types against that criteria, and selected an entity type which we believe will best serve the DAO’s needs. Right now, we are in the process of finalizing our proposal. This finalization will entail more detailed analyses of all known implications of our proposal for the DAO, as well as finalizing a process for implementation. That implementation process will, among other steps, entail time for community discussion as well as Q&A.
Providing an update here. As @Leighton wrote back in December, the vote on the fee switch proposal would be delayed for a short period of time in order for some uncertainties to be addressed. Specifically, he cited community feedback to “[put] in place a legal entity structure to alleviate concerns some delegates have around potential tax implications for the pilot”.
Since then, the UF has been working with a set of advisors to put together a proposal which aims to address that uncertainty. To do that, we identified the requirements for an entity type for the DAO, assessed several entity types against that criteria, and selected an entity type which we believe will best serve the DAO’s needs. Right now, we are in the process of finalizing our proposal. This finalization will entail more detailed analyses of all known implications of our proposal for the DAO, as well as finalizing a process for implementation. That implementation process will, among other steps, entail time for community discussion as well as Q&A.
We are working out these details and hope to have the proposal posted on the forum in ~2-3 weeks.
The UF is working on an update here and should have a post with more details over the next few days!
We are very thankful for the robust discussion that has happened over the past two weeks. Although @guil-lambert and I have not responded to every comment, we have read them!
In the responses, two general positions have emerged. The first position has been best articulated by @alanalevin. This position acknowledges there are potential regulatory risks with the proposal but ultimately advocates moving forward now. Recognizing some uncertainty will never be settled and "action begets action".
We are very thankful for the robust discussion that has happened over the past two weeks. Although @guil-lambert and I have not responded to every comment, we have read them!
In the responses, two general positions have emerged. The first position has been best articulated by @alanalevin. This position acknowledges there are potential regulatory risks with the proposal but ultimately advocates moving forward now. Recognizing some uncertainty will never be settled and "action begets action".
The alternative position advocated by @Porter and others is to further de-risk some specific regulatory issues before moving forward. The most prominent of these being the concern some delegates have that fees generated could be considered taxable income.
Outside of these regulatory concerns, @Jack_Longarzo also did a good job articulating some of the broader risks any misstep could have on the largest DeFi protocol. We believe this is a very important point.
Similarly to previous discussions, the simple posting and planning for the vote also generated a high level of engagement from new and existing stakeholders which we are very happy to see.
In reading the feedback and having conversations over the last 2 weeks our view is that this proposal can be meaningfully de-risked in a short amount time. That can happen by putting in place a legal entity structure to alleviate concerns some delegates have around potential tax implications for the pilot. Our understanding from talking to stakeholders is there will be a thoughtful proposal on options to create an entity to handle this in a few weeks. From there, an option can be chosen and proposal can proceed with that aspect de-risked and we will put forward a vote!
That will enable us to move forward with the pilot in a unified way. We also believe this will set a much stronger foundation so that if the pilot is successful, there can be a path to transition from a pilot to larger implementation aligned with protocol growth (see @Porter last paragraph for one possible way that could look).
We know additional waiting will be painful to many but we truly believe for the good of Uniswap and DeFi as a whole it is crucial for us to set the best possible example.
Pains me to say it but Avantgarde will be voting No on this iteration.
While I appreciate the decoupling of the "does this change the product" question from the "what are we going to do with the fees" question, I think it's impossible and ultimately irresponsible to ignore the other potential negative externalities in the name of experimentation.
Pains me to say it but Avantgarde will be voting No on this iteration.
While I appreciate the decoupling of the "does this change the product" question from the "what are we going to do with the fees" question, I think it's impossible and ultimately irresponsible to ignore the other potential negative externalities in the name of experimentation.
Ultimately, turning on the fee switch will bring the protocol into the regulatory crosshairs and to do so without a plan for how we'll answer when the various authorities come around asking questions is folly. Both @Porter's post and the UF brief touch briefly on potential vectors of liability for various stakeholders and both indicate that work is ongoing to mitigate those liabilities. Let's wait for the output of that work before moving forward.
This conversation - while it may not actually result in these fees getting turned on this time - has been super valuable in galvanizing the community around the idea that the fee switch should be turned on in some form or fashion. Kudos to @Leighton for getting it started and for the various people and teams who have gone deep into the data to figure out where this experiment should take place.
On a final note, one other way to potentially avoid many of the risks associated with the fee switch would be to implement a system that accrues fees to UNI token holders who actively “opt-in.”
Can you please explain what you mean by "actively opt-in"?
Are you referring to LPs going through some sort of KYC process?
At GFX, we’ve been working towards getting the Fee Switch turned on for more than a year and, over the last several months, have been slowly gathering opinions from delegates and UNI holders. Our general observation has been that most UNI holders are interested in seeing the protocol monetized. The differences in opinion tend to come from when and how the protocol should be monetized. Some believe it should be put off until Uniswap gains greater market share, while others believe that monetizing the protocol today could rekindle interest in the protocol, governance, and UNI. Over the last six months, there has been a jump in interest in getting the switch activated, and now how has become the main question.
The how (implementation) generally consists of the flowing questions (ignoring v2 to simplify this):
We (Blockchain @ Michigan) are in favor of moving forward with the fee switch pilot. The community must understand that this implementation is merely a 120 day test on a select few pools with the lowest % fee collection possible. The tradeoff of not going forward with experimentation is stifling governance/revenue model innovation.
As for success metrics, we should make those more clear to remove any confusion. @guil-lambert’s comment on tracking the ETH-stable trades via the SwapRouter before and after fee switch would be a good addition.
Hi @PatrickOD, we posted this brief earlier today on legal and regulatory considerations: https://uniswapfoundation.mirror.xyz/H-6W3RJ8IyZSixtBEZaLmSHUlAupLDh9eCZ_t6UUPo8
Excellent question!
We expect some LPs will remove liquidity from the fees switched pools to another pool. This is totally understandable and expected to happen. But how would that liquidity affect the execution price?
Excellent question!
We expect some LPs will remove liquidity from the fees switched pools to another pool. This is totally understandable and expected to happen. But how would that liquidity affect the execution price?
In other words, if liquidity is moved from the 30bps pool to an identical price range in the 5bps pool, would that increase the slippage for the average trade? The swap router could alleviate some of the inefficiencies by re-directing trades to the "most liquid" pool, but I'd say the actual impact of that liquidity re-deployment is largely unknown.
"Trade execution" could thus be monitored by tracking the (slippage+fees)/tradeSize for all ETH-stablecoin trades that went through the SwapRouter before and after the fee switch. This would basically track whether the "effective" liquidity of the whole protocol went up/down or stayed the same. We're open to other ideas as well.
At the end of the day, we first and foremost want to focus on studying the impact of the fee switch on trade execution for swappers, and not on its impact on LP revenue.
At GFX, we’ve been working towards getting the Fee Switch turned on for more than a year and, over the last several months, have been slowly gathering opinions from delegates and UNI holders. Our general observation has been that most UNI holders are interested in seeing the protocol monetized. The differences in opinion tend to come from when and how the protocol should be monetized. Some believe it should be put off until Uniswap gains greater market share, while others believe that monetizing the protocol today could rekindle interest in the protocol, governance, and UNI. Over the last six months, there has been a jump in interest in getting the switch activated, and now how has become the main question.
The how (implementation) generally consists of the flowing questions (ignoring v2 to simplify this):
However, those questions only address the technical implementation of the Fee Switch. There are several legal questions we’ve come across that voters would like to see addressed, such as the following:
We think there are certain ways to activate the Fee Switch, which could maximize the value of the protocol while minimizing legal risks.
The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success.
We'll be voting against the proposal if it progresses to a formal governance vote because we believe the primary metric of success is unlikely to be met with the proposed implementation. Additionally, the proposal needs to address the above key questions. The below explains why we believe success is unlikely; we can make a follow-up post regarding why the proposal doesn't sufficiently address the above question if it needs to be clarified.
While some may say that the proposal is merely an “experiment,” an unsuccessful implementation will likely hinder future efforts to monetize the protocol and reflect poorly on the state of Uniswap.
Question: Why do we think the proposal will not meet its stated success metric?
If passed, the proposal will set a protocol fee of 1/10 of the fee tier of the pool for the designated pools: ETH-USDT 5bp, DAI-ETH 30bp, & USDC-ETH 100bp. For example, the USDC-ETH 100bp pool applies a 100bp fee to trades and distributes the full fee to the LPs. With the fee applied, the fee on swaps remains the same, but the fee to LPs drops to 90bps.
The protocol has four fee tiers: 1bp, 5bp, 30bp, and 100bp. Each asset pair can only have these four fee tiers; no additional pool can exist. For example, there is one ETH-USDC 1bp pool, one ETH-USDC 5bp pool, one ETH-USDC 30bp pool, and one ETH-USDC 100bp pool. If someone were to try to make a second ETH-USDC 30bp, the factory contract would prohibit it. If someone tried to make the inverse pair like USDC-ETH 30bp, the factory contract would also prohibit it.
To help normalize this information, its best to view them in a familiar format:
| Tiers | Taker | Maker |
|---|---|---|
| 100bp | 1.00% | -1.00% |
| 30bp | 0.30% | -0.30% |
| 5bp | 0.05% | -0.05% |
| 1bp | 0.01% | -0.01% |
Takers are people swapping with the pool, whereas the Makers are the LPs in the pool. Makers are currently receiving a 100% rebate for liquidity provided.
Answer: By introducing a 1/10 Protocol Fee on select pools, the protocol is reducing the rebate the LP will earn. Further, by only introducing the Protocol Fee to select pools, active LPs will likely move to one of the other three fee tiers where the rebate remains 100% or will move to a like-kind pair.
For example, if we were an active LP in the ETH-USDT 5bp pool and saw a rebate reduction of 10%, but the ETH-USDC 5bp still offered a 100% rebate, we’d simply move to that pool instead.
Potential alternatives Below are our brief thoughts on implementing a Protocol Fee for the purposes of analyzing changes to LP behavior and swap execution. The list is from the most optimal implementation to the least optimal implementation to active Protocol Fees.
Call to action If you're a UNI token holder and supportive of a thoughtful proposal to turn on the fee switch, please reach out. [email protected]
At GFX, we’ve been working towards getting the Fee Switch turned on for more than a year and, over the last several months, have been slowly gathering opinions from delegates and UNI holders. Our general observation has been that most UNI holders are interested in seeing the protocol monetized. The differences in opinion tend to come from when and how the protocol should be monetized. Some believe it should be put off until Uniswap gains greater market share, while others believe that monetizing the protocol today could rekindle interest in the protocol, governance, and UNI. Over the last six months, there has been a jump in interest in getting the switch activated, and now how has become the main question.
The how (implementation) generally consists of the flowing questions (ignoring v2 to simplify this):
However, those questions only address the technical implementation of the Fee Switch. There are several legal questions we’ve come across that voters would like to see addressed, such as the following:
We think there are certain ways to activate the Fee Switch, which could maximize the value of the protocol while minimizing legal risks.
The metric to measure success of the experiment is the following: If trading execution is not diminished for the pools with the “fee switch” turned on – the experiment is a success.
We'll be voting against the proposal if it progresses to a formal governance vote because we believe the primary metric of success is unlikely to be met with the proposed implementation. Additionally, the proposal needs to address the above key questions. The below explains why we believe success is unlikely; we can make a follow-up post regarding why the proposal doesn't sufficiently address the above question if it needs to be clarified.
While some may say that the proposal is merely an “experiment,” an unsuccessful implementation will likely hinder future efforts to monetize the protocol and reflect poorly on the state of Uniswap.
Question: Why do we think the proposal will not meet its stated success metric?
If passed, the proposal will set a protocol fee of 1/10 of the fee tier of the pool for the designated pools: ETH-USDT 5bp, DAI-ETH 30bp, & USDC-ETH 100bp. For example, the USDC-ETH 100bp pool applies a 100bp fee to trades and distributes the full fee to the LPs. With the fee applied, the fee on swaps remains the same, but the fee to LPs drops to 90bps.
The protocol has four fee tiers: 1bp, 5bp, 30bp, and 100bp. Each asset pair can only have these four fee tiers; no additional pool can exist. For example, there is one ETH-USDC 1bp pool, one ETH-USDC 5bp pool, one ETH-USDC 30bp pool, and one ETH-USDC 100bp pool. If someone were to try to make a second ETH-USDC 30bp, the factory contract would prohibit it. If someone tried to make the inverse pair like USDC-ETH 30bp, the factory contract would also prohibit it.
To help normalize this information, its best to view them in a familiar format:
| Tiers | Taker | Maker |
|---|---|---|
| 100bp | 1.00% | -1.00% |
| 30bp | 0.30% | -0.30% |
| 5bp | 0.05% | -0.05% |
| 1bp | 0.01% | -0.01% |
Takers are people swapping with the pool, whereas the Makers are the LPs in the pool. Makers are currently receiving a 100% rebate for liquidity provided.
Answer: By introducing a 1/10 Protocol Fee on select pools, the protocol is reducing the rebate the LP will earn. Further, by only introducing the Protocol Fee to select pools, active LPs will likely move to one of the other three fee tiers where the rebate remains 100% or will move to a like-kind pair.
For example, if we were an active LP in the ETH-USDT 5bp pool and saw a rebate reduction of 10%, but the ETH-USDC 5bp still offered a 100% rebate, we’d simply move to that pool instead.
Potential alternatives Below are our brief thoughts on implementing a Protocol Fee for the purposes of analyzing changes to LP behavior and swap execution. The list is from the most optimal implementation to the least optimal implementation to active Protocol Fees.
Call to action If you're a UNI token holder and supportive of a thoughtful proposal to turn on the fee switch, please reach out. [email protected]
