The price of Uniswap’s governance token UNI soared nearly 62% on Friday morning as the Uniswap Foundation proposed a fee mechanism that would reward UNI holders who have staked and delegated their tokens. The proposal is an effort to strengthen Uniswap’s governance system.
The foundation’s governance lead Erin Koen posted the proposal around 9 a.m. ET and UNI jumped from $7.18 at the time to $11.62 at presstime, according to CoinGecko.
If the governance proposal is approved and implemented, two new Uniswap smart contracts would programmatically collect protocol fees and distribute these fees pro-rata to UNI token holders who have staked and delegated their votes.
Data from blockchain analytics firm Token Terminal shows that Uniswap has generated about $305.8 million in fees over the past 180 days.
“The [smart] contracts allow UNI holders to take anywhere from 1/10 – 1/4 of fees. At 1/10, this would mean $61m revenue / year. At 1/4, this would mean $153m revenue / year,” Antonio Juliano, the founder of decentralized exchange dYdX, shared on X.
These calculations assume volume does not decrease because of the fee. “All else equal, [it is] likely volume would decrease as an extractive fee is introduced,” Juliano added.
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The Problems of Free-Riding and Apathy
The proposal aims to address how free-riding and apathy “remain existential risks” to the sustainability of the largest decentralized exchange (DEX) by trading volume, according to the proposal.
“Less than 10% of circulating UNI is used to vote on a given proposal. Further, a large portion of existing delegation is ‘stale,’ wrote Koen. “As of February 1 2024, 14 of the top 30 delegates by voting power had not voted over the last 10 proposals, and only 7 of these delegates have ever created a proposal,” he added.
Delegating UNI binds the voting power of a person’s UNI tokens to an address so it can participate in Uniswap’s governance process. “This address could be yourself, or a trusted party who you believe will vote in the best interest of Uniswap Governance,” as outlined by the DEX’s documents.
The top 30 Uniswap delegates include Ethereum development firm Consensys, risk manager Gauntlet, market maker Wintermute, and several student blockchain organizations, including those at Michigan University, UCLA, Stanford, and the University of Pennsylvania, per onchain governance platform Tally.
Andreessen Horowitz’s flagship crypto fund a16z crypto, which holds 37 million UNI tokens worth about $262.5 million, according to onchain intelligence firm Nansen, has delegated their onchain governance rights “to a broad network of qualified delegates” such as university blockchain organizations, according to a 2021 a16z blog post.
The Uniswap Foundation wrote about the potential impact of this new governance proposal on X, saying “Decentralized, resilient, and engaged governance is imperative to the long-term health and success of the Protocol. We believe this upgrade will strengthen and invigorate Uniswap governance.”
The proposal is in its early stages as community members are currently discussing the various elements of the potential upgrade. In seven days, the Uniswap Foundation will conduct a Snapshot to let community members signal sentiment offchain. If governance members support the initiative, then an onchain vote will be held to decide whether to execute the fee mechanism upgrade.
