LiteBit

Written by Erik Weijers 24 days ago

Uniswap and the fee switch: will it happen?

Uniswap is the original decentralized exchange and still unique in a few ways. Besides being innovative - it will soon allow NFT's to be traded - it is conservative in another respect: the trading fees don't accrue to the holders of its coin UNI. Will this stay the same or will the so-called fee switch be enabled?

Uniswap is one of the few Decentralized Exchanges (dexes) where the trading fees paid by traders are completely funneled towards liquidity providers. Trading on dexes like Uniswap happens in liquidity pools. Those are the places where users deposit their coins and where prices are determined. Traditionally, only banks make money on exchanging currency - with dexes it is the users (liquidity providers or LP's) who make their capital directly available for transactions and are rewarded for it.

What's the fee switch?

After being activated, the fee switch would mean that the fee that liquidity providers earn would drop from 0.3% to 0.25%. 0.05% would go towards UNI holders. Dexes like TraderJoe and Sushiswap pay out token holders similar percentages.

Wait, so why do people even hold the UNI token if they don't benefit at all from the trading activity? Well, compare this with stocks. We can view a dex that pays a percentage of its trading fees as a company that pays out dividend to its shareholders. But not all companies pay out dividend. A very successful company like Amazon has never paid out dividend and still its stock price is done extremely well.

Why not switch it on?

The fee switch is like a bomb ready to be detonated: it already sits in the smart contracts of Uniswap code. It would only need to pass a governance vote to be activated.

But will this be a good thing for the price of UNI? Since 2020, the use of Uniswap has exploded. Despite all the forks and copycats, like Sushiswap and Pancakeswap, Uniswap is still by far the largest DEX with a trading volume comparable to a centralized exchange like Coinbase.

A big reason for Uniswap's success is the fact that LP's get such a good deal. Compare it to the way Amazon has made sure that users come first. If users are happy, then the revenue - and the stock price - will follow. If Uniswap would cut the rate for liquidity providers, they might switch platform.

By turning on the fee switch, Uniswap would lose its unique (pun intended) identity and simply join the pack of dexes. The history of marketing has shown that giving up a unique selling point is often not a smart move.

Time will tell. In the meantime, UNI holders can rest assured that there is a nice 3 billion dollars in the treasury backing their coins.

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