Uniswap, one of the leading decentralized exchanges (DEX), considered implementing a protocol fee in a recent preliminary vote, which failed to pass by a narrow margin. The proposal suggested charging liquidity providers (LPs) a fee consisting of one-fifth, one-tenth, or one-sixth of the fees they receive from users, but was ultimately rejected with 45.32% votes going to the “no fee” side, and 42.34% to the fee. This move, if implemented, would have allowed UNI token holders, who theoretically own the protocol, to start earning a portion of the fees that are currently received by LPs, but was met with concerns of tax and regulatory issues. It is important to note that this vote was non-binding and merely a preliminary ballot on the matter.
Uniswap is governed by the Uniswap Decentralized Autonomous Organization (DAO), with various UNI token holders making decisions on the protocol’s development. The exchange charges transaction fees ranging from 0.01% to 1%, depending on the specific pool being used. However, all these fees go to LPs or market makers, while UNI token holders do not receive any of these fees.
Supporters of the proposal argued that Uniswap no longer needed to offer full rebates to LPs as it had matured as an exchange. GFX Labs, the author of the proposal, provided a list of fees from Uniswap’s competitors, Coinbase and Binance, to assert that Uniswap’s subsidies to LPs would still make it the best place for them to do business. “Uniswap is in a strong position to turn on protocol fees and prove that the protocol can generate significant revenues,” said GFX in the proposal’s official forum page. “We need to reaffirm that liquidity providers are protocol users and do not need full rebates,” they further stated.
On the other hand, opponents stated that charging a fee would cause tax and regulatory issues for UNI token holders. Venture capital fund A16z’s deal partner, Porter Smith, commented in the forum that fees should not be implemented until either Uniswap governance becomes an incorporated legal entity, or a decentralized “flow of funds” is developed to send revenue directly to UNI token holders. This is primarily to ensure that taxable obligations rest with users instead of the DAO.
Like most DAOs, Uniswap DAO has members operating in multiple jurisdictions worldwide and is not registered as a business in any country. The exchange initially launched on the Ethereum network but has been exploring expansion into different networks lately. The DAO recently voted to deploy Uniswap to zero-knowledge Ethereum Virtual Machine (zkEVM) network Polygon on April 14 and voted to launch a Moonbeam Polkadot parachain version on May 17.
The failure of this preliminary vote does not rule out the possibility of implementing a protocol fee in the future. However, it does highlight the concerns related to tax and regulatory hurdles and the need for more refinements to the proposal for it to gain broader support. These hurdles are not unique to Uniswap but are prevalent across the DEX industry. As the DeFi space continues to evolve, these regulatory and legal hurdles must be addressed to enable greater growth and adoption.
