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Uniswap Takes Significant Step Towards “Fee Switch”



Uniswap’s community took a big step towards its “fee switch,” which could have significant implications for both the Uniswap protocol and all UNI token holders. The fee switch has been the subject of long debates in the DeFi community, thanks to its potential implications on the community. 

What Is The “Fee Switch?”

Currently, users have to pay 0.3% to trade on Uniswap. Out of this small percentage, the entire amount is sent to the liquidity providers for that particular trade. However, if the “fee switch,” also called the “protocol charge,” comes into play, then liquidity providers would only get around 0.25%, while the remaining .05% would theoretically go to UNI token holders, who would be getting this fee for just holding their UNI tokens. 

However, it remains unclear how UNI holders would capture this value and whether they would be able to avail of it as more yield on their holdings or more airdrops. For example, SushiSwap, a fork of Uniswap, allows users to earn .05% on all trades if they hold a staked version of the SUSHI token. According to the team at Uniswap, the redirected funds could be allocated to a decentralized funding mechanism that could be used to support contributions to the Uniswap ecosystem. The Uniswap community could access this fee through a governance vote, meaning if enough users want the fee switch, they can vote and get it. 

How The Fee Switch Brings Value To UNI Holders 

So how much value can this bring to UNI holders? Over the past month, Uniswap has seen a daily volume that hovered between $37 million and $130 million. Assuming this equals an average of $83 million, .05% of which would equal $41,500, distributed to UNI token holders daily. This figure has been decided based on an average volume, so the actual figure could be much higher or lower. This means that the more UNI tokens one held, the more one could earn. For token holders, this is hugely enticing. 

What’s The Holdup? 

Liquidity providers currently get 0.3% from every transaction on Uniswap. The holdup is that these liquidity providers wouldn’t be too happy to see their earnings drop. As a result, there is the possibility that a drop in their earnings could see them pull their holdings from Uniswap, which could adversely affect its liquidity and impact the entire decentralized exchange. This is what makes a fairly straightforward choice for UNI token holders a fairly tricky one for the ecosystem as a whole. 

A Middle Ground 

However, there are attempts to find a middle ground, with one suggestion coming from the CEO and co-founder of the no-loss lottery project PoolTogether, Leighton Cusack, who suggested testing the fee switch in a limited testing capacity on only a few pools to gauge their reaction. According to Cusack, trying out the fee switch in low-stake pools would allow the Uniswap community data and time to understand how the assets accrued through the fee switch should be used. 

“Flipping The Switch” Is An Opportunity 

Cusack stated that the decision isn’t as straightforward or binary as it is being made out to be, stating that he believed it should be discussed as an opportunity that would allow them to “think creatively about how protocols, governance, and value accrual can work in Web3.” He said he sees it as much more than just free money for holders. Instead, the sum could be used for project grants or to sponsor developers. However, with UNI enjoying a bull run over the past month, the community may be reluctant to do anything that could drive away the bullish sentiment. 

An analyst at IntoTheBlock, Juan Pellicer, confirmed the sentiment in the community, stating, 

“UNI has been performing better than other ‘blue-chip’ DEXs such as CRV (#94), SUSHI (#134), or BAL (#176). This overperformance compared to its competitors shows that UNI does not necessarily need to accrue revenue. Liquidity providers margins are already low, and removing some of their income with the fee switch could cause a potential liquidity loss to the protocol.”

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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