A unicorn smiles at the day… Image by Tanja-Milfoil via flickr.com. License: Creative Commons

Sounds technical, but it is a revolution: The holders of the Uniswap DAO token, UNI, will in future benefit from fees on currency exchange at Uniswap, the largest decentralized exchange. This would make UNI a whole new class of token – and the market already loves it.

As always, it wasn’t what you expected right or left, but what was hidden under the thicket. In the crypto market, developments that to outsiders look like inconsequential, esoteric details and that cannot be expressed in anything other than technical terms can cause storms. They can move billions of dollars overnight and provide the impetus for much more.

This was seen again at the end of last week. The inconspicuous but powerful detail was a proposal in the Uniswap DAO entitled: “Activate Uniswap Protocol Governance”. It doesn’t get any less pale in German: “Activate the protocol government in Uniswap.”

Erwin Koen, the “Gov Lead,” so to speak, chairman of the Uniswap Foundation, the center of the Decentralized Autonomous Organization (DAO), submitted the proposal. He called it the “biggest week of Uniswap protocol governance since… ever.”

The market obviously likes it: The price of the $UNI token reacted euphorically; last Friday it rose from $7 to over $10, at one point even to $13, and it is now at $10.70. This is an annual high that was last seen at the beginning of 2022.

A proposal worth billions

$UNI, it should be noted, is the token of Uniswap, the DAO that governs the decentralized exchange Uniswap. Uniwap is the largest decentralized exchange, with a trading volume of around a billion dollars in the past 24 hours, it is also one of the largest crypto exchanges ever.

You can imagine the DAO like a supervisory board, whose approval the management must obtain when making groundbreaking decisions. This is primarily about changes in the protocol and the smart contracts that form the skeleton of the decentralized exchange, to which the “liquidity providers” attach the fabric.

This DAO’s token, $UNI, jumped around 40 percent in the past week. It was the top gainer, i.e. the fastest rising cryptocurrency of the past seven days; the market capitalization jumped from 4.2 to around 6.4 billion dollars. Apparently the market spontaneously valued the proposal at two billion dollars.

But not only that. Other DeFi protocols such as SushiSwap, DYDX and Compound also posted considerable profits. 20 or 30 percent is not uncommon. Ethereum also rose significantly against Bitcoin and other major cryptocurrencies in the last seven days. This could be related to the Uniswap proposal.

So what is it about? What is behind the proposal with this pale and unpretentious title? And why is it so much more than the sum of its parts?

Incentives to combat election fatigue

The “Enable Uniswap Protocol Governance” proposal seems unimpressive at first glance. But it has far-reaching implications. He calls for “governance to be activated in the Uniswap protocol,” which means that the community that decides on changes to the protocol, i.e. the board of directors, should play a larger and more active role – it will be “activated.”

The proposal thus addresses a widespread problem in DAOs: election fatigue. Many users appreciate it when their tokens remain stable or increase in value, just like stocks do; But actively participating in governance – reading, discussing and examining proposals, even changing them or submitting them yourself – is less popular. Even delegating votes to representatives who do it for you seems too much to ask!

Because this is the sobering reality of the DAO: Less than 10% of circulating Uni tokens are used for voting, and even among the delegates, many abstain from voting. Such election fatigue makes DAOs weak. On the one hand, it makes it more difficult to make decisions and, on the other hand, it reduces the necessary quota so low that the DAOs centralize to a few active players and become vulnerable.

The Uniswap proposal aims to solve this problem. More precisely: He wants to reward the delegation of UNI votes through protocol fees. “We believe that incentivizing Uniswap token holders to elect delegates will further the growth and success of the protocol. If the proposal is successful, we expect the entry of new delegates and more dynamism among them.”

So Uniswap token owners can receive income from protocol fees through active participation in the DAO. The $UNI tokens have a “cash flow”; they generate a return by receiving money from ongoing operations to pay some sort of directorate or board of directors. Or even just a shareholder. The terms are becoming blurred at this point because the token is becoming a completely new type of financial product.

But someone has to pay the bill

Roughly speaking, the UNI token is upgraded to something similar to a stock or bond. The difference is that a smart contract transfers the dividend from ongoing operations, and the entire mechanism of the levy is digitalized and therefore automated and modular. You can modify and gamify dividend payments in countless ways. The stakeholder becomes more active than he could ever be in traditional finance.

As fantastic as this may sound, there is always someone to foot the bill. In this case, these are the users of Uniswap. The actual protocol fees that arise every time you switch from one coin to another have so far flowed entirely to the meat of the DAO – the liquidity providers (LP), who put the corresponding coins into a liquidity pool from which the switch is made possible. These fees range from 0.05 to one percent. The new proposal allows a tenth to a third of this to be added, depending on the currency pair, and this amount to be transferred to the Uniswap DAO.

It’s a bit like a VAT that is added when one party provides a service to another – the liquidity providers to the users – and to a third party, governance – a government! – is redistributed. You could also say it’s like the fee of a platform operator like Amazon.

Sail into financially uncharted waters

Such a VAT or platform fee (what else is a VAT?) naturally makes trading on Uniswap slightly more expensive. It could lead to users migrating to other platforms that do not have such a model, reducing trading volumes, reducing revenue for liquidity providers, eventually moving to other platforms and drying up liquidity on Uniswap.

Based on impressions so far, the proposal is met with much more enthusiasm than skepticism in the community, both in the DAO forums and on social media. The joy of sailing into financially uncharted waters outweighs the sober consideration of possible disadvantages. And anyway – a capable supervisory board that has the incentive to actually work instead of collecting its profits could actually make Uniswap a better exchange that attracts more users and liquidity despite higher fees.

Perhaps even more important: the secondary effect of a legal nature

On the other hand, there is a secondary effect of a more legal nature that could go far beyond Uniswap. It’s not just about the already fascinating sum of its parts – the cash flow, the reinvention of the bond in smart contracts, its tokenization and gamification – but rather about the fact that Uniswap, which is based in the USA, is doing it right under the eyes of the stock market regulator SEC does – and apparently is allowed to do.

Typically, the SEC reacts sharply when something looks like a stock: it sues before it asks questions; the Uniswap Foundation would not have remained legal if it did not know this.

So that suggests that something has changed legally. Has a company won a case against the SEC? Is there any news that hasn’t been made public yet that has changed the regulatory playing field? Some estimate that Coinbase won an appeal, but as I said, nothing is known about that yet.

In any case, it is a strong signal: an invitation to others to follow Uniswap and dare to behave a little more like a stock, bond or other security and have the courage to experiment with it. This could open the door to a new wave of decentralized financial products – and the market is clearly hungry for it.

Source: https://bitcoinblog.de/2024/02/26/ein-milliardenschwerer-vorschlag-uni-holder-sollen-einnahmen-aus-groesster-dezentraler-boerse-erhalten/

Leave a Reply