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The UniSwap community initiated a proposal to open the "fee switch"

Author: Leighton

Source: UNISWAP Governance

On July 19, Leighton, a member of the UniSwap community, initiated a proposal to open the UniSwap "fee switch" in the governance forum, proposing to first open the fee switch for the two trading pairs USDC/ETH and USDC/USDT. Here's what the proposal says:

There have been many discussions about whether UniSwap should turn on the "fee switch". In most discussions, I see an assumption that using a fee switch = money flowing to UNI token holders. I think this idea has limitations.

The design space around how fee switches are used is much larger, and with all of DeFi it is critical that we think broadly about the design space. Blindly adopting a generic "staking UNI = earning some kind of fee" idea will miss the incredible opportunity we have to think creatively about how protocols, governance, and value accretion work in Web3.

The goal of this article is to make clear that the governance of UNI has two distinct decisions:

  1. Should fees be turned on?

  2. How to use the fee?

Considering these decisions separately, we may actually be able to move faster.

high risk

Uniswap is currently the largest DeFi protocol - both in usage and in philosophy. Uniswap's choice of a "fee switch" will set a precedent for the entire industry. Just like the UNI token airdrop once, it set a precedent for how governance is distributed.

The high stakes make complacency a comfortable option, but so does the risk of waiting too long to explore the tool.

"Fee switch" design space

I think the term "fee switch" is a misnomer. It refers to the ability of the UniSwap protocol to retain a portion of funds that have been paid to liquidity providers. The protocol retains some of this, providing UNI token holders with new tools to facilitate the growth and mission of the protocol. It does not imply that reserved tokens will be paid to UNI token holders in the future.

  • Public property funds (so far the first use of the protocol treasury)

  • Build the protocol's own liquidity

  • Dedicated to funding the Uniswap protocol/funding developers, etc.

  • other things we can think of

Is it time to turn on the "fee switch"?

I believe the answer is yes. It should be opened in limited testing capacity. Doing so now will give us real data and give the community more time to think about how to use the assets accumulated through this mechanism.

From this point of view, the fee switch has too much untapped design space to ignore. As mentioned earlier, this will not increase fees for users using the protocol exchange. It will only retain a small portion of the funds currently paid to liquidity providers.

What to do next?

Uniswap V3 sets fees on a per-pool basis. This means we can switch fees on for a limited pool. We can analyze the impact of this change and use the results for discussion.

I suggest setting a simple standard - if the transaction execution is not affected after the "fee switch" is turned on, it means that the experiment is successful.

I suggest we start with the two largest pools, one for stable and stable pairs (USDC/USDT) and one for stable and volatile pairs (USDC/ETH). I also suggest we start with the lowest 1/10. These modest changes should add $20,000 to $40,000 per day to the protocol, according to recent figures. Total LP fees over the last seven days were $9.5 million, according to Dune. Assuming the lowest possible setting (1/10) is 950,000 per week, the protocol's fees could theoretically increase. The cost of inaction will be high.

Fee Specifications:

  • USDC / ETH @ 0.05%, initial 1/10 "protocol fee"

  • USDC / USDT @ 0.01%, initial 1/10 "protocol fee"

In response to this proposal, users in the UniSwap community also expressed their views.

The user "jcp" said that the main consideration for turning on the "fee switch" is whether the liquidity provider will cancel the liquidity. Given that we're not sure how this type of change will play out, there is a fairly high level of risk in using the two largest and most important pools. Therefore, he thought it would be safer to try a few smaller but important trading pairs first.

User “Buckerino” argued that “fee switching” should not be the highest priority for UNI token holders at this stage. He looks forward to prioritizing reorganizing the community, streamlining governance procedures, etc., before turning on a limited "fee switch."

However, as of the publication of this article, there are still no large liquidity providers participating in the discussion of the proposal on the Uniswap governance forum.

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