Uniswap seeks to reward ‘active, engaged, and thoughtful’ staking and delegation, UNI goes up 45%

The Uniswap Foundation (UF) has published a proposal that seeks to reward “active, engaged, and thoughtful” holders of its UNI token with the specific aim of reworking the Uniswap protocol’s fee mechanism for distributing a share of fees to its community.

🔈 New Governance Proposal Posted 🔈

UF Governance Lead @eek637 just posted a proposal to upgrade Uniswap Protocol's governance system. Specifically, this upgrade would reward UNI holders who have staked and delegated their tokens.

— Uniswap Foundation (@UniswapFND) February 23, 2024

Following news of the proposal, the UNI token is up by 45% over the past 24 hours, according to data from CoinGecko. The token now ranks 16th with a market capitalization of $8.3 billion.

According to the proposal published by Erin Koen, UF’s Governance Lead, the foundation sees “free-riding and apathy” as existential risks for Uniswap and hopes these changes could “invigorate governance.”

“Decentralized, resilient, and engaged governance is imperative to the long-term health and success of the Protocol. We believe this upgrade will strengthen and invigorate Uniswap governance,” the foundation said in an X post.

While Uniswap is the largest decentralized exchange by volume, less than 10% of circulating UNI tokens are used in votes. The decentralized exchange saw about $877 million in tokens traded in the past day.

Two new smart contracts would be deployed if approved: V3FactoryOwner.sol 38 and UniStaker.sol 39. The new contract for V3FactoryOwner would enable permissionless collection of protocol fees. These would be distributed to UNI holders who stake and delegate through UniStaker. Governance would still control fee levels and eligible pools.

After a Code4rena security audit, a Snapshot vote is set for March 1, 2024, promptly followed by an on-chain vote on March 8, 2024. Dates may shift pending audit results and community feedback, the foundation said.

The UF believes an influx of new delegations could follow if it passes. They recommend all holders “do their diligence” in selecting delegates whose past votes align with their priorities.

With UNI hovering around $11, there is much anticipation around the votes scheduled for the first week of March. Passage would be a milestone for Uniswap — decentralizing governance and incentivizing community stewardship.

While rewarding engaged governance could benefit Uniswap in the long term, delegates should also consider potential impacts on liquidity. Gauntlet produced a simulation analyzing fee introduction, finding that most liquidity should remain with moderate fees.

“The impact on volume, TVL, and revenue depends significantly on the fee applied. In the most conservative case allowed by the v3 fee contracts, Gauntlet predicts that a flat 10% protocol fee would lead to a loss of 10.71% in liquidity, a 10.71% reduction in MEV volume, and a 0.75% decrease in core trading volume when factoring in the flywheel effect,” the report states.

A full version of the protocol fee report can be read here.

Recent developments from Uniswap include a partnership with ENS domains to offer uni.eth domain names, which could be claimed through its mobile app, and the canonical deployment of its Uniswap v2 on Arbitrum, Polygon, Optimism, Base, Binance Smart Chain, and Avalanche. The canonical deployment allows users to swap and create liquidity pools through these six new chains directly from Uniswap’s interface.