Uniswap Protocol

Ethereum L2 Blockchain

Treasury Size: $1.5b+

Treasury NAV: $5b+ (Total NAV treasury assets across Ethereum L1/L2 Chains, EVM Ethereum Virtual Machine)

Incoming Catalysts 2024/2025

Q4 2024: The Uniswap V4 upgrade is expected to bring significant changes and improvements to the Uniswap protocol, here are some key aspects that indicate its potential impact and scale:

Q4 2024 / 10K 2025: SEC Wells Notice Withdrawal

2025: a16z providing Guidance

2025/2026: Fee Switch Narrative

Gas Cost Reduction and Singleton Contract

Uniswap V4 introduces a singleton contract that consolidates all liquidity pools into a single smart contract. This design significantly reduces gas fees, making the creation of new pools 99% cheaper compared to Uniswap V3

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Customizable Pools and Hooks

V4 allows for customizable pools with unlimited fee tiers, unlike V3 which was limited to 0.05%, 0.30%, and 1%. Each pool can have its own unique fee structure and custom logic through the use of hook contracts, which can perform various actions at different points in a pool’s lifecycle

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Flash Accounting

The new "flash accounting" system enables users to chain multiple actions (such as swapping and adding liquidity) into a single transaction, further reducing gas costs and boosting efficiency

Tokenomics

Largest owner a16z, Andreesen/Horowitz, Uniswap Labs, Uniswap DAO (Treasury), community

Uniswap’s tokenomics revolve around the UNI token, which plays a key role in the governance and incentivization model for the Uniswap decentralized exchange (DEX). Here’s a breakdown of its main elements:

1. Token Supply and Distribution

• Total Supply: Uniswap has a capped total supply of 1 billion UNI tokens, which will be released over four years.

• Distribution:

  • 60% to the Uniswap community members, including liquidity providers, users, and those who actively engage with the platform.

  • 21.51% allocated to team members with a four-year vesting period.

  • 17.8% to investors with a four-year vesting period.

  • 0.69% to advisors with similar vesting conditions.

The distribution emphasizes decentralization, intending to empower community members and users rather than central entities.

2. Governance Mechanism

• UNI token holders participate in Uniswap’s governance, allowing them to vote on protocol upgrades, fee structures, and other changes.

• Proposal Process: UNI holders can submit proposals, but they must hold or delegate at least 1% of the total UNI supply to propose a change. To pass, proposals require at least 4% of the UNI supply in support and a majority consensus.

• This governance model places significant power in the hands of large UNI holders, though it aims to make the protocol more community-led.

3. Fee Model and Revenue Distribution

• Uniswap charges a 0.3% fee on each trade, with this fee traditionally going directly to liquidity providers as an incentive.

• However, the fee switch is a governance mechanism that allows UNI holders to vote to divert a portion of the fees from liquidity providers to UNI holders, introducing a potential revenue stream for token holders if activated in the future.

4. Liquidity Incentives and Future Developments

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• iquidity Mining: To encourage users to provide liquidity, Uniswap periodically runs liquidity mining programs. These reward UNI tokens to liquidity providers for participating in specific pools.

• Protocol Upgrades: With the launch of Uniswap V3, liquidity providers gained more flexibility with concentrated liquidity, which allows them to allocate capital within a specified price range for better capital efficiency.

5. Long-Term Inflation and Sustainability

• After the four-year initial distribution period, Uniswap will implement a perpetual 2% annual inflation rate. This gradual inflation is intended to incentivize long-term participation, ensuring continuous distribution to new community members and users while avoiding a sharp supply increase.

Summary

Uniswap's tokenomics focus on governance, decentralization, and sustainability. By aligning incentives through a carefully balanced token distribution and governance model, Uniswap seeks to empower its community while maintaining decentralized control over the protocol. The flexibility around fees and a possible revenue stream for UNI holders adds further appeal and room for growth as the protocol evolves.

4o

https://gov.uniswap.org/

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Comments from Uniswap Labs:

“Our new research paper finds that even before Dencun,

users leveraging Uniswap on L2s saw significant improvements compared to swapping or LPing on Ethereum.”

1. Revenue Sharing for UNI Holders

• Token Value: By diverting a portion of trading fees to UNI holders, the UNI token could become more attractive as a yield-generating asset. This could increase demand for UNI as investors may see it as a source of passive income, potentially driving up its price.

• Incentive for Governance Participation: With a direct financial incentive, UNI holders may become more active in governance to protect and grow their interests. This could lead to more engagement and a higher likelihood of participation in decision-making processes.

2. Liquidity Provider (LP) Incentives and Potential Trade-Offs

• Reduced Earnings for LPs: Diverting a portion of fees to UNI holders would mean that liquidity providers receive a lower fee percentage than the current 0.3% per trade. This could make Uniswap slightly less attractive to LPs, especially if competing decentralized exchanges (DEXs) do not implement a similar fee structure.

• Migration Risk: If LPs see better opportunities on other platforms (e.g., with higher fee rewards or incentives), some may migrate their liquidity, potentially reducing Uniswap’s total liquidity. Lower liquidity can result in higher slippage for traders, potentially reducing Uniswap’s competitiveness.

• Fee Experimentation: Uniswap’s governance could mitigate LP concerns by adjusting the fee switch incrementally or by experimenting with specific pools or assets to find a balance between attracting LPs and rewarding UNI holders.

3. Increased Governance Power for Large UNI Holders

• Concentration of Influence: As profits flow to UNI holders, those with large holdings could gain outsized influence over governance decisions, potentially increasing centralization. They may vote on proposals that benefit their interests, such as adjusting the profit-sharing percentages or other changes that maximize their returns.

• Potential for Governance Conflicts: There’s a risk of conflict between UNI holders and LPs, especially if LPs feel the fee diversion is too high or negatively affects their returns. Balancing these interests will be crucial to maintaining a healthy ecosystem where both parties feel incentivized to stay on Uniswap.

4. Impacts on Uniswap’s Competitiveness in the Broader DEX Market

• Market Position: As one of the largest DEXs, Uniswap could set a trend for revenue-sharing models. If successful, other DEXs might adopt similar profit-sharing mechanisms to remain competitive, especially if they’re already community-driven or governed by token holders.

• Risk of Losing Volume: Uniswap’s high liquidity and low slippage have been key factors for its popularity. However, if activating the fee switch leads to lower liquidity, traders might experience higher slippage, pushing them toward other DEXs with higher liquidity or lower fees.

5. Potential Increase in UNI Token Volatility

• Speculative Demand: The possibility of consistent revenue distribution could attract more speculative interest in UNI, resulting in price volatility as market participants react to governance proposals, changes in fee allocations, and platform performance.

• Long-Term Value Proposition: If the profit-sharing model is well-received and sustainable, UNI could see steadier demand as a yield-generating token. However, if it results in unintended consequences like reduced liquidity or diminished trading volumes, UNI’s long-term value could be negatively impacted.

6. Broader Ecosystem Implications

• Liquidity Concentration on Ethereum: Uniswap, being Ethereum-based, relies heavily on Ethereum’s network for transaction throughput and cost. A reduction in Uniswap’s trading volume or liquidity might push DeFi users to other chains with more favorable fee structures.

• Network Effects and Layer-2 Migration: To offset potential friction from the fee switch, Uniswap could further incentivize Layer-2 solutions or bridge mechanisms to retain LPs and traders by lowering costs and increasing efficiency on Ethereum’s Layer-1.

Summary

If Uniswap activates the profit lever, it could create a positive feedback loop for UNI holders while potentially creating friction with LPs. Balancing the interests of LPs and UNI holders will be essential to ensure liquidity remains robust, governance remains decentralized, and the platform’s market competitiveness is maintained. Careful experimentation, transparent governance, and a flexible fee-sharing strategy would be essential for Uniswap to maximize benefits without compromising its foundational strengths.

Activating the Uniswap fee switch could indeed function similarly to stock buyback programs in traditional markets if the fees were used for token burns or similar mechanisms. Here’s how that would work and why it would create a positive feedback loop for UNI holders:

1. Token Burn Mechanism and Reduced Supply

• Reduced Supply, Increased Demand: If Uniswap’s governance voted to use a portion of the fees to buy back and burn UNI tokens, it would reduce the overall supply of UNI. As with stock buybacks, this could create upward pressure on UNI’s price, as fewer tokens would be available in circulation.

• Value Per Token Increase: By reducing the supply while keeping demand constant or growing, the value of each remaining token could increase, benefiting existing holders.

2. Enhanced Appeal for Investors

• Attracting New Investors: Similar to how dividends or buybacks attract shareholders, a token burn model or other fee-sharing mechanisms could make UNI more appealing to investors. Knowing that holding UNI could provide capital appreciation or potential yield may increase demand from both DeFi participants and crypto investors seeking yield-like assets.

• Long-Term Holding Incentives: Token burns create a value proposition for holding UNI over time, incentivizing long-term holders and stabilizing price action. This is especially valuable in crypto markets, where volatility can be a deterrent.

3. Positive Feedback Loop in Price and Governance Participation

• Increasing Governance Engagement: As UNI becomes more valuable through burns or buyback-like mechanisms, large holders and investors may take a more active role in governance to influence decisions on fee allocations and other strategic directions. This could lead to higher voter turnout and a more engaged community, adding stability to Uniswap’s decision-making processes.

• Cycle of Demand and Scarcity: As demand for UNI grows (due to the potential for yield or capital appreciation), the token’s scarcity and perceived value increase, creating a feedback loop that could further drive demand. Similar to stock buybacks, each cycle of token burns or profit distribution would add value, encouraging more investors to participate.

4. Competitive Edge and Market Influence

• Compelling Value Proposition: Token burns or buybacks would make Uniswap’s tokenomics competitive, especially if other DEXs or DeFi protocols don’t implement similar mechanisms. This differentiation could attract more liquidity and trading volume back to Uniswap, strengthening its position in the DEX market.

• Setting a Precedent in DeFi: If Uniswap succeeds with a token burn program, it might set a trend in the DeFi space. Other protocols might adopt similar buyback/burn models, establishing a DeFi-wide standard that aligns incentives more closely with those in traditional finance.

5. Potential Risks and Balancing Act

• Liquidity Provider Impact: Similar to dividend payouts or buybacks in traditional markets, where funds could otherwise go to reinvestment, token burns mean diverting fees that might otherwise go to liquidity providers (LPs). Finding the right balance would be key to keeping LPs incentivized while also rewarding UNI holders.

• Speculative Demand and Volatility: A token burn model could drive speculative demand, making UNI’s price more volatile in the short term. This may be beneficial for traders but could increase market risk for long-term holders.

Summary

Using fees to buy back or burn UNI tokens would effectively create a similar mechanism to stock buybacks in traditional markets, fostering a positive feedback loop by reducing supply and potentially boosting UNI’s value. This model could incentivize long-term holding and governance engagement, making UNI a more attractive investment while potentially strengthening Uniswap’s market position. However, it would require careful balancing to ensure that LPs remain engaged, liquidity is maintained, and governance aligns with the interests of both holders and users.

The Uniswap DAO / Decentralised Stockholders

governs the Uniswap protocol, managing protocol parameters and fund allocation to promote growth.

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Process: Governance follows procedures outlined in Uniswap Docs and the Governance Forum.

Principles for Delegates:

• Integrity: Act honestly, voting in the protocol's best interest.

• Due Diligence: Review proposals thoroughly or abstain if not well-informed.

• Inclusivity: Consider diverse stakeholder perspectives and respect differing views.

• Transparency: Communicate key decisions, maintain openness to community scrutiny, and offer feedback on unclear proposals.

• On-chain Focus: Prioritize on-chain decisions and record key actions on-chain for transparency.

Guidelines:

• Conflict Disclosure: Reveal conflicts of interest clearly, and avoid severe conflicts that could impair governance integrity.

• Decentralization: Safeguard decision-making from centralization and cartel formation.

• Security: Prioritize protocol and treasury security; proposals must prove safety.

• Clarity: Ensure vote rationales and proposals are accessible, clear, and supported by data for community understanding.

ETHEREUM DCF CALC 2024-2025

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