Leading decentralized exchange (DEX) Uniswap’s UNI token received a massive boost in late February 2024 following a proposal to share platform fees with token holders who delegate and stake their tokens.
Following the announcement, UNI jumped over 70% to a near two-year high of $12.79 on February 24 on expectations of higher demand and lower UNI circulating supply from increased staking on the platform.
Will the latest news affect the long-term Uniswap (UNI) price prediction?
In this article, we analyze Uniswap’s fee-sharing proposal and highlight risks that could cut short the token’s rally.
Uniswap’s Fee Switch Upgrade to Reward UNI Holders
On February 23, 2024, the Uniswap Foundation proposed a network upgrade to implement a fee mechanism that rewards UNI token holders that have delegated and staked their tokens.
The Uniswap Foundation said that the proposed fee mechanism upgrade seeks to invigorate Uniswap’s governance system by incentivizing token delegation and staking.
“Less than 10% of circulating UNI is used to vote on a given proposal. Further, a large portion of existing delegation is ‘stale.’ As of February 1, 2024, 14 of the top 30 delegates by voting power had not voted over the last 10 proposals, and only 7 of these delegates have ever created a proposal,” said Uniswap Foundation.
How Will Uniswap’s Fee Switch Upgrade Work?
At the time of writing, Uniswap collects 0.3% fees on v2 and 0.05% to 1% fees on v3 for swapping tokens, which are paid to liquidity providers (LP).
If the new fee mechanism is approved, UNI stakers and delegators will receive a part of the LP fees.
The fee mechanism proposal is also known as the “fee switch” upgrade because the collection of protocol fees is actually built into the Uniswap protocol. However, the protocol fee collection was never turned on and was initially set to zero.
Here are key details of the proposed Uniswap fee switch upgrade:
- The protocol fees that will be distributed will be expressed as a fraction of LP fees.
- The protocol fees will be adjustable by governance and can be 0, 1/4, 1/5, 1/6, 1/7, 1/8, 1/9, or 1/10 of the LP fees.
- Protocol fees can be set on a pool-by-pool basis.
- Fees are accrued in both tokens that comprise the pool.
Two new smart contracts will be introduced with the new fee mechanism proposal:
1. V3FactoryOwner.sol
This contract will bring a programmatic, permissionless collection of protocol fees. It will also allow the conversion of those fees into a common ERC20 for distribution to stakers.
2. UniStaker.sol
This contract will manage delegation and fee distribution.
Risks to UNI Token Price From New Fee Mechanism Proposal
News of Uniswap’s proposed fee mechanism that rewards UNI stakers and delegators was cheered by the crypto market participants who pushed the UNI token price to its highest since April 2022.
In this section, we highlight events that could cut short Unswap’s explosive rally.
Protocol Fee-Sharing Approval Awaits
UNI token holders have to bear in mind that the proposed fee-sharing mechanism has not been approved as of February 27, 2024.
The Uniswap community will begin voting on the proposal on March 1, 2024. All Uniswap proposals are subject to a 7-day voting period during which UNI token holders can vote for, against, or abstain from voting.
Although it is widely expected that the proposal will get approved (as it benefits UNI holders who are voting), there are certain members of the Uniswap community for whom the new fee mechanism is unfavorable — Uniswap liquidity providers.
Anndy Lian, an intergovernmental blockchain expert, told Techopedia:
“If the proposal is approved, it would activate the protocol fee switch and distribute a portion of the fees collected by Uniswap to the token holders. This would increase the demand and value of UNI and incentivize more participation and delegation in the governance process.
“However, if the proposal is rejected, it could lead to a sell-off and a drop in the UNI price.”
Uniswap Trading Volume, TVL, and Liquidity Expected to Fall on Protocol Fee Sharing
According to a report by crypto analytics firm Gauntlet, the distribution of protocol fees to UNI stakers and delegators can reduce the profitability of LPs on Uniswap.
The reduced LP yield is expected to cause some of them to withdraw liquidity from Uniswap. The less liquidity in Uniswap’s trading pools might result in higher slippages for traders. The higher slippages might cause poor user experience and force traders to choose rival DEXs, which might ultimately result in decreased trade volume on Uniswap.
It should also be noted that lower trade volume might result in lower protocol fees distributed as the platform collects fees when token swaps occur.
Gauntlet warned that setting extremely high protocol fees would result in the DEX being “unable to retain any LPs.”
The research firm also added that core trading volumes from retail and institutional traders will be less affected than MEV volume, which accounts for 40% to 80% of volume on Uniswap and other DEXs, as MEV trades are more sensitive to market liquidity.
Gauntlet noted:
“At the extreme, a 100% protocol fee should result in a 100% loss of all volume, since such a DEX would be unable to retain any LPs. However, even for an extremely aggressive 80% protocol fee, the simulated DEX still retains substantial core volume. This once again highlights that liquidity is rarely a limiting factor for most of Uniswap’s core users.
“We note that for a viable 10-25% protocol fee, the revenue curves are fairly linear and far from the theoretical maximum. We conclude that a protocol fee in this range would be effective at generating revenue and is unlikely to suffer from diminishing returns due to core volume loss.”
Uniswap (UNI) Price Analysis: Is the Rally Short-Lived?
The rally in UNI token price has cooled since the crypto jumped as much as over 70% on February 23, 2024, following the fee switch upgrade proposal announcement. Token holders took the chance to book profit after UNI hit near two-year highs of $12.79.
Blockchain analytics firm Lookonchain reported that a “Uniswap Team/Investor/Advisor wallet” sold 90,000 UNI tokens from $1.03 million in USDC.
Tony Severino, a CMT candidate, technical analyst, and the author of the CoinChartist VIP newsletter, was bullish on the UNI token as he shared his technical analysis on the crypto:
“UNI’s over 50% single-week surge might only be the beginning of a sustained trend change. The clean breakout above the weekly and monthly upper Bollinger Band is a technical buy signal following a nearly two-year accumulation range.”
Elsewhere, CoinCodex data showed UNI token trading at an overbought zone as its 14-day relative strength index stood at 75 points on February 27, 2024. The token traded at $10.05 at the time of writing, above its 200-day simple moving average of $5.68.
The Bottom Line
Uniswap’s fee switch proposal is expected to have lasting consequences if approved.
Although the crypto market is currently focused on the direct benefits that UNI holders hope to enjoy, the resulting effects on Uniswap governance from an approved fee switch upgrade cannot be understated.
The upgrade is expected to incentivize “active, engaged, and thoughtful delegation,” which will ultimately make Uniswap more decentralized, resilient, and community-driven.
Source: https://www.techopedia.com/uniswap-uni-price-analysis
Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.
Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.
An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.