Uniswap has been amidst a major decision in the future of its protocol, as the infamous “fee switch” is almost on the brink of happening. The fee switch could serve to be a big step for Uniswap holders, as it would affect nearly all Uniswap stakeholders involved. What are the implications of the fee switch, and what could it mean for everyone involved with Uniswap? Have a read below.
The fee switch is looking like a major decision, and that too, in the direction of Uniswap holders. IF the decision solidifies, it would be a win for the holders of the UNI token. On the other hand, all liquidity providers for Uniswap will take the “L” here, with their share of earnings decreasing.
What the Fee Switch Means
Essentially, the fee switch is a shift in the earning proportions of UNI tokens and liquidity providers. Before, liquidity providers were getting 100%, but now UNI holders get 1/6th of the cake too – to sum it up simply.
Now, in a more detailed manner, every single transaction that takes place on Uniswap charges a 0.3% transaction fee. The entire portion of this fee would previously go to liquidity providers, and it’s surely a big number. Why? Because the daily transaction volume on the platform is around $80 million on average. Even a mere 0.3% of that value translates to about $300,000 on a daily basis for the liquidity providers.
However, with the fee switch taking place, part of the transaction fee will go to UNI holders – 0.05% to be exact. Liquidity providers will still receive 0.25% of the share, but they’re still not happy about the reduction in their portion.
Who’s Causing the Fee Switch?
Well, there’s only one party involved that could cause the fee switch to take place – the UNI holders. One of the benefits of being a UNI holder is governance rights in future decisions about the platform. Hence, the discussion about a potential fee switch has been in the works for quite some time. However, it’s still up to the decision of all holders involved and whether a vote will be passed by them. If it does pass through, then the new rule applies, regardless of what anyone else thinks.
However, upsetting the liquidity providers who basically make the market for you might not be the best decision to make if you’re Uniswap. But, what are liquidity providers exactly?
What are Liquidity Providers?
We can explain the role of liquidity providers in a market, but we think it’s much better explained by the professionals at fia.org:
Liquidity providers can be on either side of a transaction, as buyer or seller. By entering and holding positions they bridge the gap between market participants. In this way, they quite literally make a market for an asset. This allows long-term investors to buy or sell stock whenever they want to, without having to wait for another long-term investor looking to do the opposite; it allows farmers to hedge against a drop in crop prices and food production companies to hedge against a rise in the cost of ingredients.
Liquidity provision is commonly understood as acting as an intermediary by continually trading in and out of relatively short-term positions. Liquidity providers tend to send orders to the marketplace at prices that reflect available information regarding asset prices including the risk associated with transacting and holding that asset. The hallmark of liquidity providers is that they continually provide liquidity in all market conditions, not just when they desire to accumulate or close-out longer term investment positions.
Banks, financial institutions, and principal trading firms (PTFs) all act as liquidity providers in today’s markets. The different business models and capabilities of these liquidity providers allow them to serve the market in different ways. For instance, banks with large balance sheets may carry more inventory and be able to facilitate larger transactions in a given asset. PTFs, on the other hand, serve investors by maintaining tighter bid/ask spreads, offering reliable market liquidity, and optimizing price discovery across products and asset classes. PTFs do so by effectively processing market information from many public sources and efficiently deploying their capital.
So, What Now?
There are two sides to the story, and the directors at Uniswap will definitely have a tough decision in their hands. However, it might seem like the best option here would be to not upset liquidity providers, and to make sure the liquidity numbers stay stable. Here’s what Juan Pellicer of IntoTheBlock had to say regarding the issue:
..It is certain that Uniswap would have an identity loss since it would stop being the DEX that pays as much as possible to its liquidity providers and would become a common DEX regarding its fee structure. So far it seems that the benefit for token holders would not be as large as some think and most UNI holders so far seem to prefer that the flows in the protocol remain only between traders and liquidity providers. In this way the protocol keeps a win-win relationship between all the kinds of parties involved: traders and liquidity providers.
Even if Uniswap does allow holders to get the added benefit with the fee switch, it wouldn’t amass to much. At least not as much as the potential loss if the liquidity providers pull out of the Uniswap project. However, what they could do is offer more earning opportunities for UNI holders, so they don’t feel left out either.
Uniswap at the core of it is just a cryptocurrency exchange where users can exchange various currencies. Think of it as just another Binance or PancakeSwap. Uniswap also has its own protocol which facilitates various transactions to take place on its network. This is built using the Ethereum blockchain. The platform has actually been able to perform much better than its competitors such as Sushiswap and Curve DAO.