Uniswap DAO rejects plan to charge LP fees; UNI holders cite tax concerns

A proposal to enable protocol fees for the Uniswap decentralized exchange failed on June 1, potentially allowing liquidity providers (LPs) to continue to earn all revenue from swaps, according to the proposal’s official webpage. It narrowly missed being passed, with 45.32% of votes going to the “no fee” camp and 42.34% voting to charge liquidity providers one-fifth of the fees they receive from users. Another 12.3% voted to enact a fee charge of one-tenth and 0.04% voted to charge one-sixth.

The “no fee” camp won by a plurality, implying that supporters of a protocol fee may have prevailed if they had united behind a specific fee percentage.

Uniswap fee switch vote neck and neck in the final hours.

Fun fact, I don’t think any UNI vote that’s passed on snapshot has been turned down once proposed onchain. pic.twitter.com/lasYGYaELM

— Matt (@MattFiebach) June 1, 2023

The vote was a “temperature check,” or non-binding preliminary ballot; further refinements may be offered in the future as discussion continues.

Uniswap is governed by the Uniswap Decentralized Autonomous Organization (Uniswap DAO), consisting of holders of the Uniswap (UNI) token.

The exchange currently charges crypto traders 0.01% to 1% of each swap as a fee, depending on the particular pool they use. However, all these fees go to the liquidity providers or market makers who provide crypto to be traded. The UNI token holders who theoretically own the protocol do not receive any of these fees.

In the proposal’s official forum page, supporters argued that Uniswap has matured as an exchange and no longer needs to offer full rebates to liquidity providers. The proposal’s author, GFX Labs, posted a list of fees from Uniswap and competitors Coinbase and Binance, arguing that Uniswap’s subsidies to LPs will still make it the best place for them to do business.

“Uniswap is in a strong position to turn on protocol fees and prove that the protocol can generate significant revenues,” GFX stated. “We need to reaffirm that liquidity providers are protocol users and do not need full rebates,” the user continued.

Opponents of the proposal argued that charging a fee would cause tax and regulatory headaches for UNI holders. For example, Porter Smith, deal partner for venture capital fund A16z, stated fees should not be enacted until one of two things happen: either Uniswap governance becomes an incorporated legal entity or a decentralized “flow of funds” is developed to send revenue directly to UNI holders:

“In the absence of a legal entity, it is important to reduce tax risk by using a programmatic flow of funds directly to token holders who are performing work on behalf of the DAO [Uniswap governing body]. […] A programmatic flow of funds could help ensure the taxable obligation rests with those users instead of the DAO.”

As is the case with most DAOs, Uniswap DAO has members in multiple jurisdictions worldwide and is not registered as a business in any country. The exchange began on the Ethereum network but has been trying to expand into additional networks recently. On April 14, the DAO voted to deploy Uniswap to the Polygon zero-knowledge Ethereum Virtual Machine (zkEVM) network. On May 17, it voted to launch a Moonbeam Polkadot parachain version as well.