Optimizing Fee Switch Revenue for Sustainable Growth and Innovation
The Uniswap Foundation is a non-profit organisation dedicated to supporting and advancing the Uniswap Protocol, one of the largest decentralised trading platforms in the world. Established in 2022, the Foundation plays a crucial role in fostering the growth and development of the Uniswap ecosystem through various initiatives, including grants, research, and community engagement..
As part of its mission to support innovative projects within the Uniswap ecosystem, the Uniswap Foundation operates a grants program to fund initiatives contributing to the protocol's growth and improvement. Our project was selected as one of the recipients of this program, demonstrating the Foundation's commitment to exploring new ideas and strategies for enhancing the Uniswap Protocol.
The Foundation's grants program aims to support various projects, from technical improvements and research to community-building efforts and educational initiatives. By funding diverse projects like ours, the Uniswap Foundation seeks to drive innovation, increase adoption, and strengthen the ecosystem surrounding the Uniswap Protocol.
Our collaboration with the Uniswap Foundation through their grants program allowed us to conduct in-depth research and develop strategic recommendations for one of the most pressing issues facing the protocol — the potential implementation of a fee switch and the optimal utilisation of the resulting revenue. This partnership exemplifies the Foundation's dedication to addressing critical challenges and fostering community-driven solutions in the decentralised finance space.
Challenges
Uniswap, a leading Automated Market Maker (AMM), was considering enabling a 'fee switch' that could redirect 10-25% of the total fees from each pool back to the protocol. The community was divided on this issue, with some believing a prerequisite for turning on the fee switch was understanding how these funds should be utilised. The challenge was determining the best use of these funds to further the protocol's goals while addressing concerns about potential impacts on liquidity providers (LPs) and overall competitiveness.
Approach:
Conducted in-depth interviews with 10+ ecosystem stakeholders, including Uniswap LPs, liquidity protocols, token holders, VC analysts, and governance delegates.
Analysed interview findings to identify key concerns and potential options for utilising fee switch revenue.
Explored both direct and indirect options to increase protocol volume and mitigate potential negative impacts on liquidity providers.
Evaluated various strategies for improving liquidity provision, governance, and overall protocol growth.
Considered the protocol's main goals:
— Increasing activity and growth, increasing protocol liquidity, and enhancing community engagement and governance.
Solution
Based on the research and analysis, we proposed a multi-faceted approach to utilise fee switch revenue:
— Direct volume increase strategies
— Improve UI/UX to cater to traders, including features such as charts, limit orders, stop losses, and advanced order types.
— Implement routing incentives for high-potential trading pairs, such as wstETH/ETH and other liquid staking pairs.
— Establish protocol-owned liquidity in strategic pools, such as UNI/ETH and stablecoin pairs.
— Pursue partnerships with CeFi platforms (e.g., Robinhood, Blackrock, Fidelity) and wallet providers (e.g., Metamask, Snowflake, Rabby) to route trades via Uniswap.
— Indirect growth strategies
— Expand and refocus the grants program to fund impactful projects, including audits and incubation-style approaches for promising teams.
— Implement compensated delegation programs to improve governance participation, similar to MakerDAO's approach.
- Develop dynamic fee policies to optimise liquidity provision and adjust fees based on market volatility.
— Lower barriers to entry for retail liquidity providers through professionally provided LP vaults with customisable parameters.
— Encourage developer activity through improved SDKs, documentation, and support for more programming languages.
— Community engagement
— Create educational content and increase retail awareness through Reddit, Discord, and Telegram platforms.
— Implement governance incubators to encourage smallholder participation, including training, mentorship, and community support for proposal creation.
Results
The proposed strategies are expected to:
— Increase protocol activity and growth by encouraging LPs to use Uniswap for its high capital efficiency and attracting traders with the best price execution.
— Improve protocol liquidity by prioritising LP tooling for profitability, usability, and lowering the barrier to entry for retail LPs.
— Enhance community engagement and governance participation through improved education and incentives.
— Maintain Uniswap's competitive edge in the DEX market by continually innovating and addressing potential disruptions from new entrants.
The primary focus is reinvesting fee switch revenue into protocol growth and innovation rather than distributing fees to token-holders, which many stakeholders consider the least value-additive option. This approach aims to mitigate the impact on liquidity providers while strengthening Uniswap's position in the decentralised exchange ecosystem.