Analyze Opportunities and Challenge from New Fee Mechanism “Fee Switch” from Uniswap

Proposed by developers under the supervision of Uniswap within the ecosystem has sparked a substantial discussion regarding the adjustment of the fee mechanism, the "Fee Switch." Various parties worry that this adjustment may change Uniswap's operating model. The proposal offers an interesting solution to Uniswap's primary concern by suggesting changes that will aid the Fee Switch to operate without encountering legal or taxable obstacles.

Uniswap proposals are processed through the following steps:

1. Submission: UNI token holders can outline a modification to Uniswap which should include the detail on proposed change, justification for the change and its potential impact.
2. Discussion: Proposal will then be presented to Uniswap’s community for discussion, during which, UNI holders can express opinions, questions and suggestions regarding the proposal.
3. Voting: After the discussion, UNI holders can vote to accept or reject the proposal. The proposal must reach a threshold of 50%  positive votes for it to be accepted.
4. Implementation: If the proposal is passed, it will be implemented according to the proposed plan. UNI holders can monitor the progress and provide feedback throughout the implementation phase.

Why is this proposal being addressed?

Uniswap is a decentralized exchange protocol on the Ethereum Blockchain, the most successful DeFi innovation.  It allows users to exchange any ERC-20 token standard through it. Uniswap is managed by a Decentralized Automated Community (DAO), in which UNI (Uniswap's token) holders participate in decision-making about changes. 

Uniswap's community has consistently focused on supporting the protocol's sustainable growth. Its most recent proposal is to add a 'Fee Switch' to its token pair so that fees are distributed to both Uniswap's Liquidity Provider (LP) and the community’s Governance.

Nevertheless, the latest proposals on the use of the Fee Switch mechanism for certain ETH-Stablecoin token pairs, have also raised regulatory concerns and non-transparent taxable processes, presenting another opportunity to re-evaluate this plan for the development of a model that will benefit all parties.

This proposal is yet another attempt to address the risks inherent in the current plan and better motivate all participants in the ecosystem.

Challenges on Fee Switch’s Readjustment

The implementation of Uniswap’s Fee Switch would result in UNI token holders receiving protocol fees. The original fee of 0.3% allocated to Liquidity Pools would be divided, with 0.25% remaining for the pools and an additional 0.05% distributed to UNI token holders. Moreover, UNI token holders will have the opportunity to voice their opinions and influence changes regarding the fee process.

However, the latest proposal under consideration involves implementing a 'Fee Switch' with only certain tokens. While Uniswap continues to support the protocol's sustainability, the current plan still raises concerns, including:

• Legal and taxable uncertainty: Fee Switch’s fee calculation for main token pairs such as ETH and Stablecoin raises regulatory and taxable non-transparency.
• Risk Management: The current plan creates legal and taxable risks that may affect Uniswap, DAO, and stakeholders.
• Limited Scope: Identifying high-volume token pairs like ETH-Stablecoin may entail significant risk and potentially causes future fee proposals changes.

New Proposed Guidelines

This proposal recommends shifting fee collection responsibility to each token team, with the main principles being:

• Proposal from each token creator: Teams that introduce tokens can submit proposals to the Uniswap DAO to receive fees from their tokens. This approach helps teams better manage token market creation, encourages LP participation and minimizes Impermanent Loss risk.
  
  
• Each team controls market creation directly: Every token team can manage market creation more effectively, encouraging liquidity and trading activities.
  
  
• Designed to attract investors or liquidity providers: Teams can develop programs tailored to liquidity providers using collected fees, encouraging safer liquidity provider behavior and temporarily minimizing loss risks.

How Does This Proposal Benefit All Parties?

• Protocols:
• Enhance market control or price pairing for their token
• Increase incentives for investors and liquidity providers through personalized programs.
• Open up additional potential revenue streams if there are no fee distributions for all collected fees.

• Liquidity Provider:
• Have the potential to earn higher profits from incentivized protocols.
• Gain flexibility in participating in other DeFi projects.
• Engage in a targeted community with similar goals for sustainable markets.

• Swapper Users
• Facilitate liquidity distribution for the entire group, leading to better prices and reduced slippage.

• Uniswap:
• Enhance platform attractiveness for liquidity providers by enabling market creation driven by each token's autonomy over its own market.
• Potentially establish another revenue stream from subsidiaries fees (once the legal structure is established).
• Encourage innovation and competition in DeFi space

Nevertheless, there are criticisms. Some community members worry that the new fee mechanism might not benefit UNI holders or could still raise legal concerns. Additionally, others find the proposal too obscure and may not provide significant advantages, if at all, to the team or the protocol.

Concerns and Solutions

• Inspection and Evaluation of Team Proposals: Uniswap DAO will employ a thorough evaluation process for each proposal to ensure its legality and confidence. 
• Liquidity Distribution Strategy: Protocol teams are empowered to determine the most suitable liquidity distribution strategy for their respective communities.
• Fee Mechanisms: Protocols can choose from various fee distribution methods, such as Merkle Distributor or even determine independent solutions.

Overall Summary and next process

Overall, it appears that this alternative proposal offers an innovative solution to address legal and tax complexities. By distributing responsibility to each token team, the Fee Switch process will enable all parties to benefit while minimizing various risks that might affect Uniswap DAO, effectively promoting sustainable processes such as:

• Community Discussion: Given the potential benefits of this proposal, further discussion within the Uniswap community is crucial to determine its feasibility and potential effects.
• Legal and Tax Analysis: It is essential to involve legal and tax experts to analyze the implications of these proposed guidelines before implementation.

—-------------------------------

Source:

https://gov.uniswap.org/t/uniswap-proposal-an-alternative-use-case-for-the-fee-switch/20779 

https://uniswap.org/governance

https://gov.uniswap.org/t/a-deep-dive-of-uniswaps-governance/19792