Uniswap DAO Rejects Proposal to Impose LP Fees; UNI Holders Highlight Tax Concerns

On June 1, the proposal to implement protocol fees for the Uniswap decentralized exchange was not successful, potentially allowing liquidity providers (LPs) to continue earning full revenue from swaps. According to the official webpage of the proposal, it narrowly missed approval, with 45.32% of votes supporting the "no fee" approach, while 42.34% voted in favor of charging LPs one-fifth of the fees they receive from users. Additionally, 12.3% voted for a fee charge of one-tenth, and 0.04% voted for one-sixth.

Although the "no fee" camp won by a slight margin, it is worth noting that supporters of a protocol fee might have achieved success if they had rallied around a specific fee percentage. It is important to emphasize that this vote was merely a non-binding preliminary ballot, serving as a "temperature check." Further revisions and refinements may be proposed in the future as discussions progress. Currently, Uniswap charges crypto traders fees ranging from 0.01% to 1% per swap, depending on the specific pool utilized. However, all these fees are allocated entirely to the liquidity providers or market makers who supply the cryptocurrencies for trading. UNI token holders, who theoretically own the protocol, do not receive any portion of these fees.

Supporters of the proposal argued that Uniswap has reached a mature stage as an exchange and no longer requires full rebates for liquidity providers. The proposal's author, GFX Labs, shared a list of fees from Uniswap and its competitors Coinbase and Binance, asserting that Uniswap's subsidies to LPs would still make it the preferred platform for them to conduct business.

"GFX stated, 'Uniswap is in a strong position to introduce protocol fees and demonstrate that the protocol can generate substantial revenues. We need to reaffirm that liquidity providers are protocol users and do not require full rebates,'" as mentioned on the proposal's official forum page.

Opponents of the proposal raised concerns regarding the potential tax and regulatory complications for UNI holders if fees were to be implemented. For instance, Porter Smith, deal partner for venture capital fund A16z, suggested that fees should not be imposed until one of two conditions is met: either Uniswap governance becomes an incorporated legal entity, or a decentralized "flow of funds" is developed to directly channel revenue to UNI holders. Smith emphasized the importance of reducing tax risks by employing a programmatic flow of funds that ensures the taxable obligation rests with the users performing work on behalf of the Uniswap DAO, rather than burdening the DAO itself.

It is worth noting that, similar to most DAOs, Uniswap DAO has members in various jurisdictions worldwide and is not registered as a business entity in any country. While the exchange originated on the Ethereum network, it has recently endeavored to expand into additional networks. On April 14, the DAO voted to deploy Uniswap on the Polygon zero-knowledge Ethereum Virtual Machine (zkEVM) network, and on May 17, it voted to launch a Moonbeam Polkadot parachain version as well.