Introduction

Uniswap dominates the DEX landscape. Uniswap has a cumulative total of ~$1T volume, often competing with CEXs like Coinbase for volume on major pairs. Uniswap views CEXs as its primary competitor rather than other DEXs. The Uniswap community is sitting on a lever that could enable them to redirect a portion of the protocol’s fee revenue to governance, otherwise known as the fee switch.

For now, 100% of the ~$2B fees accumulated pass through to LPs, with the protocol’s fee switch yet to be activated. Controversial decisions by the Uniswap Foundation and lack of traction from grassroots governance proposals have frustrated many UNI tokenholders. The UNI token has developed a reputation among some as a useless token. If Uniswap were to activate the fee switch, how much would UNI token holders stand to benefit?

Fee Switch High-Level Implications

There has been a dormant protocol charge in Uniswap since the launch of Uniswap v2. If the protocol charge were turned on, 0.05% of the 0.30% liquidity provider fee (16.67%) would be allocated to UNI governance. Uniswap v3 offers more flexibility for the fee switch if it were to be activated. Uniswap governance can activate the fee switch on specific pools, directing 10-25% of LP fees to governance.

Before we begin to quantify the potential impact of activating Uniswap’s fee switch, we first must have a reasonable estimate for how much volume and fees the protocol stands to earn over the next 5 years.

LPs assume more risk in non-correlated pairs like ETH/DAI and therefore opt for higher-fee pools. LPs take on minimal risk in correlated pairs like USDC/DAI, which tend to use the lower fee tier of 0.05%. Additional fee tiers can be added by the platform’s governance, as was the 0.01% tier which was added in November 2021.

The 0.05% fee tier accounts for the majority (59%) of Uniswap’s total trading volume. However, this tier has only produced 19% of the total fee revenue within the