Uniswap V4 + UNI Token Staking Rewards
Three days ago, a proposal for the Uniswap token emerged, and following the proposal, the UNI token saw a significant increase in value. The proposal was to reward token holders for staking their UNI tokens and participating in activities, and since the contract was fully developed, it seems certain that this proposal will pass. UNI tokens are currently used for 'governance'.
Token holders delegate their tokens to those who make better proposals, and the delegated individuals propose improvements for Uniswap, sustaining the community and Uniswap over time. However, it's clear that this governance model isn't working well. Most people are not very interested in the proposals made by Uniswap. In fact, it's said that only about 10% of the tokens have been delegated, and most of that is from older delegations. Among the 30 individuals who have received UNI token delegations, only 7 have voted in the last 10 proposals. Thus, it can be argued that governance without rewards has failed. To revive the failed governance and create a sustainable community, Uniswap plans to introduce protocol fees and distribute them to those who stake and delegate UNI tokens.
Uniswap, the most successful app on the Ethereum network, currently generates approximately 2.5M (about 3.6 billion KRW) in fees on the Ethereum network V3. Including V2 and many L2 networks, the fees generated by Uniswap itself are quite substantial. Currently, all these fees go to liquidity providers, but with the introduction of UNI token staking rewards, a portion of the fees, between 1/4 to 1/10, will be shared with stakers. Uniswap aims to activate governance more than before with such staking rewards. I also believe that rewarding voting with tokens will encourage more participation. Consequently, many UNI token holders strongly agree with this proposal. Additionally, Uniswap plans to upgrade from the V3 model to the V4 model within this year. The introduction of staking rewards and the upgrade to V4 need to be considered together because they complement each other well.
If UNI token staking rewards are introduced, it's expected to start at the lowest level of 1/10. From the perspective of liquidity providers, their income would decrease by 10%, and there might be pushback due to Impermanent Loss. Although this might not lead to the withdrawal of liquidity provision, it could disrupt continuous liquidity supply. However, in the V4 model, all pools will be managed under a single contract, significantly reducing transaction fees, allowing for actions that maintain or even increase pool fees compared to the current model. The biggest change in the V4 model is that all pools will operate under a single contract. In V3, each pool was created in separate contracts. For example, in V3, the ETH/USDC pool and the USDC/DAI pool were in two different contracts. If there were multiple fees, different pools were created for each fee. In V4, all these pools will exist as one, reducing gas fees since exchanges within the contract will be cheaper. With reduced network gas fees, even if exchange fees are slightly higher, exchanges could be made at current prices, and if competition among pools intensifies, exchanges could become cheaper while protocol fees continue to be collected.
V4 will introduce a pool manager system with various customized options such as limit orders, fixed fees, phased purchases for large orders, and automatically lending tokens if the liquidity range is exceeded. This will inevitably complicate the UI, but liquidity providers will have more options for supplying liquidity. Despite a potential increase in pools, liquidity will be supplied from a single pool, so there should not be a decrease in liquidity or an increase in fees.
Many things are being tokenized, specifically becoming ERC-20. We're even witnessing NFTs becoming ERC-20 through ERC-404. Despite having NFTs, Pandora, a leader in ERC-404, sees 90% of its transactions on Uniswap. As more assets on the Ethereum network become ERC-20, Uniswap stands to benefit. While many L2 bridges exist, most are highly centralized; if Uniswap's unified contract supports bridges, it could outperform others in terms of decentralization and liquidity. Many lending protocols exist, but if Uniswap were to support them, or even margin trading within Uniswap, it would significantly enhance its ecosystem.
Image source: Generated through OpenAI's DALL·E
