The Uniswap (UNI) Buying Opportunity

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(Note: Subscribers to our Bitcoin Market Journal newsletter found out about this opportunity Friday 3/1/24; the official vote will happen Friday 3/8/24. Sign up for our newsletter here.)

Today, I bring you a buying opportunity.

There’s a vote currently happening on Uniswap that I believe will greatly increase the short-term value of UNI.

Whether it is a good thing for the long-term value of UNI is debatable.

The TLDR is that the vote, if approved, will share Uniswap fees with tokenholders who “delegate” their tokens. Think of “staking rewards” that you can earn by staking ETH, and now imagine a similar kind of reward for UNI.

My prediction is this proposal will pass, because UNI token holders will like the idea of making extra money on top of their UNI. (Who wouldn’t?)

Indeed, the price of UNI has already rocketed upward in recent days. I’m predicting it will go even higher.

In this column, I’ll break down what this proposal is trying to do, what I believe it will actually do, and the new long-term problems that Uniswap will face when (not if) the proposal passes.

The Uniswap Proposal, Explained

Think of how most national governments work. We citizens don’t have the time or patience to debate every piece of legislation, so we hire representatives to do it for us.

In the U.S., for example, we vote on Senators who will do all the tedious work of governing, trusting that they will represent us fairly. This saves us from having to research and vote on every law, bill, and amendment that hits the Senate floor.

In the decentralized world of Uniswap, tokenholders have voting power. If somebody proposes that Uniswap change its logo from a unicorn to a unibrow, all the UNI holders can vote.

The problem is that most UNI tokenholders, like most citizens, don’t vote.

This must be frustrating for the small handful of people who really care about Uniswap. Why don’t more people vote?

So what they are proposing is that UNI tokenholders can delegate their votes to “Superdelegates” (my word), who will vote in their best interest.

It’s very much like hiring a Senator to do the work for you. It’s tedious. It’s mundane. It’s a lot of politics. (And there are about to be a lot more politics, once this proposal passes.)

But here’s the crypto twist: unlike voting in Senators, tokenholders will earn a percentage of Uniswap fees for delegating their votes.

Imagine if voting for a Senator meant that you got a tiny portion of U.S. tax revenue paid back to you.

Now, ask yourself: would this increase the number of active voters? (You better believe it.)

But, would it result in better government?

How UNI Tokenholders Think

UNI tokenholders care about three things: price, price, and price.

As a UNI tokenholder since Day 1, I think I can speak for most of us: we are as uninterested in the day-to-day operations of Uniswap as we are of government. (Not many people are glued to CSPAN.)

Here’s what we care about: do price go up?

I say this as a long-term investor: I want thoughtful and responsible managers who are making wise long-term decisions to grow the long-term value of the protocol.

So far, the management of Uniswap has been excellent, with a consistent history of innovation and improvement that has kept it the leading decentralized exchange.

However, thinking that this proposal will motivate UNI tokenholders to get involved with the day-to-day operations is like paying U.S. citizens to vote for Senators, then expecting more citizens to start watching CSPAN. It’s not going to happen.

Instead, the proposal will pass for two reasons:

1) Delegating rewards: UNI holders will like making extra money on their UNI.

2) Short-term benefit: It is likely to pump the price of UNI (during a bull market, no less).

But just like paying citizens to vote for Senators, the proposal introduces a number of new problems, and a whole lotta politics.

What You Can Expect to See

Governance Will Become a Lot More Political: If UNI holders are primarily motivated by financial gains, which they are, they will likely just stake their UNI with the most popular Superdelegates, rather than doing any research.

While I would love for the U.S. to be a six-party country, the reality is that most people line up between one of two candidates. UNI tokenholders will coalesce around a few Superdelegates who sound like they will make UNI price go up.

Power Will Become Centralized: Thus, the proposal will almost certainly centralize governance power among large UNI holders, since smaller tokenholders do not have the time or patience to sift through confusing technical proposals.

This handful of Superdelegates will become very powerful. (Another example of the Consensus Pararadox, as we described in our book Blockchain Success Stories: decentralized systems grow more centralized as they grow more popular.)

Liquidity Providers Will Be Pissed: This is the big one. Today, the liquidity providers (the people who actually provide the money that runs Uniswap) get 100% of the fees. Any amount that’s going to tokenholders will come out of their pie.

If the price of UNI is going up, you can expect LPs to at least take comfort in the fact that their fees are getting slimmer, but their bags are getting fatter. But when the price of UNI comes down again (as it will), how will Superdelegates keep both LPs and tokenholders happy?

A Uniswap Superdelegate is not a job I would like to have. And it gets worse.

How Much Will You Make with UNI Staking?

Here’s the crazy part: we don’t even know what the staking rewards will be.

Seems like kind of an important detail, but the proposal just says that anywhere between 10% and 25% of Uniswap fees will become “protocol fees,” and then the governance — the Superdelegates! — will decide on how much to pay to tokenholders.

I think UNI tokenholders should hold out for a better deal than that. If the Superdelegates are going to make the ultimate decision how much you get paid for voting them into office, you should probably get a number in writing before you approve their plan.

Investor Takeaway

I am a long-term believer in Uniswap.

I believe decentralized exchanges are a key piece of the new financial system, and Uniswap is the leading DEX by far. (The same reason I invest in Ethereum, the leading smart contract platform by far.)

Uniswap is a great product, with a great track record, and a great management team (so far).

But the new proposal is going to change things.

Short-term, it’s a buying opportunity for UNI. And it’s also a way to make some money by staking your UNI. Those are good things for investors.

Long-term, it will be up to the tokenholders to vote in Senators — or Superdelegates — that really do make good decisions for the good of the Uniswap “company.”

And the smart Superdelegates should start getting ready to run political campaigns.

Politics are coming to crypto. Get ready.

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