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| "Don't look for the needle in the haystack. Just buy the haystack!"
- John Bogle |
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| In today's issue: If you've heard the bad news about Binance (see below), it's probably good news for Uniswap.
Many investors are leaving centralized exchanges (CEXs) in favor of decentralized exchanges (DEXs), and Uniswap remains the biggest.
DEXs offer several benefits to traders and investors, not least of which is the possibility of sharing the fees collected with the users of the platform. Centralized exchanges can't do that.
Since its launch in 2018, Uniswap has been a leader in the DEX ecosystem. It's size is unrivaled among its peers, many of which are forks of the original Uniswap code.
Today, we look at Uniswap fees and revenues in our updated Investor’s Guide to Uniswap. We also delve into the much-hyped possibility of fee sharing for investors in UNI. Read on! |
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| | | Must Read Today's most important story for crypto investors. |
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| The Republican heads of two crucial House committees have put forward a preliminary bill that proposes a regulatory transition for digital assets, allowing them to start as securities and eventually be overseen as commodities.
The 162-page unnamed draft bill was made public last Friday by Patrick McHenry (the chairman of the House Financial Services Committee) and Glenn Thompson (the chairman of the House Agriculture Committee).
This bill, focusing on market structure, is designed to initiate dialogues between republicans and democrats on both committees, along with the Senate, regulators, and the private sector per senior staff involved in the drafting process. |
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| Image via Twitter.
Investor takeaway: SEC Chairman Gary Gensler has consistently stated that digital assets are securities, and thus, new regulations are unnecessary. He claims the issue isn’t a lack of clarity. Instead, he cites the unwillingness of trading platforms to abide by existing regulations.
The crypto industry disagrees, and claims current rules aren’t clear and that the SEC process for registration doesn't work for crypto. The draft bill offers guidance to platforms on how to register at the SEC, CFTC, or both, and would require the two regulators to jointly issue rules on definitions and conduct oversight of dually-registered exchanges.
Premium members will get even deeper looks into the bill tomorrow when we break it down to examine what it means for crypto investors. |
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| Breaking News Hot off the press. |
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Monday morning saw the Securities and Exchange Commission, the regulator responsible for regulating U.S. securities markets, file a 136-page complaint, with 13 charges against Binance and its founder and CEO Changpeng Zhao.
The regulator alleges that Binance has been mixing “billions of dollars” in customer funds and secretly sending them to a separate company (Merit Peak Limited) controlled by CZ. |
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| Crypto markets were roiled by the news. At the time of writing leading cryptos bitcoin and Ethereum are down nearly 6% each, while Binance's own BNB token is off by 10%.
The SEC, which has the protection of investors as one of its three key missions, alleges Binance misled investors regarding the protections it had in place to detect and control trade manipulation. It also alleges that Binance failed to take sufficient measures to restrict U.S. residents from using its unregulated platform.
Binance responded to the allegations in a blog post, saying company management has been negotiating for a settlement with regulators and were "disappointed" and "disheartened" by the SEC’s decision to bring a case. The company said the case was a "misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry."
Monday's action by the SEC comes just over one month after the Commodities Futures Trading Commission (CFTC) filed lawsuits in federal court alleging numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations.
This all could be good news for decentralized exchanges like Uniswap. Keep reading. |
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Investor’s Guide to Uniswap: King of the DEXs by Preetam Kaushik |
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| Executive Summary: Uniswap reigns as the undisputed leader of the DEX revolution. With no centralized order book, the exchange relies on a smart algorithm to set prices on hundreds of ERC-20 token pairs available on the platform for buyers and sellers.
With low trading fees and a growing user base, Uniswap remains the king of DEXs, but plenty of competitors want to claim the throne.
Is Uniswap’s UNI still a good investment? Who might unseat it? Read on to learn the answers to these questions and more.
Uniswap remains the largest decentralized exchange in 2023, handling the lion’s share of DEX trading volumes. Here's a quick look at the recent DEX trade volumes: |
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| Uniswap is clearly taking the lion’s share of trade volume. Image via Token Terminal.
Traditional centralized exchanges (CEXs) like Coinbase and Binance rely on order books (lists of all the buyers and sellers for specific security) to set prices on their platforms.
Decentralized exchanges (DEXs) like Uniswap rely on mathematical formulae to price assets. This technology is called an automated market maker (AMM), and it removes the need for a middleman to set the prices for the market.
In the history of crypto, Uniswap was a significant step forward.
Where CEXs were slow to add new tokens (they had to carefully vet each one), Uniswap could automatically support any Ethereum-compatible token where there was enough supply and demand. The software-based approach let the company scale quickly.
The original version of the Uniswap protocol was launched on the Ethereum mainnet in November 2018. There have been several incremental upgrades since then:
Version 1: Allowed users to trade between ETH and any ERC-20 tokens. Version 2: Launched in May 2020, this version added new features and functionality like increased decentralization, flash swaps, and ERC-20 pools, allowing direct exchange between different Ethereum-based tokens. Version 3: Launched in May 2021, it includes improved security and efficiency, with features like concentrated liquidity, range orders, NFTs, and flexible fees. Version 4: Currently under development, V4 is expected to be an incremental upgrade focusing on QoL changes like a better UI, built-in wallet, NFT aggregation, and possibly a batched auction system to combat MEVs.
The native token of the Uniswap protocol is also called Uniswap (UNI). Its stated purpose is to serve as the governance token of the protocol, though our thesis is that investing in UNI is like buying Uniswap “stock.”
UNI was launched without any ICO/token sale in September 2020. Instead, community members, protocol users, and liquidity providers were given free airdrops of the token (up to 400 UNI -- worth approximately $1,500 at the time).
Synthetix founder Kain Warwick called the airdrop a “galaxy brain move” as it rewarded early users for their loyalty. It was a bit like getting free stock in a company at its IPO as thanks for being a loyal customer.
The airdrop was another Uniswap innovation that has since been copied by many new crypto projects. Today, this is expected of any new token launch. |
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Uniswap Fees Vs. Revenues (Explained)
As a DEX, Uniswap’s revenue/fee structure is different from those you find at centralized exchanges (CEX) like Binance and Coinbase.
Unlike most other CEXs, Uniswap doesn't charge separate fees. Instead, Uniswap charges a flat fee of 0.30% per token swap.
The revenues generated by this fee are paid in full to the liquidity pools (i.e., the users providing the pairs of tokens to swap). The "company" itself and the holders of its governance token (UNI) don't get any direct rewards from the Uniswap fees.
Uniswap V2 added the option for a “fee switch.” If switched on, this option would allow the protocol (i.e., the Uniswap company itself) to take a percentage of the fees collected from trades (like retained earnings, this could theoretically be paid out to UNI token holders).
As of this writing, the fee switch has not been implemented. The decision to turn on the fee switch can only be taken through an open vote among the protocol governance forums (i.e., UNI token holders must approve it).
When Uniswap launched V3, they kept the fee switch option in place. The main change was the addition of different fee tiers, ranging from 0.01% to 1%. If they do switch on fee sharing, it's up to liquidity providers to decide which fee structure they want to use.
Since the fee switch has not been implemented, all the revenues generated to date have been paid to liquidity providers. This means the Uniswap “company” is not retaining any “revenue” right now. However, that may change if the fee switch is turned on.
The History of Uniswap Revenues
Uniswap started to take off after the launch of V2 in 2020, which allowed users the freedom to trade any ERC-20 token pairs (before that, V1 only allowed users to trade ERC-20 tokens against ETH).
Monthly revenues for liquidity providers climbed from $4.8 million in July 2020 to $35 million by December of that year. However, the real spike in Uniswap revenues occurred in 2021 as V3 upgrades added further efficiency and features.
The protocol gained widespread acceptance, and monthly revenues quickly exceeded $100 million by March 2021. Uniswap hit a new peak in May, with revenues awarded to liquidity providers reaching an all-time high of $285 million.
Uniswap fees declined briefly in Q3 2021 before regaining steam in Q4, rallying to $180 million in November. In 2022, Uniswap broke several records in fees collected.
In June 2022, average daily fees earned on the protocols reached $4.87 million, surpassing even Ethereum which was at $4.8 million. By August 2022, Uniswap 7-day average fees were nearly double that of ETH ($8.7 million vs $4.07 million).
However, the meltdown in the wider crypto market in Q3 and Q4 of 2022 wiped out most of these gains. It took the market several quarters to reverse the decline.
After the chaos of 2022, the wider crypto market has seen signs of recovery in 2023. While it's too early for celebrations, there's space for cautious optimism.
With the successful Shapella upgrade, activity on Ethereum has gained momentum in 2023. Per CryptoFees data, Ethereum is the king of the hill, with 7-day average fees of $9.6 million in 2023.
Uniswap has fallen to third, but it remains the dominant exchange on the list with $1.6 million in 7-day average fees. For reference, BNB Smart Chain, its nearest CEX competitor, is less than one-third the size at $536,000 in average fees. |
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| Source:Crypto Fees
Uniswap Fees Vs. Other DEXs
In the last 3-4 years, several contenders have emerged, providing stiff competition for the DEX throne. Uniswap is no longer the only popular DEX in the market. Let’s take a quick look at some of the DEX competitors:
SushiSwap and PancakeSwap: Both are clones of Uniswap, built using the latter’s open-source code and offering similar features and fees as competitive advantages.
Compound: Launched in 2017, this is a specialized DEX that creates tokens for assets locked on the platform. The tokens allow users to earn interest while retaining the freedom to transfer and use the assets on other platforms.
Curve Finance: Another specialized DEX that's focused exclusively on stablecoins like USDT, USDC, DAI, and TUSD. Users can stake their stablecoins in liquidity pools or swap between different coins on the trading platform.
dYdX: Another DEX launched in 2017, dYdX gives additional options to users in the form of derivative trading. It briefly overtook Uniswap as the top DEX in terms of trading volume in September 2021.
Let’s compare Uniswap’s revenues against the contenders: |
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| Image viaToken Terminal.
It's undeniable that the rise of clones like PancakeSwap and SushiSwap has eaten a chunk out of Uniswap’s business. Together, these clone DEXs accrued $1.5 billion in revenues prior to the 2022 downturn despite launching after Uniswap. |
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| Image via Token Terminal.
When it comes to TVL, Uniswap is no longer the king of the hill. That honor belongs to Curve with $4.3 billion locked. Uniswap is second with $4.1 billion, while PancakeSwap is a distant third at $1.6 billion.
dYdX has been steadily eating away at the market share of Uniswap since 2021. With the advantage of an order book, derivative trading, and a massive airdrop of the dYdX token, the protocol has rapidly closed in on Uniswap over the last two years.
As of Q2 2023, it ranks second in the DEX tables with $621 million in trading volumes (daily). The other clones are far behind, with PancakeSwap V2 being the closest at $139.68 million.
In terms of crypto fees generated from trades, none of these DEX contenders come anywhere close to the numbers generated by Uniswap in early Q2 2023. The nearest is Curve, with $283K in 7-day average fees. SushiSwap is further behind at $118K, just a fraction of the revenues generated by Uniswap for liquidity providers.
Who Benefits from Uniswap Fees?
As we've mentioned, 100% of the revenue generated from trading fees on Uniswap go back to liquidity providers through direct deposit into their liquidity pools.
Neither the team behind the protocol, nor the holders of the UNI governance token earn anything from the revenue generated on Uniswap.
All that could change in 2023 as GFXLabs, one of the contributors to the Uniswap project, advanced a proposal to turn on the fee switch and move a portion of the revenues to protocol treasury.
The proposal, if passed by the on-chain governance, would implement a protocol fee of 20% on the collected fees from V3 and turn on the fee switch on V2.
Based on projections released by GFXLabs, the proposed 1/5th fee would generate over $52 million in revenues for the protocol across six months (based on average fees generated in May 2023). In theory, part or all of this revenue could be shared with UNI holders (like a stock dividend).
Any such move would also have a direct impact on the revenue generation of liquidity providers, who could leave for competing exchanges. For UNI investors, that's a risk that may outweigh the reward.
Uniswap Team Revenues
The protocol is managed by Uniswap Labs (formed by founder Hayden Adams). To date, the company has conducted two funding rounds and raised over $176 million.
The series A round in August 2020 was led by Andreessen Horowitz (a16z crypto) and raised $11 million. There were eight total investors including Union Square Ventures, A. Capital Ventures, SVA, and Variant Alternative Income Fund.
Uniswap launched its Series B round in October 2022. Conducted in the midst of the crypto winter, the initiative was a remarkable success, bringing in $165 million. The round was led by Polychain and featured SVA, Variant, and a16z as returning investors.
Since the company doesn't take trading fees, the main source of value/revenue for the project is its native token UNI. Though most of the tokens were airdropped to community members, liquidity providers, and protocol users on launch, 20% of the UNI supply has been kept in reserve.
The total supply of UNI is 1 billion. At the time of writing,UNI had a price of $5.32, putting the value of the 20% reserves at $1.06 billion (which is set aside for the team behind the Uniswap project). Depending on UNI's market price, these holdings can be sold for cash to run the business, but that would only last so long.
If the proposed activation of the protocol fee switch is passed, the revenues for the protocol and the team behind Uniswap could increase by up to $50 million a year. The proposal seeks to spend these additional revenues to fund new projects and education programs.
Uniswap LP Revenues
Anybody with available crypto assets can become a liquidity provider or LP. A DEX cannot function without LPs as they make trades possible. Thus, Uniswap wants to encourage as many people as possible to become LPs.
To understand the revenue potential for being a Uniswap LP, let's take a detour to explain how automated market makers work.
In an order book system at a traditional exchange, we have trading pairs (for example, BTC/ETH, ADA/DAI, or any other pairing of two currencies). On these traditional crypto exchanges, transactions occur between buyers and sellers (i.e., peer-to-peer).
In an AMM exchange, the counterparty is not one person, but a pool of funds supplied by many users, with the smart contract setting prices and executing trades.
This is where LPs enter the equation. The cryptos they lock into Uniswap provide liquidity to the smart contract. Instead of a buyer and seller, you have a buyer and a liquidity pool. People make up the pool.
In Uniswap, these pools are often based on token pairs like ETH/BTC or SOL/DAI. To participate in a liquidity pool, you deposit equal amounts of the two tokens in a 50:50 ratio (for example, 50% ETH/50% BTC).
Since they're so integral to an AMM, liquidity providers are rewarded handsomely by companies. Uniswap earned $612 million in fees between May 2022 and April 2023, all of which was paid out to LPs.
It can pay to play in the pool. This is why turning on the fee switch could be problematic; LPs may go to competitor DEXs where they can make more money. |
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Why Uniswap is Important for Investors
Uniswap is the most successful DEX based on the AMM model. Moreover, if it maintains high revenues and stability, it’s the proof of concept that a crypto exchange can work without a centralized order book or market maker.
(This takes on renewed importance with the recent news about the SEC crackdown on Binance. Uniswap, as a decentralized alternative, cannot be easily shut down.)
The entire concept of blockchain is based on decentralization: trusted transactions on a transparent, yet highly secure network. Uniswap brings that vision to the crypto exchange market (like handling your money yourself).
Conversely, mainstream crypto exchanges use centralized architectures to provide better user experiences and more user safety (like trusting a broker or banker to handle your money for you).
While 2022 was a tough year for everyone in the crypto market, developments in 2023 have shown there's still room for hope and optimism.
Trading volumes on Uniswap have increased dramatically, and the DEX continues to pull in over $1.5 million in 7-day average fees. LPs are earning more on this DEX than other exchanges due to its generous fee structure.
However, if Uniswap votes to implement platform fees, it could have some impact on investor confidence. At least a few LPs could opt to leave the protocol as the fee would directly be taken from their shares of the revenue.
Investor Takeaway
Uniswap faces an uncertain future. Though it still has a huge user base, it's losing market share to competing DEXs that don't have the AMM model. Many LPs face an uphill battle to retain profits in AMMs due to “impermanent loss.”
There's also considerable opposition to the "fee switch" proposal, as changes in revenue generation could attract increased attention from US regulators (Uniswap is located in the US).
Still, Uniswap has a history of innovation and delivering on significant protocol upgrades (Uniswap ships). It's also far easier for the average user to understand and use than tech-heavy sites like dYdX.
With the rise of knockoffs and non-AMM alternatives, Uniswap has its work cut out for it. It must continue to innovate, add new features, and improve user experiences, all areas where it's traditionally performed well.
Much will also depend on the future trajectory of the crypto market. Overall, Uniswap remains our top pick for the long-term DEX winner, which is why we continue to hold UNI as part of our Future Winners Portfolio. |
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| | | ICYMI In Case You Missed It |
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UNI investors just want to share in the fun of earning fees. |
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It's created by John Hargrave, Nick Marinoff, Steve Walters, Anatol Antonovici, Matthew Du, Daniel Joel, and Preetam Kaushik.
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