Although UNI has asset value, Uniswap still has a long way to go to achieve decentralization

However, from the current perspective, the liquidity taken away by Sushiswap does not seem to pose a threat to its survival. Uniswap not only survived the storm and recovered, but also released the native protocol token UNI. It took only 18 months to become the world's largest decentralized exchange (DEX) in terms of trading volume.

Initially, UNI tokens were issued through community airdrops and liquidity mining, starting on September 18, 2020, and then gradually entered circulation, with a total supply of 1 billion. Among them, 15% of the initial supply of UNI tokens will be distributed to the Uniswap community through community airdrops, 10.06% of the supply will be provided to historical users, 4.92% will be allocated to existing liquidity providers, and existing SOCKS users can claim 0.02%. In addition, Uniswap distributes another 2% of UNI tokens to the community through liquidity mining. Anyone can farm UNI tokens by providing liquidity in one or more of the four pools of USDC/ETH, USDT/ETH, DAI/ETH, and WBTC/ETH (more liquidity pools may be added after 30 days). Between September 18 and November 17, 2020, each pool will be allocated 5 million UNI and distributed to liquidity providers in proportion to the liquidity provided.

Since Uniswap adopts community airdrops, theoretically the circulating supply of UNI tokens should start from 150 million, but since not all airdropped tokens have been claimed, the current circulation is only 130 million. In the next four years, these tokens will be released gradually to minimize the possibility of manipulation in the UNI market. It is reported that the governance library will retain 43% of the UNI supply; team members and future employees will receive 21.51% of the UNI supply; Uniswap early venture capitalists will receive 17.80% of the UNI supply; consultants will receive 0.69% of the UNI supply. In short, 60% of the UNI founding supply will go to the community, and the remaining 40% will be distributed to team members, investors and consultants.

UNI token release schedule not clear enough?

However, while Uniswap claims that the tokens allocated to the team and investors will be released over a four-year period, they have not publicly disclosed the exact release schedule. And worryingly, these tokens are not currently locked, but are stored in regular Ethereum addresses (externally owned addresses or EOAs) and are fully in circulation. In contrast, the tokens allocated in the governance treasury are locked in smart contracts and are expected to be released programmatically over time. But regardless of whether there are any security-related reasons or a vague promise to the community not to participate in governance, not locking tokens still raises concerns. Even if there are legitimate reasons, the Uniswap team should provide a detailed and transparent explanation of the structure of this token, the reasons for keeping it unlocked, and the precautions taken to prevent human manipulation.

It should be noted here that the Uniswap team seems to use the word "release" very loosely. Perhaps their real purpose is to mislead community members and make them feel that the team or investor party representatives need to wait until "release" before they can use it. This way of storing tokens essentially gives the Uniswap team and investors the authority to manage the protocol. If a coordinated attack on Uniswap occurs, these tokens may become an "emergency override measure." In addition, perhaps in order to give the community more confidence, Uniswap stated that team members will not directly participate in governance in the foreseeable future. Although they can delegate voting rights to protocol representatives, they will not try to influence their voting decisions.

We know that the main function of the UNI token is to grant holders the right to make decisions about the protocol, including governance of the Uniswap protocol and obtaining potential revenue share. There is a "fee switch" in the Uniswap governance contract. If the switch is activated, UNI token holders can get a portion of the protocol fee. The "fee switch" is set with a 180-day time lock to ensure that investors and liquidity providers (LPs) have half a year to prepare for this new revenue sharing model.

It is worth mentioning that the governance function of the token actually took effect on the first day of the UNI token release, but the vault will not be unlocked until 30 days later. After unlocking, UNI token holders can decide how to deal with the funds in the vault. However, not all funds in the vault can be used immediately. The tokens in the governance vault smart contract will be gradually reduced in the next four years. Uniswap can use these tokens for community programs, liquidity mining, contributor donations, and other projects to further develop the Uniswap protocol and ecosystem.

While the Governance Treasury seems like a great way to decentralize protocol ownership on the surface, the community has expressed concerns about Uniswap’s specific governance model and the level of decentralization and flexibility. First, if a community member wants to submit a governance proposal, they must hold a minimum threshold of 1% of the total UNI token supply. Secondly, a minimum quorum is required to pass a proposal, but to meet this condition, 4% of the total UNI token supply (40 million), which is almost 31% of the current total circulation. So, even if you meet the threshold of holding 1% of the total token supply, it is very difficult to get a proposal passed. So, even though the UNI token has been listed for more than a week, the community has not put forward a single governance proposal, which is in stark contrast to other vibrant and actively engaged DeFi communities.

Judging from the UNI governance model, it seems that Uniswap has set a very high threshold. Some people even think that Uniswap deliberately designed it this way to prevent people from collecting 10 million votes and making suggestions. But in fact, their real purpose is to avoid major changes to the protocol in the early stages, and then smoothly transition to decentralized governance when the protocol is stable.

Do the Uniswap team and investors have greater voting rights?

In addition, there is another problem with the UNI governance model, that is, even if the Uniswap team and investors will not use the tokens that have not yet been released, they still have disproportionate power over the community in the early stages of governance. They can even vote on the allocation of treasury funds to further increase UNI token holdings, thereby giving themselves greater voting power. Of course, the Uniswap team and investors may be relatively more constrained. However, some other DeFi protocols recently released on the market have "whales". "Whales" are a group of anonymous yield farmers with a lot of money. The difference between them and ordinary investors is that they may be concerned about reputation issues due to their high attention. In addition, they regard making money as their only purpose and do not care about the future of the project at all.

There are currently only 15 addresses known to control 10 million (or more) UNI tokens, but when it comes to the possibility of creating a governance proposal, there is only one address with enough UNI token liquidity to submit a governance proposal at this stage. This address belongs to Binance, which currently holds 26 million UNI tokens. In other words, during the period when the governance treasury will not be unlocked until one month later, only Binance has the right to decide how to use these funds. However, it should be noted that Binance is actually a centralized exchange that is in direct competition with Uniswap, so it is almost impossible to propose a proposal that is beneficial to Uniswap.

While Binance may not be able to control enough UNI tokens to meet the 4% quorum right now, it is possible to unite multiple centralized exchanges (CEX) in a coordinated attack. First of all, Binance has 26 million UNIs, plus the currency has 9.4 million UNIs, and OKEx has 1.5 million UNIs, which is very close to the 40 million UNI tokens required to meet the proposal quorum. Compared with the Uniswap team and investors, independent UNI token holders not only have fewer voting rights, but community governance has also become more difficult due to low voter turnout. Therefore, in the end, many UNI holders will only sit on their tokens and expect appreciation, rather than participate in governance.

Although it is very difficult to mobilize the community to "gather enough" votes, Uniswap is prepared for this possibility. Although the token release time is scheduled, it is still necessary to ensure that there is enough liquidity to maintain the team or investor token allocation. At the same time, in order to prevent attacks from centralized exchanges, they chose to make these tokens completely "accessible" before they are released. This means that even if the community can gather enough UNI tokens, the Uniswap team, as well as investors and consultants, still have the majority of voting rights, which ensures that centralized exchanges cannot attack, but at the same time, Uniswap will not be governed by the community for a period of time.

At present, the community is full of concerns about whether the community governance decisions made by Uniswap are fair, but in fact, the Uniswap team still has absolute control over the tokens that have not yet been released. First of all, this is because the Uniswap team is trusted and respected in the community. Unlike Chef Nomi, the founder of "Sushi" Sushiswap, the Uniswap team and investors and advisors are unlikely to sell tokens at high prices. Although the UNI tokens that were supposed to be locked are currently in a liquid state, the chances of these tokens being abused are very low. But although the Uniswap team and investors and advisors are trustworthy, the core of decentralized protocols is to prevent the community from having to rely on this "trust". Secondly, for early projects, gradual decentralization and eventual full decentralization are usually the safest and most practical approach. Although Uniswap is not an early project, they are indeed the first to try a decentralized governance model, so it is too early to transition to a "fully decentralized" node at this stage. The Uniswap team is also working hard to "launch" and hopes to let the community take over governance, but it is still in the early stages, so the founding team decided to maintain control. Finally, while there are other security solutions, these solutions take time to implement and need to be tested and audited. Now that the UNI token has been successfully launched and Uniswap has once again dominated the DeFi market, the Uniswap team now finally has more time to prepare for network decentralization.

Seeing this, one can't help but ask what other options Uniswap has? You know, the approach taken by Uniswap is fundamentally opposed to the spirit of the protocol, and there are other solutions on the market, such as emergency migration contracts and second-order voting. The potential backup plan of emergency migration contracts is more like a mechanism where stakeholders can vote to move all liquidity to a new Uniswap fork if there is a malicious governance proposal. However, in order to avoid abuse of this mechanism, it may require a quorum of UNI token holders and Uniswap liquidity providers, and it must be used when the vast majority of protocol stakeholders benefit. The second-order voting method has been fully tested in production and has been successfully implemented by many DeFi protocols. If used correctly, it will minimize the influence of "whales" in protocol governance, and it will also be much more reasonable than the unilateral governance rights of Uniswap.

It can be seen that the above-mentioned security solutions can allow the Uniswap team to retain relevant control, but the "disproportionate voting rights" approach they are now taking seems likely to undermine the best interests of the team and investors, especially since this approach is technically feasible, which makes the community very worried.

Summarize

Uniswap's release of the UNI token means that Uniswap has been officially listed as a community-owned and self-sustaining infrastructure, while also continuing to carefully maintain its indestructible community autonomy. With the upcoming release of V3, Uniswap is expected to continue to be one of the most valuable platforms in the crypto industry, and if the protocol fee conversion is activated, UNI token holders will have a very high chance of receiving continuous and substantial returns.

Although Uniswap has labeled itself as "decentralized" with the launch of the UNI token, there is still a long way to go to achieve this goal. Because we see that in the short term, Uniswap sacrificed "decentralization" for the best interests of the protocol and to avoid the risk of attacks in the early stages. Eventually, as the treasury funds are gradually released, the control of the Uniswap team, as well as investors and advisors, will be diluted, and control of the protocol will be transferred to the community. In short, although the Uniswap team currently has problems, the UNI token is still a strong and valuable asset. (Golden Finance)