Burning is Uniswap's final trump card

After waking up, UNI surged nearly 40%, leading the entire DeFi sector in a broad rally.

The reason for the rise is that Uniswap has finally played its last card. Uniswap founder Hayden released a new proposal, with the core content revolving around the long-discussed "fee switch" topic. In fact, this proposal has already been raised seven times over the past two years, so it's nothing new for the Uniswap community.

However, this time is different. The proposal was initiated by Hayden himself, and in addition to the fee switch, it also covers a series of measures such as token burning and the merger of Labs and Foundation. Some whales have already expressed their support, and in prediction markets, the probability of the proposal passing is as high as 79%.

2 Years, 7 Failures: The Repeatedly Defeated "Fee Switch"

The fee switch is actually a fairly common mechanism in the DeFi sector. Take Aave as an example: it successfully activated the fee switch in 2025, using a "buy + distribute" model to use protocol revenue for AAVE token buybacks, pushing the token price from $180 to $231, an annualized increase of 75%.

Besides Aave, protocols like Ethena, Raydium, Curve, and Usual have also achieved significant success with their fee switches, providing sustainable tokenomics models for the entire DeFi industry.

Given so many successful precedents, why has Uniswap failed to pass it?

a16z Relents, But Uniswap's Troubles Are Just Beginning

This brings us to a key player—a16z.

In Uniswap's history, the quorum has generally been low, usually requiring only about 40 million UNI to reach the voting threshold. But this venture capital giant previously controlled about 55 million UNI tokens, giving it a very direct influence on voting outcomes.

They have always been opponents of related proposals.

As early as the two temperature checks in July 2022, they chose to abstain, only expressing some concerns on the forum. But by the third proposal in December 2022, when pools like ETH-USDT and DAI-ETH were preparing to activate the 1/10 fee rate on-chain vote, a16z cast a clear "no" vote, using 15 million UNI voting power. The vote ended with 45% support; although the majority supported it, it failed due to insufficient quorum. On the forum, a16z made it clear: "We ultimately cannot support any proposal that does not consider legal and tax factors." This was their first public opposition.

In subsequent proposals, a16z maintained this stance. In May and June 2023, GFX Labs launched two consecutive fee-related proposals. Although the June one received 54% support, it failed again due to insufficient quorum under the influence of a16z's 15 million opposing votes. In March 2024, a governance upgrade proposal saw the same scenario—about 55 million UNI in support, but ultimately failed due to a16z's opposition. The most dramatic was from May to August 2024, when the proposers tried to establish a Wyoming DUNA entity to circumvent legal risks. The vote was originally scheduled for August 18 but was postponed indefinitely due to "new issues from unnamed stakeholders," widely believed to refer to a16z.

So what exactly is a16z worried about? The core issue is legal risk.

They believe that once the fee switch is activated, the UNI token could be classified as a security. According to the well-known Howey test in the US, if investors have a reasonable expectation of profits "from the efforts of others," the asset may be deemed a security. The fee switch creates exactly this expectation—protocol generates revenue, token holders share in the profits, which is highly similar to the profit distribution model of traditional securities. a16z partner Miles Jennings bluntly stated in a forum comment: "A DAO without a legal entity faces exposure to personal liability."

In addition to securities law risks, tax issues are equally thorny. Once fees flow into the protocol, the IRS may require the DAO to pay corporate tax, with preliminary estimates of back taxes possibly reaching $10 million. The problem is, the DAO is a decentralized organization without the legal entity or financial structure of a traditional company—how to pay taxes and who bears the cost are unresolved issues. Without clear solutions, rashly activating the fee switch could expose all governance participants to tax risk.

As of now, UNI remains the largest single token holding in a16z's crypto portfolio, with about 64 million UNI, still enough to influence voting outcomes alone.

But as we all know, with Trump's election as president and the SEC's leadership change, the crypto industry has entered a period of political stability, reducing Uniswap's legal risks and softening a16z's stance. Clearly, this is no longer the main issue, and the likelihood of the proposal passing has greatly increased.

However, this does not mean there are no other conflicts. Uniswap's fee switch mechanism still has some points of contention.

You Can't Have Your Cake and Eat It Too

To understand these new controversies, we need to briefly explain how the fee switch actually works.

From a technical implementation perspective, this proposal makes detailed adjustments to the fee structure. In the V2 protocol, the total fee remains at 0.3%, but 0.25% goes to LPs and 0.05% to the protocol. V3 is more flexible, with protocol fees set at one-fourth to one-sixth of LP fees. For example, in a 0.01% liquidity pool, the protocol fee is 0.0025%, or 25% of the split; in a 0.3% pool, the protocol fee is 0.05%, about 17%.

Based on this fee structure, Uniswap is conservatively estimated to generate $10 million to $40 million in annualized revenue, and in a bull market scenario, based on historical peak trading volumes, this figure could reach $50 million to $120 million. Meanwhile, the proposal also includes the immediate burning of 100 million UNI tokens, equivalent to 16% of the circulating supply, and the establishment of a continuous burn mechanism.

In other words, through the fee switch, UNI will transform from a "valueless governance token" into a true yield asset.

This is certainly great news for UNI holders, but the problem lies precisely here. The essence of the "fee switch" is the redistribution between LPs and protocol revenue.

The total fees paid by traders do not change; it's just that the revenue, which originally went entirely to LPs, now has a portion allocated to the protocol. The wool comes from the sheep's back: as protocol revenue increases, LP income will inevitably decrease.

You can't have your cake and eat it too. On the question of "LPs or protocol revenue?", Uniswap has clearly chosen the latter.

Community discussions suggest that once the "fee switch" is activated, half of Uniswap's trading volume on the Base chain could disappear overnight

The potential negative impact of this redistribution should not be underestimated. In the short term, LP earnings will be reduced by 10% to 25%, depending on the protocol fee split. More seriously, model predictions suggest that 4% to 15% of liquidity could migrate from Uniswap to competing platforms.

To mitigate these negative effects, the proposal also introduces some innovative compensation measures. For example, the PFDA mechanism internalizes MEV, providing LPs with additional returns—every $10,000 in trading can bring $0.06 to $0.26 in extra rewards. The V4 version's Hooks feature supports dynamic fee adjustments, and aggregator hooks can open up new revenue streams. In addition, the proposal adopts a phased implementation strategy, starting with core liquidity pools as a pilot, monitoring the impact in real time and adjusting based on data.

The Dilemma of the Fee Switch

Despite these mitigation measures, whether they can truly allay LPs' concerns and allow the proposal to be implemented remains to be seen. After all, even with Hayden himself stepping in, it may not be enough to save Uniswap from this predicament.

The more direct threat comes from market competition, especially the head-to-head battle with Aerodrome on the Base chain.

After Uniswap's proposal, Aerodrome development team Dromos Labs CEO Alexander mocked on X: "I never thought that on the eve of the most important day for Dromos Labs, our biggest competitor would deliver such a major blunder."

Aerodrome Is Crushing Uniswap on the Base Chain

Data shows that in the past 30 days, Aerodrome's trading volume was about $20.465 billion, accounting for 56% of the Base chain's market share; Uniswap's trading volume on Base was about $12-15 billion, with a market share of only 40-44%. Aerodrome not only leads by 35-40% in trading volume, but also surpasses Uniswap in TVL with $473 million versus Uniswap's $300-400 million.

The root of the gap lies in the huge difference in LP yields. Take the ETH-USDC pool as an example: Uniswap V3's annualized yield is about 12-15%, coming only from trading fees; Aerodrome, through AERO token incentives, can offer 50-100% or even higher annualized yields, 3-7 times that of Uniswap. In the past 30 days, Aerodrome distributed $12.35 million in AERO incentives, using the veAERO voting mechanism to precisely guide liquidity. In contrast, Uniswap mainly relies on organic fees, occasionally launching targeted incentive programs, but on a much smaller scale than its competitors.

As someone in the community pointed out: "The reason Aerodrome can crush Uniswap in Base trading volume is because liquidity providers only care about the return on every dollar of liquidity they provide. Aerodrome wins in this regard." This observation hits the nail on the head.

For LPs, they won't stay because of Uniswap's brand influence—they only care about yield. On emerging L2s like Base, Aerodrome, as a native DEX, has built a strong first-mover advantage with its specially optimized ve(3,3) model and high token incentives.

In this context, if Uniswap activates the fee switch and further reduces LP yields, it may accelerate the migration of liquidity to Aerodrome. According to model predictions, the fee switch could cause 4-15% liquidity loss, and on a fiercely competitive battlefield like Base, this proportion could be even higher. Once liquidity drops, trading slippage increases, trading volume declines, and a negative spiral forms.

Can the New Proposal Save Uniswap?

From a purely numerical perspective, the fee switch can indeed bring considerable revenue to Uniswap. According to detailed calculations by community member Wajahat Mughal, the situation is already quite impressive just looking at V2 and V3.

The V2 protocol has generated $503 million in total fees from early 2025 to now, with the Ethereum mainnet contributing $320 million and $50 billion in trading volume over the past 30 days. If calculated at a 1/6 fee split, based on Ethereum mainnet activity, protocol fee revenue in 2025 is expected to reach $53 million. V3's performance is even stronger, with total fees of $671 million since the beginning of the year, $381 million from Ethereum mainnet, and $71 billion in 30-day trading volume. Considering the different split ratios for different fee pools—low-fee pools charge 1/4 protocol fee, high-fee pools charge 1/6—V3 may have already generated $61 million in protocol fees since the start of the year.

Adding V2 and V3 together, protocol fee revenue since the beginning of the year is estimated at $114 million, and that's with six weeks left in the year. More importantly, this figure does not yet reflect Uniswap's full revenue potential. This calculation does not include the remaining 20% of V3 pools, fees from all chains outside Ethereum mainnet (especially Base, whose fees are almost equal to Ethereum mainnet), V4 trading volume, protocol fee discount auctions, UniswapX, aggregator hooks, or Unichain sequencer revenue. If all these are included, annualized revenue could easily exceed $130 million.

Combined with the plan to immediately burn 100 million UNI tokens (worth over $800 million at current prices), Uniswap's tokenomics will undergo a fundamental change. After the burn, the fully diluted valuation will drop to $7.4 billion, with a market cap of about $5.3 billion. Based on $130 million in annualized revenue, Uniswap could buy back and burn about 2.5% of the circulating supply each year.

This means UNI's price-to-earnings ratio is about 40x. While this doesn't seem cheap, considering there are still many revenue growth mechanisms yet to be fully realized, this number has plenty of room to fall. As someone in the community remarked: "This is the first time the UNI token truly seems attractive to hold."

However, behind these impressive numbers, there are also significant concerns. First, trading volume in 2025 is clearly higher than in previous years, largely thanks to the bull market. If the market enters a bear cycle and trading volume drops sharply, protocol fee revenue will shrink accordingly. Using bull market data as the basis for long-term valuation is obviously misleading.

Second, the method of burning and the specific operation of the potential buyback mechanism are still unknown. Will it use an automated buyback system like Hyperliquid, or be executed in another way? The frequency of buybacks, price sensitivity, and market impact—these details will directly affect the actual effect of the burn mechanism. If not executed properly, large-scale market buybacks could trigger price volatility, leaving UNI holders in an awkward "left hand to right hand" situation.

When platforms like Aerodrome, Curve, Fluid, and Hyperliquid Spot are all attracting liquidity with high incentives, will Uniswap's move to cut LP yields accelerate capital outflows? The data looks great, but if liquidity—the foundation—is lost, even the most beautiful revenue forecasts are just castles in the air.

The fee switch can undoubtedly provide value support for UNI. But whether it can truly "save" Uniswap and restore the former DeFi giant to its peak remains to be tested by both time and the market.