Original text: Tokens vs. Equity

Author: DEFI EDUCATION

Compiled by: Odaily How about

Recently, Uniswap’s charging of fees has caused a lot of discussion. The fees ended up belonging to Uniswap Labs without any surprise. UNI token holders did not enjoy rights similar to stock dividends. This cant help but lead to an old topic - Do DeFi project governance tokens have actual economic effects?

An article published by DEFI EDUCATION today believes that the interface fee introduced by Uniswap benefits equity holders and puts token holders at a disadvantage. This fee is not paid to token holders, but to Uniswap Labs as the operating entity. This fee solves the problem faced by Uniswap Labs but brings no benefit to UNI token holders. Token holders lack actual rights to protect themselves and can only rely on social obligations to safeguard their own interests. In this case, Uniswap Labs should prove that they will work for the benefit of the protocol and token holders, otherwise there is no reason to hold UNI tokens.

The following is the original text of the report, compiled by Odaily.

Uniswap has announced that they will be introducing a 0.15% (15 basis points for our finance readers) fee on their front-end, applicable to certain transactions.

First, these fees are not paid to token holders. Uniswap’s “fee switch” requires governance approval, but this fee apparently does not.

These fees are paid to Uniswap Labs, the operating entity behind the Uniswap protocol. 15 cents of every $100 will be paid to Uniswap Labs. This fee is only charged when specific tokens, such as ETH, USDC, WETH, USDT, DAI, etc., are exchanged on Uniswap. If you simply exchange one stablecoin for another, you don’t need to pay this fee. And if you just swap ETH for WETH, you won’t be charged.

UNI’s price fell 7% in the 24 hours after Uniswap announced the fee, taking its trailing 12-month performance to -40% and trading at its lowest since 2020.

The price behaved when the Uniswap founder tweeted announcing a fee on the Uniswap front-end, with proceeds going to Uniswap Labs rather than UNI token holders.

Thats the whole situation. Some of you may already know this. Let’s go back to September 2020, over 3 years ago.

At the time of the UNI token’s launch, other decentralized exchanges and DeFi protocols also launched their own governance tokens, often accompanied by liquidity mining programs. Some of these protocols directly copied Uniswap’s code and added tokens to attract liquidity. The most notable example is SushiSwap, which posed a competitive threat by copying Uniswap and introducing SUSHI tokens as rewards to encourage deposits of Uniswaps LP tokens, and migrating them to Sushiswap.

The launch of the UNI token is a response to these competitive pressures.Uniswap may not want to decentralize governance or hand over control to token holders, but they may feel they have to create the token to counter the competitive threats of 2020.This results in a dual “ownership” structure, with equity in Uniswap Labs held by a few, while the tokens are widely available to everyone. The Uniswap team only holds 21% of UNI tokens, while they likely hold the majority of Labs’ equity.

There are many reasons as to why token holders and equity holders are at odds. We highly recommend reading the articleThe Real Meaning of Tokens. Here are some points of concern:

● Crypto ventures may have financial reserves, token market capitalization, equity value of the operating entity, and various social and legal obligations. This makes it difficult to determine how value is distributed among stakeholders.

● Corporate reserves may not be clear whether they belong to the corporate entity or to the token holders. This can lead to disputes and confusion about who has rights to the reserves and the right to decide how the funds are spent.

● Token holders may believe they have certain rights, such as access to transparent financial information, making demands on the team, or influencing the direction of the project. However, these rights may not be expressly granted in any document, resulting in a conflict.

● Tokens may facilitate collaboration without the need for traditional registration, but the lack of clear legal obligations becomes problematic when disputes arise. It is often unclear what legal rights token holders have, especially compared to equity holders.

● In the crypto space, the agency problem, where one party (the agent) makes decisions on behalf of another party (the principal), is even more severe. Token holders (principals) may be at a disadvantage relative to developers or organizations (agents) due to lack of transparency, lack of regulation, and technical knowledge gaps.

● To investors, tokens may be viewed as assets, but to issuers, they may be viewed as liabilities. This duality can lead to confusion about what the token truly represents and the impact on the protocol and its stakeholders.

● Equity holders may focus more on the long-term success and profitability of the company, while token holders may focus more on short-term gains and growth in token value. These different priorities can lead to conflicts in decision-making and strategy.

● Crypto projects often operate based on a “social contract” or community trust. However, in the event of bad faith or disputes, these social contracts may not be enforceable, especially compared to traditional legal contracts that bind equity holders together.

● Token holders may face the risk that if the team behind the protocol misbehaves, they may be left with worthless tokens, a phenomenon known as “operations.” Equity holders, on the other hand, have more traditional legal protections.

● In traditional companies, it is obvious that equity holders are the last to be paid. However, in crypto projects with both tokens and staking, the prioritization of payments becomes confusing, especially given the “social contract”.

In summary, Uniswap Labs, Uniswap Protocol, and the UNI token may appear to be the same on the surface, but upon closer inspection, you’ll see that they have different goals and incentives. In fact, there are more conflicting goals than you think.

Let’s start with a big question -Commercialization and revenue generation。

Uniswap Labs is a centralized entity that may seek to commercialize the platform or generate revenue through proprietary features, licensing, partnerships, or capital raising at the entity level. When “Uniswap” acquired NFT aggregator Genie, it was actually Uniswap Labs and not the Uniswap protocol or UNI token holders.

Uniswap Labs has earned $11,962 so far from the new fee, which went into effect earlier today.

Instead, the Uniswap protocol community and token holders may prefer to keep the platform as open and permissionless as possible. Token holders want fees to go to them, not Uniswap Labs.

Even Uniswap’s licensing and intellectual property are in dispute. Uniswap Labs wants to protect its code and functionality to prevent malicious forks and maintain a competitive advantage. The broader community advocates a fully open approach, allowing anyone to fork, modify or build upon the protocol without restrictions.

If governance becomes more decentralized, token holders may push for decisions that serve their own interests, even if those decisions may be detrimental to the original vision or to the long-term health of the protocol. As a diverse group with different interests, token holders may hold different opinions on the direction of the protocol, influenced by short-term gains, ideological beliefs, or other factors. Conversely, teams with significant influence over the direction of the protocol are likely to be inclined to make decisions that are consistent with their own vision or business interests.

To be clear:In a dual equity + token structure, there is no clear setup for everyone to get what they want。

As the operating entity of the Uniswap protocol, Uniswap Labs has the onus to demonstrate that they are a bona fide actor working for the benefit of the protocol and UNI token holders. Otherwise, there is no reason to hold UNI tokens.

Uniswap has now introduced an “interface fee” that is solely for the benefit of Uniswap Labs, not the protocol. Now, you could argue that funding the operating entities would benefit the protocol indirectly, by paying for their operating expenses (although we dont know what those expenses are). Uniswap Labs raised $165 million in October 2022, and the team has likely been looking for ways to continue funding operations without having to sell additional equity.

A more cynical view might be that the team has already monetized the UNI token (of which they only hold about 21%). The team likely owns a majority of Uniswap Labs equity and is looking for ways to increase the value of the equity. What better way to increase equity value than with cash flow?

Maybe the real answer is: all of the above!

obviously,These fees solve a number of problems faced by Uniswap Labs, but do not solve any problems for UNI token holders.

This isn’t the first time equity holders have benefited at the expense of token holders.

We’ve talked about dYdX’s old token economic model many times. Users are incentivized with tokens for trading on the platform, thus encouraging excessive trading activity. At the same time, transaction fees will be paid to dYdX’s operating entities. The rationale for this is regulation. Maybe Uniswap will mention the same reason. Of course, we dont agree with this view. Regulation being a barrier to compensating token holders does not mean that actions can be taken that benefit equity and harm token holders.

However, token holders have no real rights they can exercise to protect themselves.Tokens are still only backed by social obligations (threat of sale by holders) rather than any real legal obligations.If the team doesnt care about tokens and is primarily compensated through other means (i.e. equity), dont expect social obligations to protect you.

Token design is really complicated and obscure.