Does Uniswap Generate $0 in Revenue?

Last week, Uniswap Labs announced it raised $165m in Series B funding at a $1.66bn valuation from Polychain Capital, a16z, Paradigm and others. The Uniswap Labs team founded and deployed Uniswap and owned 21.51% of UNI token when it was launched in 2020.

If you’ve loosely kept up with Uniswap governance, you might have heard of something called the “fee switch.” The fee switch was introduced in Uniswap v2 and introduced a mechanism that could be turned on to enable the protocol to generate a 0.05% fee. Uniswap v3 introduced different fee tiers for liquidity providers (LPs) and stipulated that the protocol could generate anywhere between 10% and 25% of LP fees based on the pool. This fee would be collected by the treasury Currently, the switch is not turned on and the protocol charge is 0.

Wait, the protocol charge is 0?? Yes, you read that right. LPs on Uniswap v3 generate anywhere between 0.05% and 1.00% in fees while the protocol generates 0.00%. This explains why Uniswap’s treasury contains 100% UNI. There is notably a lack of Eth or other tokens that would be earned by the protocol fee. (note: Benzinga and Bitcoin Market Journal both mentioned $40m of revenue in 2021 reportedly being generated / held back for the team)

Debate around the fee switch is ongoing in the Uniswap governance forums and there are multiple important concepts to consider. It seems one of the biggest reasons why the fee switch hasn’t been turned on is because of the unknown effect it’ll have on liquidity providers (as noted by contributor jcp below). That is, if the fee switch eats into some of the returns of LPs, will they take their capital to another DEX with more advantageous terms? Additionally, it’s unclear of how Uniswap would handle the protocol fees if they were to be generated. Would they accrue to the treasury? Would they be distributed to all UNI holders as a dividend?

Uniswap generated $865k in 7-day trailing average daily fees. Annualized this is $315m, 100% of which is going to liquidity providers, and not being captured by the protocol. This naturally leads to the question of what is the value of the protocol? In a tweet last week, I mentioned how UNI is trading at a 16x multiple, almost 4x that of Coinbase.

But, is Uniswap more accurately trading at an infinite multiple with $0 in protocol revenue?

Uniswap is clearly one of the most valuable dApps in the industry, still driving meaningful volumes and fees in the middle of a crypto bear market. It’s also an example of how fundamental company analysis is challenging for open-source protocols.