The Contradictions of Uniswap Governance

In the year since its activation, Uniswap’s governance has been characterized by paradoxes and contradictions. The first Uniswap governance vote, itself intended to lower the submission threshold and quorum to pass proposals, failed to pass precisely because it fell short of meeting said quorum, revealing the inaccessible nature of governance. Some commentators attributed this to the core team's desire to “protect the protocol from radical changes… even at the cost of community disenfranchisement” (Glassnode Insights). While the proposal threshold was later successfully lowered, it is still too high for the average tokenholder. The controversial DeFi Education/Defense Fund proposal, intended to raise awareness of the importance of political lobbying for DeFi, instead threw the concentration of Uniswap governance power in the hands of a few large tokenholders into sharp relief. Today, both the number of proposals and the level of engagement with community governance remain markedly low compared to other protocols (Tally).

Against this backdrop, the increasing activity around one particular issue area in Uniswap’s otherwise stagnant forum offers a productive lens through which to assess Uniswap’s current limitations and future opportunities for improvement in governance: scaling.

Scaling By Way of Governance

In light of Ethereum’s growing transaction fees, scaling solutions have recently been a hot topic in the Uniswap governance forum. While Uniswap is the second largest DEX by TVL, it is lagging behind in terms of L2s having so far deployed to Arbitrum, Optimism and Polygon. In comparison, Curve Finance is already present on 7 chains and Sushiswap, Uniswap’s ‘evil twin’, exists on over 10 different EVM compatible chains, including non-Ethereum L1s such as Avalanche (DeFi Llama). In response to the slow progress on scaling by Uniswap Labs, these issues have been taken up by Uniswap’s community governance, as $UNI holders resort to pushing for deployment and incentivization on L2s and sidechains through proposals.

And yet, it is not self-evident that scaling solutions should be subject to community governance in the first place. In theory, it should be the core team’s prerogative to select preferred chains to which to deploy since this pertains to development strategy. In practice, the scope of governance is very loosely defined so that “anything” can potentially fall under its purview. According to Uniswap Labs’ original statement, UNI holders have control over: governance, treasury deployment, the hotly debated fee switch, uniswap.eth ENS name, Uniswap default list, SOCKS liquidity tokens and, with the launch of V3, licensing and protocol upgrades. But what pertains to “governance” itself is not clearly stated.

In the debate around these proposals, confusion abounds as to who should make these decisions, and whether a governance vote is required in the first place. In the proposal to deploy Uniswap to Polygon PoS chain, initiated by the Polygon team, one participant responded with: “There is nothing to authorize here. Uniswap Labs can just deploy if they are willing to.” By contrast, in the thread regarding a proposed deployment to the Avalanche blockchain, one community member replied: “The contracts are open source. Does it actually need a vote? Can’t any community member deploy the contracts on Avalanche?” This lack of clarity can be partially attributed to the core team's ambiguous position vis-a-vis the protocol, an issue discussed in greater depth in Other Internet’s Uniswap off-chain governance report. In short, Uniswap Labs has not set clear boundaries around what it intends its purview to be, and as a result, does not exercise authority where it could—a form of self-limitation further complicated by the protocol’s ongoing focus in the regulatory spotlight, which may have been causing additional wariness around taking executive decisions. In the debate around these proposals, confusion abounds as to who should make these decisions, and whether a governance vote is required in the first place. In the proposal to deploy Uniswap to Polygon PoS chain, initiated by the Polygon team, one participant responded with: “There is nothing to authorize here. Uniswap Labs can just deploy if they are willing to.” By contrast, in the thread regarding a proposed deployment to the Avalanche blockchain, one community member replied: “The contracts are open source. Does it actually need a vote? Can’t any community member deploy the contracts on Avalanche?” This lack of clarity can be partially attributed to the core team's ambiguous position vis-a-vis the protocol, an issue discussed in greater depth in Other Internet’s Uniswap off-chain governance report. In short, Uniswap Labs has not set clear boundaries around what it intends its purview to be, and as a result, does not exercise authority where it could—a form of self-limitation further complicated by the protocol’s ongoing focus in the regulatory spotlight, which may have been causing additional wariness around taking executive decisions.

Despite this state of confusion, efforts to push for action on the crucial issue of scaling have already produced results, with the Polygon proposal seeing some of the highest participation rates within Uniswap governance to date. We see opportunities for further improvement by leveraging community interest in this domain.

Bigger than Uniswap? Motivations for Participation in Scaling Proposals

The issue of scaling produces motivations for governance participation that are qualitatively different from those of a topic like the fee switch. On one hand, the growing momentum around L2s and sidechains is an expression of the community’s interest toward usability and, more generally, an awareness of the potential role Uniswap could play in driving forward the public good of scaling for the overall web3 ecosystem. As reflected in the argumentation offered by one commenter on the Arbitrum proposal: “I believe it is in the best interest of UNI holders, as well as the Ethereum ecosystem as a whole, for there to be an officially-supported instance of Uniswap V3 deployed to Arbitrum.” The proposal to incentivize liquidity on L2s is even more direct: “Uniswap governance should start incentivizing liquidity on its Arbitrum and Optimism deployments to kickstart adoption of Ethereum Layer-2.”

On the other hand, while scaling is a web3 public good, it is also a battleground for private interests as projects and protocols increasingly compete to be the winning service provider. In the context of Uniswap governance, this is particularly salient in the case of the Polygon deployment proposal, which is as much a community governance proposal as it is a business offer insofar as it includes financial and non-financial incentives for Uniswap adoption. The boundary between community governance and commercial negotiation will likely become increasingly blurry, particularly as the conversation is already moving from L2 deployment to L2 incentivisation.

These shifting boundaries necessitate close scrutiny of the different political actors involved in such decision-making processes, and their nuanced needs, desires, and goals. We see three classes of actors within the Uniswap community whose participation could be motivated by desires to support ecosystem development and sustainability, incentives to profit in the provision of web3 public goods, or both.

• Large $UNI holders, such as whales and delegates: holders or representatives of large amounts of $UNI that have the ability to pressure Uniswap Labs to carry out certain actions in the same way that activist investors do for management, similarly to “attentive shareholders” or “activist investors” in corporate governance.
• Governance discussion contributors: users of the protocol and beneficiaries of the retroactive token distribution that may not have as many tokens as the above group, but are able to make up for this in contributions of time, attention, effort, and awareness raising.
• _Protocol diplomats:) people and organizations who may or may not have significant amounts of $UNI tokens, but whose interest in governance is determined by the prospect of becoming a service provider for the protocol (as in the case of the Polygon proposal). This set of stakeholders face different challenges than the previous two groups: just like traditional lobbyists, it is a difficult balance they have to strike between credibility and neutrality, and advancing their interests.

What are the inherent benefits and constraints of each of these groups? What opportunities and challenges do they face when setting to formulate a proposal to Uniswap governance? How does communication happen within and between them? In practice, the interests of these different groups interweave with each other on different occasions, but without a clear demarcation of scope and roles, evidence has shown that the economic interests of large token holders prevail at the expense of small governance contributors. By aligning interests over collective issues, these sets of tokenholders can synergize efforts and accelerate the development of governance at Uniswap and in the web3 ecosystem, enabling this dysfunctional system to overcome its impasse.

Emerging Sites of Interest Representation in Uniswap Governance

Whether participants in these governance proposals are motivated by the progress of web3 towards the public good of scaling, or the potential to profit as a key service provider in the process, it is clear that Uniswap governance is fast becoming an important domain for interest representation and lobbying by groups whose desires, goals and concerns extend well beyond the bounds of Uniswap as a protocol.

In addition to scaling, there are several other issue areas that simultaneously concern Uniswap as a protocol and web3 as a broader ecosystem, while also creating lucrative opportunities for service providers competing with each other for market dominance. These multilevel issues, often grouped together under the umbrella term of web3 public goods, are also likely sites of interest representation and lobbying. They include the following:

• Cross-protocol relations: The importance of cross-protocol interoperability, within and beyond the Ethereum ecosystem, is a strongly felt issue across DeFi. As we’ve seen, the current governance impasse is preventing Uniswap from acting fast and deploying its protocol to other sidechains to the detriment of the overall DeFi space. Similarly, it may hinder Uniswap’s ability to enter into mutually beneficial DAO2DAO relations with other protocols, including with licensees of its v3 designs.
• MEV: The proliferation of MEV bots that provide just-in-time liquidity and remove it within the same block has been seen as a possible reason for impermanent loss (IL) among LPs – an issue that v3’s concentrated liquidity model was supposed to address. On the other hand, MEV auctions have been proposed in the Ethereum ecosystem as a way to mitigate bots activity and fund public good development but no concerted effort has been made by Uniswap governance to integrate these ideas.
• Public goods funding: Within the Ethereum ecosystem several projects and individuals have raised the importance of funding web3 public goods. Even Vitalik has exhorted Uniswap to be more ambitious and take on more responsibility as a protocol with regards to its governance in the direction of supporting public goods and realize the vision of the Ethereum ecosystem as a “crypto state.”
• Metagovernance decisions: For Uniswap to become a pillar of web3 and remain competitive within the fast-paced field of decentralized exchanges, it needs processes and mechanisms to enable its governance to adapt to changing conditions and evolve to better support its community and the protocol’s place within the wider web3 ecosystem. Decisions pertaining to a potential token redesign, or larger governance restructuring, need to be supported by the most appropriate processes and tools to facilitate effective decision making in these areas.

Other Internet’s Governance Research and Contributions

In order to answer these questions, we will be researching and collaborating with the groups and individuals that have demonstrated a keen, strategic motivation to contribute to these multilevel issues that concern both Uniswap and web3 at large—from whales and delegates, to voluntary governance contributors and protocol diplomats.

This research is a first step towards answering the following questions:

• What is the most conducive organizational structure for governance-led action on web3 public goods?
• What are the best approaches to the funding and development of these ecosystemic initiatives? Which decision-making processes and voting mechanisms better suit different issues?

Other Internet’s research will attempt to answer these questions in order to better evaluate Uniswap governance and enable wider and more effective community control. What might this look like in practical terms?

• What if coordination around web3 public goods issues were led not by Uniswap Labs, nor through loosely structured governance processes, but rather led by a mission-specific working group of advisors and advocates drawn from both informed community members and the core team?
• How could community decision-making around large infrastructural projects such as scaling or MEV auctions be better facilitated through purpose-built voting and fund dispersal mechanisms, such as conviction voting or quadratic funding?
• What if Uniswap’s responses to multilevel issues were not directed by governance alone, but led by a special-purpose acquisition DAO that ensures that the protocol’s partnerships, collaborations and business relationships do the utmost to support pro-social projects that genuinely benefit the web3 ecosystem?

As we speculate on potential solutions, it is important to keep in mind that governance is not something to be ‘solved’, it is an evolutionary process in which cultural norms are as important as codified voting mechanisms. By studying the rise of interest representation and lobbying around the provision of web3 public goods and Uniswap’s role within this in the protocol’s governance, we aim to understand the decisions that Uniswap is currently facing, identify stakeholders that are affected by these decisions, and propose processes best suited to overcome these coordination challenges, in order to incrementally build a governance system for Uniswap that can serve as a model for other digital organizations facing similar challenges.

--— We’re initiating and inviting conversations with major delegates, past proposal creators, and active governance participants in Uniswap. We’d love to talk to you about improving governance agility, scaling and other web3 public goods issues, and Uniswap’s role in leading the charge. Send us a DM at twitter.com/otherinternet_ if you’re interested in chatting._

Additionally, if you’re considering a proposal to Uniswap governance, we would love to connect and follow your journey. Read more here.