Uniswap burns 100 million UNI, soaring 40%! Reduced LP earnings may send liquidity to competitors

On November 11th, UNI surged to $8.42, with the highest overnight increase exceeding 40%, lifting the entire DeFi sector. The reason for the rally is that Uniswap revealed its final card. Founder Hayden released a new proposal centered around the “Fee Switch” topic. This proposal has been introduced 7 times over the past two years.

Repeated Failures of the Fee Switch, a16z Loosening as a Key

(Source: CoinMarketCap)

The fee switch is a relatively common mechanism in the DeFi space. For example, Aave successfully activated the fee switch in 2025, using a “buy + distribute” model to allocate protocol revenue toward repurchasing AAVE tokens, which drove the token price from $180 to $231, with an annual growth rate of 75%. Besides Aave, protocols like Ethena, Raydium, Curve, and Usual have also achieved significant success with fee switches, providing sustainable tokenomics models for the entire DeFi industry.

Given these successful precedents, why has Uniswap been unable to pass such a proposal? This brings us to a key player—a16z. Historically, Uniswap has had relatively low governance participation, with about 40 million UNI typically enough to reach voting thresholds. However, this venture capital giant previously controlled around 55 million UNI, exerting significant influence over voting outcomes. They have consistently opposed related proposals.

In early July 2022, during two initial warm-up votes, they abstained. But by the third proposal in December 2022, when on-chain votes were about to activate a 1/10 fee rate for pools like ETH-USDT and DAI-ETH, a16z cast a clear opposition vote, using 15 million UNI voting power. The vote ultimately passed with 45% support, but failed due to insufficient quorum. On the forum, a16z explicitly stated: “We ultimately cannot support any proposal that does not consider legal and tax factors.”

In subsequent proposals, a16z has maintained this stance. The core issue is legal risk—they believe that activating the fee switch could cause UNI tokens to be classified as securities. According to the well-known Howey Test in the US, if investors have a reasonable expectation of profits from “others’ efforts,” the asset could be deemed a security. Besides securities law risks, tax issues are also complex. If fees flow into the protocol, the IRS might require the DAO to pay corporate taxes, with preliminary estimates of back taxes possibly reaching $10 million.

Currently, UNI remains the largest single token holding in a16z’s crypto portfolio, with about 64 million UNI, capable of influencing votes independently. However, with Trump’s election as President, the SEC turnover, and a more stable political environment for crypto, the legal risks for Uniswap have decreased, and a16z’s attitude appears to be softening. Clearly, this is no longer a major obstacle, and the chances of this proposal passing have greatly increased.

Zero-Sum Game of Fee Redistribution Dilemma

To understand these new contentious points, we first need to briefly explain how the fee switch operates. 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% is allocated to LPs, while 0.05% goes to the protocol. The V3 protocol is more flexible, setting protocol fees as a quarter to a sixth of LP fees—for example, in a pool with 0.01% liquidity, the protocol fee would be 0.0025%, representing a 25% split; in a 0.3% pool, it would be 0.05%, about 17%.

Based on this fee structure, conservative estimates suggest Uniswap could generate annual revenue of $10 million to $40 million, and in a bullish scenario based on historical peak trading volumes, this could reach $50 million to $120 million. In other words, through the fee switch, UNI would transform from a “valueless governance token” into a real income-generating asset. This is undoubtedly good news for UNI holders, but the problem lies precisely here. The essence of the “fee switch” is a redistribution of LP and protocol revenue.

The total fees paid by traders do not change; instead, the original all goes to LPs, but now a portion is allocated to the protocol. The “wool on the sheep”—meaning, the protocol’s revenue—increases, but LP income must decrease accordingly. You can’t have both. When faced with the question “Choose LPs or protocol revenue?” Uniswap clearly favors the latter.

The Zero-Sum Battle of Fee Reallocation and the Threat of Aerodrome on Base Chain

This potential negative impact of redistribution should not be underestimated. In the short term, LP earnings could decrease by 10% to 25%. More seriously, models predict that 4% to 15% of liquidity might migrate from Uniswap to competing platforms. The more direct threat comes from market competition, especially in the battle on Base Chain with Aerodrome. Dromos Labs CEO Alexander sarcastically posted on X: “I never thought that on the day Dromos Labs would celebrate its most important milestone, our biggest competitor would deliver such a major mistake.”

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

The root of this gap lies in the significant difference in LP yield rates. For example, in the ETH-USDC pool, Uniswap V3’s annualized yield is about 12-15%, solely from trading fees; whereas Aerodrome, incentivized by the AERO token, can offer 50-100% or higher annualized yields—3 to 7 times higher than Uniswap. Under this scenario, if Uniswap activates the fee switch and further cuts LP yields, it could accelerate liquidity migration to Aerodrome.