Token Burning

Uniswap Labs asked holders of the UNI token to approve protocol fees on a portion of Uniswap v4 pools for the next stage of the UNIfication burn program that already runs on 11 chains. 

The company will hold a snapshot vote that will run for five days beginning July 7 and closing July 12, with a binding on-chain vote to follow the week of July 13.

How will Uniswap add v4 to UNIfication?

Uniswap Labs opened a snapshot vote today, July 7, asking holders of the UNI token to add v4 pools to its fee and burn program that already runs on 11 chains, namely Ethereum, Arbitrum, Base, Celo, OP Mainnet, Soneium, X Layer, Worldchain, Zora, BNB Chain, and Polygon. 

The vote will run for five days, until July 12, with on-chain votes starting the week of July 13.

When traders use Uniswap, they pay fees— some of which go to the protocol. To claim those fees, a searcher has to burn an equal value of UNI, and the burned tokens are bridged to Ethereum and sent to the `0xdead` address, gone for good. 

With the UNI burned and the total supply reduced, the token goes up in value. 

UNI token holders enjoy this setup, but liquidity providers, the people who actually supply the capital pools that trade against, do not. Since they supply the money that traders use, when the fee switch turns on, they lose a part of their earnings.

Because v4 pools work differently, the v4 version is harder to add than older versions. They can change their fees block by block, so the proposal uses a new system with two contracts. One contract figures out the fee while the other collects it and sends it to the right place.

The snapshot vote would affect three types of v4 pools: pools without hooks, pools made through auctions, and pools using aggregator hooks (pools that bring in outside money) The fee is 25 times higher for aggregator hooks, letting the protocol charge more than the normal 10 basis point limit. On the Base network, the fee is 3 basis points. On other networks, it is 10. 

Guillaume Lambert, who runs an options protocol called Panoptic, said taxing v4 could push liquidity providers away. He added that they would have nowhere left for them to go, since v2 and v3 are also taxed, and that could kill the protocol. In his view, the v4 fee puts token holders above the LPs who keep the pools working.

Uniswap burned a record 186,000 UNI in one day last month, above the 134,000 daily high Cryptopolitan reported on June 5. 

UNI traded at $3.23 on July 7 with a market cap of about $2 billion, far below its peak of $44.97 from May 2021. However, Uniswap keeps growing. It launched on Robinhood Chain, a new layer 2 network, around July 1. Uniswap put v2, v3, v4, and UniswapX on it from day one and did over $250 million in volume there in less than a week.

Why is v4 different from older versions?

v2 and v3 pools have simple fixed fees, so Uniswap can just set one rate for each pool and collect fees the same way every time, but V4 has a “hook” system. Hooks let developers add extra features to pools, such as changing fees. A pool can have many different fee tiers. It can even change its fee from one block to the next. 

However, the proposal includes the provision of a V4 Fee Controller to ease operations. This fee controller system has two parts. The first part is the V4FeePolicy contract, which decides the fee for any pool. It uses rules that Uniswap governance sets. 

The second part is the V4FeeAdapter contract that makes sure the rules are followed. It can also change the fee for specific pools if needed, and then it sends the fees to the TokenJar contract.

The system is set up so that governance can change the rules later without having to rebuild everything. They can just swap out the policy contract for a new one.

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