A study published by the Bank for International Settlements (BIS) claims that the most successful liquidity providers on Uniswap v3 are sophisticated institutional agents who mimic the tactics of traditional finance.

Despite the promise of decentralized finance (DeFi) opening up lucrative opportunities to average Joes, the findings show that there’s no such thing as a free lunch.

The BIS’ 36-page Working Paper compares “sophisticated and unsophisticated participants” across the top 250 pools, representing 96% of volume on the decentralized exchange (DEX); the groups are defined according to their “behavior and position sizes.”

The “profitability, liquidity provision strategies and responses to market changes” of the two groups were then analyzed to explore “whether DEXs fulfill their promise of ‘democratizing’ financial markets by allowing anyone to participate in liquidity provision without intermediaries.”

Rather than wide-range, passive liquidity provision, the more successful, institutional group adapts to the market in real-time, “[mimicking] traditional bid-ask spreads, enabling them to earn significantly higher profits.”

In addition, these improved gains are further maximized, “especially during periods of high market volatility,” which are typically when LPs face the highest risk.

Read more: Uniswap’s new trading fee neglects UNI holders

A short history of Uniswap liquidity providers

Decentralized exchanges, such as Uniswap, rely on users, known as liquidity providers, who deposit assets into “pools” which can then be used by traders to swap between the assets available.

In return, the providers are paid in the trading fees charged on each trade, with high-volume pairs being the most lucrative. Price volatility between the assets supplied can, however, incur heavy losses.

In Uniswap v1, launched in 2018, all assets were paired against ETH, a risky setup for liquidity providers because of its volatility. The DEX’s v2 introduced pools between pairs of any asset, meaning that providers for stablecoin pairs could earn relatively low-risk yield.

Read more: Uniswap Labs launches Unichain without UNI unanimity

Uniswap’s v3 introduced the capacity for liquidity providers to specify a range over which their funds could be used to settle trades between assets — a feature known as ‘concentrated liquidity’. This change vastly increased the complexity, and potential profit, of providing liquidity, which had previously been a passive practice.

Hitting the sweet spot

The ability to adjust the range of their positions according to market conditions lets providers zero in on the most efficient use of their funds. However, the accumulation of “gas” fees required for fine-grained adjustments can make this viable only for the larger players.

The researchers found that sophisticated participants tend to avoid asset pairs with sustained volatility but capitalize on shorter periods of volatility by widening their range. Retail users tended to do the opposite and made fewer adjustments on high-volatility days.

Overall, “retail liquidity providers are outcompeted by a small group of sophisticated agents” who “hold about 80% of total value locked and focus… on liquidity pools that have the most trading volume and are less volatile.”

In contrast, the net profitability of retail users is skewed by a handful of especially successful examples, and on “more than half of the days [studied], retail liquidity providers lose money.”

While DeFi’s promise to democratize finance may be a noble goal, the study concludes that centralizing forces in traditional finance “are likely inherent characteristics of the financial system, even in DeFi.”

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The post TradFi tactics win on Uniswap v3 says BIS study appeared first on Protos.

One of the largest holders of UNI tokens is questioning Uniswap’s decentralization and backroom deal-making, specifically, its claim of “efficiency” as justification for a suite of overhauls, and a possible undisclosed financial interest between Uniswap Labs and another blockchain, Optimism.

The Head of Governance at Stanford Crypto, a delegate entrusted with UNI governance tokens from thousands of individuals, threaded a 22-post complaint about Uniswap’s sudden decision to launch its own blockchain, kill its proposed fee switch that might have benefitted holders of UNI, and bypass the ostensibly decentralized autonomous organization (DAO) that supposedly governs Uniswap.

The hurried launch of Unichain “took many by surprise” and left “delegates in the dark,” wrote Billy Gao, who casts votes on behalf of his sizable delegation. He also noted that the decision “functionally mutated” the ERC-20 contract of UNI, which is “immutable” only by the most strict and pointless definition — given that UNI is now tied to an entirely new blockchain.

‘What control do token holders truly have?’ the delegate lamented.

Uniswap (UNI) and Optimism (OP)

Worse, Gao soon raised suspicions of a backroom deal that financially motivated Uniswap’s extralegal bypass of the DAO. Although he did not make a formal allegation, he noted, “there must be reasons behind adopting the OP [Optimism] stack for Unichain.”

Optimism is a separate blockchain that publishes rolled-up data onto Ethereum. The so-called “layer 2” or “scaling solution” launched its own token, OP, which is worth over $7 billion.

Importantly, Optimism is just one of thousands of competitors in the layer 2 ecosystem atop Ethereum. Indeed, it is less than one-fifth of the value of all Ethereum layer 2s. The Stanford Crypto delegate asked why Uniswap Labs chose OP and why everyone should trust that the decision had no backroom deal-making.

Lingering questions about Uniswap’s decentralization

Questions abound regarding Uniswap Labs’ decision to repurpose the UNI token away from its original focus on exchange fees. Why did Uniswap not choose Arbitrum, for example, the market leader that is more than twice as large as Optimism?

Read more: Is Uniswap becoming more TradFi than DeFi?

In short, Uniswap Labs is the target of another critique that marks yet another chapter in its saga of decentralization theatrics. In the past, the leader of the ostensibly decentralized token exchange has suffered criticism for endowing power with monied interests like Binance, a16z, and even the $700 million Ethereum Foundation.

Now, delegates who thought they had a say in Uniswap governance are left stunned at a hasty decision to launch a new blockchain, change the real-world function of an ostensibly immutable smart contract, and align with a second-ranked layer 2 with its own token incentives.

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With social media aflutter with news that Uniswap had received a Wells notice, it’s important to define exactly what Uniswap and a Wells notice are.

Uniswap is what’s known as a decentralized exchange — a platform that relies on smart contracts to execute buy and sell orders for customers instead of a matching engine controlled by a centralized entity. While the domain and front end of the website are able to be seized or shut down, many aspects of Uniswap — like the backend and the protocol — cannot simply be seized to stop customers from trading.

Additionally, Uniswap offers its own token (UNI) that allows traders or investors to participate in the governance of the protocol. This is similar to how shares allow investors to have a say in the direction of a company.

But what is a Wells notice? Put simply, it’s a notification by the Securities and Exchange Commission (SEC) that it has finished an investigation into a company, foundation, or individual, and plans to bring an enforcement action.

Uniswap gets notice

No one outside of the SEC and Uniswap has seen the Wells notice or been privy to the investigation. However, there are only a handful of issues that the SEC could be looking into and almost all of them rely on acknowledging that Uniswap is an exchange.

It will be the responsibility of the SEC to prove without any doubt that Uniswap is acting as an exchange, which according to rule 3b-16(a) is defined as ‘any organization, association, or group of persons that (1) brings together orders for securities of multiple buyers and sellers; and (2) uses established, non-discretionary methods under which such orders interact with each other, and through with the buyers and sellers entering such orders agree to the terms of the trade.’

But the idea that Uniswap meets this definition isn’t a surefire bet. Commissioner Mark Uyeda stated last year that “expanding the scope of the exchange definition in an ambiguous manner might suppress further beneficial innovation.”

A lawyer familiar with the case said that the government’s argument would suggest that “no one would be exchanging (utilizing the decentralized Uniswap protocol) if not for Uniswap, so it is an exchange,” while the defense will state that it “outsources the matching and rule settings.”

Read more: Uniswap’s new trading fee neglects UNI holders

If Uniswap fails to mount a reliable legal defense, the lawyer said it could expect “fines, an injunction, and general deterrence.” They added that this case is “the opposite of a chickenshit case” — cases that pick on small fries and try to achieve a settlement so that the price of prosecution is minimal.

They also stated the case will take “at least a year, for sure,” and that the chances of Uniswap reaching a settlement are slim to nil.

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The post Uniswap received a Wells notice — now what? appeared first on Protos.

Hayden Adams’ token swap service Uniswap claims to be a decentralized finance (DeFi) protocol, where holders of its UNI governance token can cast controlling votes on upgrades and changes. However, as with most self-described DeFi protocols, Uniswap utilizes quite a few decentralization theatrics.

For years, Uniswap boasted its open-sourcing efforts. The Ethereum Foundation even provided initial funding to Uniswap for its free and open source software (FOSS) initiatives.

Nowadays, Uniswap enlists a team of brand protection workers to send cease and desist letters, threatening to sue users of its technologies. For example, one observer claims that its team mails legal takedown notices to InterPlanetary File System (IPFS) gateway operators who host forks of its token exchange. IPFS is a peer-to-peer data storage network without a central server.

For much of its history, Uniswap has reigned as the world’s most popular DEX. Since its inception, it has processed trillions of dollars in transactions. It currently boasts $4 billion in total value locked and a $6.2 fully diluted valuation.

UNI: Uniswap’s afterthought

For years, Uniswap operated without any proprietary token. In September 2020, however, it launched the now-$4 billion UNI with generous allocations to insiders and venture capitalists like a16z.

At the time of its UNI token issuance, it was the most liquid exchange to swap tokens in a non-custodial manner. Today, the recently launched, Solana-based Jupiter outranks it.

Read more: Jupiter’s massive insider allocation of Solana airdrop JUP

Previously, Protos has covered Uniswap insiders overlooking UNI tokenholders’ wishes. This included their implementation of a 0.15% fee on popular trading pairs that Uniswap Labs founder Hayden Adams confusingly claimed was separate from another fee switch. Importantly, his addition of that new fee bypassed governance token holders’ financial interests.

Consider another example. In response to a US regulatory suggestion, Uniswap quickly delisted 100 tokens from the user interface on its website. This move, of course, sparked controversy due to the lack of a governance vote.

Uniswap also tried to court traditional finance companies like PayPal and Stripe without UNI tokenholder approval.

Companies cast the vote

Big tokenholders also sway voting on any Uniswap proposal. Andreessen Horowitz (a16z) once held enough tokens to control any vote. A16z still lists Uniswap in its current investment portfolio.

Similarly, Binance once held massive quantities of UNI. In a moment of goodwill, it swore never to utilize its customers’ UNI tokens to vote on proposals. 

Even when a proposal passes all rounds of discussion and voting, Uniswap developers might still need to actually implement it. For example, insiders once delayed the implementation of a switch fee long after it gained overwhelming approval from UNI tokenholders.

Read more: Why does a16z want to strengthen its grip on Uniswap?

Three years and 85% lower

Some UNI tokenholders have had enough. The DeFi Education Fund, which holds approximately $3 million worth of UNI, announced its intention to sell the rest of its position. More generally, investors are underwhelmed with UNI. The token has not made a new high in three years and still languishes 85% below its $44.92 all-time high.

In short, various events in Uniswap’s history show how the protocol is concerningly centralized despite its claims of decentralization. Its leaders have a history of overlooking governance votes and sending legal team after anyone who dares to fork its user interface.

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The post Is Uniswap becoming more TradFi than DeFi? appeared first on Protos.

The world’s largest so-called decentralized exchange, Uniswap, has introduced a 0.15% fee on its most popular trading pairs — a move that will not benefit UNI tokenholders. Incredibly, Uniswap Labs founder Hayden Adams claims that this new fee is separate from Uniswap Protocol’s fee switch function, which UNI token holders govern.

Aggravating UNI holders with this decision continues a long history of overlooking Uniswap’s curious coin offering.

Indeed, the price of UNI has declined 91% since its all-time high. Worse, Uniswap functioned for two years without the need for any governance token. Coinciding with a generous allocation to Adams and a group of early insiders, Uniswap oddly bolted its UNI token onto its otherwise well-functioning ecosystem on September 16, 2020.

With $3 billion in total value locked (TVL) and a #1 ranking on DEX volume leaderboards, Uniswap.org is by far the world’s most popular website to swap digital assets in a non-custodial manner. It has processed trillions of dollars worth of transactions since its inception.

Uniswap charges extra 0.15% on website, wallet

The new fee will impact trading pairs that include two of the following tokens: ETH, USDC, WETH, USDT, DAI, WBTC, agEUR, GUSD, LUSD, EUROC, and XSGD.

Swaps between stablecoins or between ether and wrapped ether will not be charged the additional fee. Furthermore, a Uniswap spokesperson told CoinDesk that she “just wanted to clarify that both the input and output tokens need to be on the list for the fee to apply (not just on one end).”

In any case, Adams’ new 0.15% fee only affects users of Uniswap’s website and wallet (API and other on-chain users can avoid it). Developers say the new fee will help sustainably fund the protocol.

He also boasted that the 0.15% fee is among the lowest for digital asset exchanges and should not reduce accessibility to Uniswap, and reassured UNI holders that the fee will fund future Uniswap-related development. 

Of course, the proceeds of the UNI token sale were supposed to fund Uniswap-related development. However, people who bought and voted with that token, despite their years of contribution, will not benefit from Adams’ new 0.15% rate.

More money for the team, not UNI holders

There were many criticisms of Uniswap’s new UNI-excluding fee with several frustrated users replying directly to Adams’ announcement.

Adam Cochran joked that UNI has become so neglected that Uniswap has basically relegated it to a meme coin: UNI in name only.

A long history of ignoring UNI holders

The Uniswap team has previously shown little regard for the results of UNI governance votes. For example, it took an extended amount of time to implement a fee switch protocol that had passed with a supermajority in every round of voting. After unexplained delays, it eventually blamed regulators.

Read more: Uniswap founder trolled for asking devs to contribute to DeFi protocol update

It doesn’t help that the voting system favors parties that can afford to snap up millions in UNI tokens, even temporarily. Binance, of course, denied using customers’ UNI holdings to vote on proposals even though it likely benefited from a vote to launch Uniswap on BNB Chain.

Although the Uniswap team will likely benefit from the new 0.15% fee on some trading pairs, UNI token holders will not see any benefits. As usual, Uniswap made a unilateral decision without asking its governance token holders first.

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Last week, Uniswap teased the fourth iteration of its decentralized exchange protocol. The tweet included a link to an early version of the code and an invitation for “community feedback and contribution.”

Since the announcement, the DeFi sector’s leading exchange has come in for criticism. Some accuse Uniswap of co-opting the open-source ethos of the community, encouraging developers to contribute to a codebase that will be released under a proprietary Business Source Licence (BSL).

Opposition came both in the form of trolling and a proposal to change the license, with Uniswap founder Hayden Adams later clarifying that “source available” would be a better description for the v4 code.

DeFi prides itself on its experimental nature which often includes projects building on top of one another, or even ‘forking’ parts of existing code for use in another application. This practice allows for a composable network of projects to capitalize on previous successes but also comes with its problems.

Read more: To fee or not to fee? That is the question — does Uniswap have an answer?

Many forks, however, bring nothing new to the table and are simply low-effort cash grabs taking advantage of others’ hard work. Those looking to make a quick buck can copy the code of a popular protocol, launch a shiny new UI and token, and rely on Ponzi mechanics to draw in users.

Forks of well-established projects often overlook key security concerns, as they are using (supposedly) safe code. Many forks have taken losses when the hastily-copied code is redeployed under different conditions or implemented in insecure ways.

While it seems doubtful that a license would be enough to put off the more determined, often anonymous grifters, the constant fork-pump-dump cycle is wearing on developers who may work for years to create a new platform, and damaging to the industry’s reputation as a whole.

Adams characterizes his situation as being stuck between a rock and a hard place, unable to please both the ideologues and pragmatists.

While the Uniswap v4 proposal may be taking flak from the open-source community, many other leading DeFi protocols operate under the same BSL setup.

However, Uniswap’s suggestion that developers collaborate was seen as disingenuous, and especially grating against the backdrop of repeated attempts to turn on a revenue-sharing ‘fee switch,’ which have been voted down by VC-dominated UNI governance.

In an industry that is becoming gradually more businesslike, the pressures of large quantities of VC money are starting to show. A similar episode occurred in November when Ethereum client Akula wound down in the face of alleged copy-paste competition from Paradigm.

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The Uniswap governance forum is once again debating whether to activate the protocol’s ‘fee switch,’ which would finally see revenue accruing to DeFi’s leading decentralized exchange.

This isn’t the DAO’s first attempt to utilize the feature, with previous efforts hampered by regulatory concerns.

Currently, traders’ swap fees go directly to the liquidity providers (LPs) who supply pooled tokens necessary for trading. LPs can choose to deposit into pools with fee tiers of between 0.01% and 1% in Uni V3, or a flat 0.3% in Uni v2. The fee switch would siphon off some of these fees, returning them to Uniswap itself.

The protocol currently makes no revenue despite daily volumes which routinely top $1 billion and a total value locked (TVL) of more than $4 billion across six blockchains.

Read more: How Uniswap’s voting system is unfairly favoring the richest token holders

This latest proposal, authored by GFX Labs, was brought to the DAO governance forums on May 10. The suggestion is to activate the switch with a fifth of swap fees being rerouted, though exact amounts remain up for discussion.

Weighing the pros and cons

Benefits of the move include bolstering and diversifying the project’s treasury, which is entirely made up of the UNI tokens allocated to it at launch. While the DAO holds one of the DeFi’s largest treasuries, the dual benefit of covering expenses via fees, whilst not diluting the token’s circulating supply, would ensure that Uniswap remains well funded into the future.

Future benefits could also include the distribution of protocol revenues to UNI holders, though this would require its own governance debate.

Pushback against the initiative has focused on a variety of points. These range from its potential to diminish Uniswap’s purpose as a public good, and the lack of a plan for how to use the extra funds, to simply wasting an opportunity to pump the token price whilst stuck in a bear market.

The reasoning against the proposal which has gained the most traction, however, revolves around the legal implications. Uniswap Labs, Uniswap’s legal wrapper, as well as some larger UNI holders, are based in the US, so it comes as no surprise that certain stakeholders may wish to tread carefully.

The main worry appears to be that the fee switch may incur tax obligations for the DAO (an unincorporated organization) and that any future accrual of revenue to UNI holders would equate to dividends, which would attract the attention of the SEC.

However, DAO members based outside the US have also voiced frustrations stemming from a supposedly autonomous protocol being influenced by a specific country’s regulatory environment.

With regulators out for blood in an embattled crypto industry, staying out of the limelight has so far been a priority for many of DeFi’s major players.

Past attempts have been less than successful

Previous attempts to turn on the potential revenue stream have been much-debated and, thus far, fruitless.

While both V2 and V3 contracts are immutable, their code contains the provision for on-chain governance to determine whether to collect fees, within certain bounds.

Over the past two years, there have been multiple calls to activate the fee switch, but differences of opinion on how to implement the move, as well as legal uncertainty, have ended in stalemate.

After V3’s launch in 2021, discussions began on flicking the V2 switch but fizzled out when there was no firm response regarding the legal implications.

Then, last summer, the idea of a pilot program picked up more momentum, even passing a Snapshot vote to check if there was sufficient appetite before supposedly moving to on-chain voting. However, after being postponed until December, the campaign eventually stalled in the face of uncertainties around taxes.

So, the question is, will things be different this time? Unfortunately, GFX Labs doesn’t have an answer. According to the Uniswap governance forum:

“GFX Labs is not equipped to address the regulatory implications of this proposal. While GFX Labs is based in the USA, the protocol is not based in any one country and has token holders and users globally. We encourage token holders with concerns to voice them and vote with their tokens for their desired outcome.”

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Venture capitalists at Andreessen Horowitz (a16z) could control at least 41.5 million and likely over 55 million Uniswap (UNI) tokens. Globally, there are 753.7 million circulating UNI, and if a16z does indeed hold this number of tokens, it would allow the firm to unilaterally reach quorum for voting on Uniswap proposals.

Analytics provider Bubblemaps alleges that a16z controls 11 wallets with 41.5 million UNI. That figure surpasses a critical 4% threshold of UNI’s supply for voting purposes. Additional reporting by CoinDesk increases the estimate of a16z’s holdings to above 55 million, including the firm’s delegated holdings. What’s more, a16z retains the right to revoke that delegation and resume voting control over all 55 million tokens.

Read more: Binance denies using customers’ UNI for its own Uniswap votes

The founder of 0xPlasma Labs, Ilia Maksimenka, submitted a proposal to deploy Uniswap on Binance’s BNB Chain. Ilia reasoned that deploying the decentralized exchange on BNB Chain would enable Uniswap to gain a new audience and boost DeFi adoption. That proposal quickly became hotly contested.

DeFi analytics provider Treehouse highlighted that proactively adding Uniswap to BNB Chain would give Uniswap a competitive advantage over a possible competitor forking the code when an important license expires in April 2023.

a16z used 15 million tokens to vote against the proposal. Ilia’s proposed addition of Uniswap to BNB Chain would have used Wormhole as a designated bridge instead of LayerZero Labs. a16z had previously led a $135 million funding round in LayerZero labs.

a16z’s attempt to block the proposal failed, with 65.89% of overall votes in favor of the proposed addition of Uniswap to BNB Chain. Despite its failure, it highlighted the outsized influence that investment firms could have on supposedly decentralized apps.

Indeed, even Binance CEO Changpeng Zhao (CZ) commented on the possibility that Uniswap may not be all that decentralized.

Read more: Uniswap votes to launch on Binance’s centralized BNB Chain

Delegated tokens may partially explain a16z’s failure to block the proposal. Uniswap makes it possible to delegate voting to another party. a16z had delegated about 25 million UNI to third parties that supported the proposal — likely against the VC firm’s wishes.

The failure to nix the proposal may not have sat well with a16z. Understandably, it suffered accusations of pumping UNI soon afterward. Some argued that buying pressure originated from a16z snapping up enough UNI to ensure that such an embarrassing failure doesn’t happen again.

a16z controlled 41.5 million Uniswap tokens at the time of the vote on Ilia’s proposal to deploy Uniswap on BNB Chain. It used the 15 million tokens in one of the wallets to vote against the proposal because it suggested using a competitor for one of the organizations in its portfolio.

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A temperature check vote proposing to deploy Uniswap v3 on BNB Chain has passed with over 80% of the vote. This is despite community concerns about moving the decentralized exchange (DEX) to a more centralized platform. 

However, despite the vote attracting “the biggest number [of participating wallets] for the whole Uniswap Governance History,” with just 0.1% of voting wallets making up 99% of the 24.9 million votes, Uniswap may have centralization problems of its own.

Uniswap’s v3 protocol is active on just five blockchains: Polygon, Arbitrum, Optimism, and Celo in addition to Ethereum, which contains 90% of its total value locked (TVL). This is more conservative than other popular DEXs such as Curve (12) and Sushi (23).

The move, pushed by Plasma Finance, would target the $2.45 billion TVL of BNB Chain’s current leading exchange, Pancake Swap, which is itself a fork of Uniswap’s simpler v2.

Read more: Explained: How $600M was stolen from Binance’s BNB chain

Uniswap v2 is one of the most forked protocols, with SushiSwap’s famous ‘vampire attack’ draining a large portion of Uniswap’s TVL back in 2020. To combat this, Uniswap launched v3 in the spring of 2021 under a two-year business license. On expiry, v3 code will become open-source and is likely to be forked on many different blockchains. 

Plasma Finance, which has its own Active Liquidity Management Protocol, Quadrat, operating on top of Uniswap v3, is apparently keen to establish v3 TVL on the retail-friendly BNB Chain before the forking begins.

However, it would also mean Ethereum’s most popular DEX moving to a more centralized environment. Back in October, BNB Chain demonstrated just how far removed it is from crypto’s ideals of immutability and decentralization when it paused the entire network in response to a hack.

High speeds and lower fees have made BNB Chain (previously Binance Smart Chain) a favorite among so-called ‘retail’ investors, especially during the peak of the bull market, when they were priced out of Ethereum. But, while it may be good for traders, v3 isn’t retail-friendly when it comes to providing liquidity.

Uniswap v3 allows liquidity providers to specify a price range between which they are willing to facilitate trading. However, these should be updated as prices diverge in order to remain profitable. Many retail traders simply stick to passive LPing (as on v2), which turns out to be a losing game as they received less in trading fees than they lose to so-called impermanent loss, as more sophisticated traders arbitrage price differences.

Uniswap responded with its own analysis that showed passive LPs do in fact make money. However, the query turned out to be inaccurate.

A protocol is only as decentralized as the blockchain it’s built upon. And during the past year, the perils of centralized crypto platforms have been demonstrated time and again.

While governance is set to stay on Ethereum for now, Uniswap users’ funds on the BNB Chain won’t be underpinned by the same guarantees of decentralization.

This makes the apparent desire for the move seem somewhat bizarre, given its would-be status as one of the prime examples of decentralization in the sector.

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Binance has denied allegations that it intends to use customers’ Uniswap tokens (UNI) held on its exchange for governance votes. A Binance spokesperson acknowledged that it moved 4.6 million UNI between wallets and activated its delegation, but said the reason for the transfer was misreported and it never intended to vote with the tokens.

The transfer gave Binance a chance to become Uniswap’s second-biggest voter on governance proposals.

Today, a Binance wallet holds enough UNI to give it over 13.2 million votes on DAO governance proposals. Uniswap creator Hayden Adams pointed out that Binance is Uniswap’s second-largest delegate — giving it considerable clout if it ever decides to vote on proposals. (It has never cast a vote to date.)

Binance holds 5.9% of the voting power on Uniswap. For context, the venture capital firm a16z has 6.7% and has voted on 14 proposals. Consensys previously held second place with more than 7 million votes and still sits in the top 10 delegates by vote weight with 3.145% of Uniswap’s voting power.

Adams called Binance’s clout as a rogue voter a “very interesting situation.”

How does Uniswap’s governance work?

Theoretically, anyone who owns UNI may create or vote on any proposal. Their influence is weighted based on how many UNI tokens they own.

UNI holders could designate themselves as delegates or pool their votes with other UNI token holders by selecting another entity to cast votes on their behalf. A16z votes on behalf of 42 token holders, for instance.

Voting is one thing, but actually implementing a change is another. Some users have complained that delegates might as well not bother voting on proposals because they might not get implemented anyway. Indeed, Uniswap’s developers once failed to implement a fee switch proposal that overwhelmingly passed every voting round.

The fee switch proposal proved controversial because it could attract unwanted attention from regulators. Even Hester Pierce, an SEC commissioner who champions the digital asset industry among regulators, warned that a “decentralized in name only” organization could attract SEC enforcement action.

For example, one UNI token holder described a fee switch proposal that would likely gain overwhelming popular support yet would almost certainly not be implemented due to Uniswap insiders who don’t want to violate SEC regulations.

Binance UNI wallet action misunderstood

Naturally, Binance received backlash over its movement of UNI tokens. Media reported the idea that it might use its customers’ UNI to establish itself as Uniswap’s second-largest delegate. Shortly after the movement of UNI, Hayden Adams called on Binance CEO Chengpeng Zhao (CZ) to clarify his intentions.

Some people theorized that Binance planned to use its clout to convince Uniswap to support Binance’s BNB Smart Chain. However, a proposal to that effect hasn’t shown up on a list of upcoming Uniswap votes.

A Binance spokesperson told CoinDesk, “We’re currently in discussions to improve the process to prevent any further misunderstandings from happening again.”

Replying to Hayden Adams, Binance said it merely transferred 4.6 million UNI tokens between internal wallets. It claimed this transfer somehow automatically triggered the wallet’s “designate” status for Uniswap governance voting. Binance said it was currently disarming the wallet with the Uniswap team’s support.

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