The Uniswap protocol is believed by many to be a model of true decentralization in DeFi. Technically speaking, Uniswap versions 1-3 do deserve this accolade.
However, Uniswap’s behavior as a company over the past 2 years raises concerns that absolutely need to be taken into consideration despite its technical benefits.
The Protocol
Uniswap has been released in three subsequent versions, which each one serving as an “upgrade” intended to replace the previous.
All versions to-date have featured immutable core logic, the only caveat being that in v3 there is a “fee switch” that can be activated by UNI tokenholders which diverts a portion of the liquidity rewards for certain pools away from liquidity providers and to a new destination (keep this in mind – it will be important in a minute).
This immutability makes Uniswap a relative rarity in the upper echelon of the DeFi ecosystem. Total immutability means that not only is the core code logic forever written on the Ethereum blockchain, but there are no variables that can be tweaked or knobs that can be turned to change the way the system works. This is a good thing for those of us who want access to trustless liquidity providing and trustless token swaps.
It’s always much easier for a dev to retain some centralized control over a smart contract and be able to fix bugs as they arise rather than deploy immutable, unchangeable code and have faith that it will work properly forever. In the DeFi space, launching immutable code takes some serious balls. For this reason, its founder has deservedly received much praise.
The Company
Uniswap was launched in 2018 by a young, upstart dev named Hayden Adams:
Uniswap’s origin story is inspiring and Hayden’s spirit at that point embodied the true spirit of decentralized development on Ethereum.
Shortly after the protocol was launched, Hayden decided to form a corporation. That’s fine. Lots of DeFi devs do this to handle liability, accounting and other key issues for their team.
But, how did we end up here just 4 years later?
From 2018 to 2022, the Uniswap company turned from a spunky little startup into a scary, TradFi-looking monster looking much more like a big bank than a decentralized unicorn startup.
The Uniswap team is now full of politicians, bankers, surveillance experts and others who have had a very clear impact on the decisions of the company.
The most obvious of these decisions was their choice to be extremely proactive when it came to blocking users from using Uniswap’s official front-end if they had even a whiff of “illegal” activity, and their decision to collect immense amounts of data from users of that same front-end.
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UNI token and VC infiltration
Along the way, Uniswap picked up a massive amount of venture capital investment from various VC firms including Andreesen Horowitz (a16z), a major player in the DeFi space. As we all know, when large VC firms invest in a DeFi protocol or app, they expect a return on their investment. This is why governance tokens exist.
So, despite the Uniswap protocol being entirely immutable and having basically nothing to govern, a decision was made to launch the UNI token in 2020. This resulted in a massive airdrop to Uniswap’s founders and VC investors.
Simultaneously, as a part of the token launch, a whopping 43% of the total UNI supply was dedicated to the UNI treasury, which would be controlled by UNI tokenholders.
Since the vast majority of UNI tokens fell into the hands of Uniswap founders and VC investors, they now controlled the massive treasury (worth $1.9 billion at the time of this post). They’ve proven this control on more than one occasion – the most obvious being the unilateral approval by a16z and its delegates of the “DeFi Education Fund” in 2021, which has turned out to be little more than a legal slush fund serving a16z’s investment portfolio.
So what?
At this point, it’s totally reasonable for you to be asking “So what? The protocol is immutable! They can hire whoever they want, but they can never change the unchangeable smart contracts. And I can just use a different front-end! Hah – joke’s on them!”
This is true. There’s nothing that these former Blackrock/Chainalysis/Fed/Obama executives can do to modify the existing smart contracts. Obviously, they were brought in to “legitimize” the company. Obviously, they’re concerned about illegal usage.
They’re blocking users from their front-end because it’s the most that they can possibly do right now. They can’t block users from the smart contracts. They’re maxing out their efforts.
Or are they?
This is where we need to be worried about Uniswap. We need to be worried about v4.
v4
This team has already proven to us that it has obliterated Hayden’s decentralized spirit from the corporation. The corporation is going to be responsible for what comes next from Uniswap. And what comes next from Uniswap will take into consideration the concerns of the new executive team.
v4 will almost certainly be regulatory-friendly. What does this mean? We’re not sure yet. But whatever it is, it will be less decentralized than v1-3. It could involve Uniswap’s core logic being manipulatable by UNI tokenholders. Or, it could involve the requirement to KYC before you can use it. I’ll review how this could be implemented in a future post, but it will likely involve limiting the “official” protocol to a Layer 2 which requires KYC to bridge into and incentivizing liquidity to move there (more on that in a moment).
“Again, so what? I can just keep using v3 or v2! They can’t force me to move to a v4 or KYC!”
This isn’t really true. Uniswap is only as good as the liquidity that’s available. If there’s no liquidity left on previous versions to conduct low-slippage swaps, then you’re not going to want to swap there.
So how will they incentivize liquidity to move to a more centralized, regulatory-compliant version of Uniswap?
That’s where their control over the treasury comes in.
The treasury
Remember that “fee switch” that we mentioned earlier? Well, it’s about to be flipped.
Instead of liquidity rewards being diverted to UNI users, as many hoped would happen, the plan is to direct the fees to the treasury. Yes, the same treasury that Uniswap founders and VC investors have proven again and again that they control with their token majorities. They want to grow it even more.
As mentioned in the post linked above, the idea of the treasury (again, currently at $1.9 billion and soon to be growing) is to be used for “public good purposes for the community and to grow the Uniswap protocol.” However, history has shown us that Uniswap’s corporation and VC investors are absolutely not above using their token majorities to spend the treasury as they wish to achieve their own business needs.
Let’s cut to the chase:
If a centralized, regulatory-compliant v4 is launched, Uniswap’s largest tokenholders (its founders and VC investors) could easily use the multi-billion dollar treasury to offer rewards designed to incentivize liquidity providers to jump through whatever regulatory hoops necessary and migrate to the new version.
Money talks and principles walk in the DeFi space. This type of a plan could act as a very effective and efficient vampire attack on the decentralized versions 1-3, giving the Uniswap corporation the appearance of making a good faith effort to bring DeFi trading activity into compliance by shifting liquidity to v4.
VC investors will make a lot more money with a regulated and compliant Uniswap protocol than they will ever make with a pirate, anti-regulation Uniswap protocol. It’s highly likely that they would favor a move toward a compliant Uniswap.
The advice
“Well, is Uniswap safe to use or not?”
Uniswap’s front-end is tracking you. If you choose to use Uniswap, you should avoid using its official front-end at app.uniswap.org or take special precautions when using it (including but not limited to using a VPN and a privacy browser like Brave).
your wallet for any prior illicit activity” and much more.
Aside from the front-end tracking, from an on-chain point-of-view, swaps and liquidity providing on Uniswap v1-3 are still safe from points of centralization.
But therein lies the irony: Uniswap v1-3 are among the most decentralized & trustless protocols in all of DeFi, while the Uniswap corporation is becoming one of the most anti-crypto and regulation-friendly organizations in all of DeFi.
It’s important that we continue to approach the Uniswap corporation (and its properties, such as the front-end) with our eyes wide open (and cookie blockers activated) and hope that principled developers in the DeFi community consider building a strong competitor that finds a way to maintain a strong commitment to decentralization before a regulated version of the Uniswap protocol sucks all key liquidity into compliance-land.
More to come on Uniswap soon. Stay tuned.