Why Uniswap liquidity providers say the protocol fee switch ‘can’t work’

Liquidity providers (LPs) are now concerned over Uniswap’s fee switch across the Robinhood Chain and the DEX’s other V4 versions across other networks. 

The latest fee switch was activated on Monday, the 27th of July. Experts now claim that those who provide liquidity in V2 and V3 will see up to a 25% haircut. For those in V4, the shared profits can be cut by up to 33%, mainly for Uniswap [UNI] buyback and burn. 

According to some LPs like Guil Lambert, the new fees ‘structurally can’t work,’ pressing his colleagues to explore better yield opportunities. 

The fee switch is live on all UniV4 pools. LPs now pay 10- 25% of fee revenues to the protocol. I’ll keep being an LP, but providing liquidity as usual structurally can’t work, to be honest.

Aerodrome Finance’s Alexander Cutler jumped on the opportunity to woo disgruntled Uniswap LPs back to their DEX, which is on Base.  

Are Uniswap fees ‘horrible’ or good for UNI?

For his part, analyst KoolKrypto called the entire Uniswap protocol fee switch ‘horrible’ for LPs. In fact, he projected that the LPs will likely move to Aerodrome and other competitors. 

According to him, Uniswap LPs were not profitable even before the fee switch went live. As a result, the new fee cuts will worsen the situation. 

It will not be optimal or even viable to provide liquidity on most pairs for Uniswap going forward. The relative success of the Robinhood chain launch might have provided a small bump, but Uniswap’s business model is unsustainable, and I expect it to start melting away from here.

Worth noting that since Uniswap’s debut, LPs have been the ones collecting the generated trading fees, with zero going to protocol revenue.

Last year, the fee switch was activated. A percentage of the generated fees is set aside for UNI buybacks and burn while LPs pocket the rest. So far, Uniswap has generated nearly $6B in fees but only collected $27 million in revenue since 2020. 

In fact, the latest fee switch plan was announced about three weeks ago. Apart from Guil Lambert and a few others, who complained that the fee switch would make Uniswap V4 uncompetitive, most LPs didn’t voice major concern.

In fact, the proposal got an overwhelming 97% support with only 2.7% voting against it. However, whether the critics’ concerns, like uncompetitiveness or LPs’ migration to rivals, will emerge remains to be seen. 

Final Summary

• Uniswap LPs warned that the recent fee switch on Robinhood Chain and other networks will force them to migrate to rivals.
• Liquidity providers have collected $6B of generated Uniswap fees since 2020, but some claim they have been mostly unprofitable.