In the 1990s, General Electric was sometimes referred to as “the most important stock in the world” because it had a little bit of everything: It was an industrial/consumer/financial powerhouse with exposure to nearly every corner of the economy.
“Yet if we have learned one thing from the history of invention and discovery, it is that, in the long run — and often in the short one — the most daring prophecies seem laughably conservative.”
— Arthur C. Clarke
Flipping the Switch on DeFi’s Future
In the 1990s, General Electric was sometimes referred to as “the most important stock in the world” because it had a little bit of everything: It was an industrial/consumer/financial powerhouse with exposure to nearly every corner of the economy.
GE results were typically early on the earnings calendar, so, four times a year you'd get an indication of how hundreds of other companies may have fared. And the forward-looking statements from management were considered a leading indicator for the economy as a whole.
Regard for GE’s management was so high that the stock consistently traded at a large premium to its sum-of-the-parts. That’s no longer the case, following its long, slow decline into the afterthought it’s become today.
It turns out that doing a little bit of everything is not a great business model, so, there are no real successors to GE’s status as the “most important stock in the world.”
We do, perhaps, have a worthy successor in crypto, however: Uniswap is exposed to nearly every major theme in digital assets, which makes it, in my mind at least, “the most important altcoin in the world.”
Open Questions
There are no quarterly earnings reports in crypto and therefore no need for a GE-like tell on how protocols are doing.
There are, however, a lot of open questions in DeFi, and Uniswap is at the center of many of them.
Are protocols companies? Do crypto businesses have moats? Do governance tokens have value?
Uniswap is often cited as Exhibit A in these first-principles debates on digital assets.
We don’t seem to have made much progress on those this year, but that could be about to change: If Uniswap token holders vote to flip the fee switch, we will soon have a lot of new information to go on.
Flipping the switch would redirect a portion of Uniswap's fees to its treasury — which is to say, Uniswap would, for the first time, keep some of the revenue it generates, instead of passing it all through to liquidity providers.
Blockworks analyst Matt Fiebach told me “turning on the fee switch is an unprecedented experiment in token value accrual and DAO governance. Whether the exchange can maintain dominance, how the revenue will be utilized/flow back to UNI's price, and potential regulatory concerns will set the stage for the future of DeFi tokenomics.”
Let’s look at some of the big questions this unprecedented experiment might get us closer to answering.
Can crypto protocols have moats?
Being open source, it’s difficult, if not impossible, for protocols to develop sustainable business moats.
Can copy/paste-able software have any value to investors? We may find out if Uniswap turns on the fee switch.
Profit margins are already razor thin for liquidity providers (LPs). If a portion of those margins gets redirected to Uniswap’s treasury, the LPs may leave, endangering the protocol.
A business that can’t collect fees is a business without a moat.
Are protocols companies?
The debate around the UNI fee switch seems not to be "should we turn it on?" but “can we turn it on?”
To me, that implies token holders want Uniswap to be a business.
Or, at least, that token holders recognize the protocol needs to generate revenue as if it’s a business.
But maybe it can't.
In which case, the value of UNI tokens may come into question.
Do governance tokens have value?
The UNI token currently has a market capitalization of $8.6 billion.
A large portion of that is presumably predicated on the assumption that governance rights will allow token holders to someday pay themselves a return.
If the fee switch fails, that assumption will be challenged — we may then get to see how the market values a pure governance token.
Do governance tokens have value if fees can never be paid out?
There is presumably some value to having governance rights over a fee-generating protocol, even if none of those fees will ever be paid to token holders.
In the case of Uniswap, at least, there would surely be enough vested interest in how a foundational DeFi lego is governed to give the governance token value.
A house can only have one foundation, however, so I’m not sure how much value the rest of the DeFi governance legos would have.
Do protocols need tokens?
A failed fee switch experiment would suggest Uniswap does not.
But most others likely do.
If they can’t pay devs and/or token holders with fees earned, DeFi protocols will have to get creative with tokenomics.
(Let’s hope that doesn’t mean more Curve/Convex veTokens — those things make my head hurt.)
Is UNI a security if the fee switch gets turned on?
If UNI sends fees to its treasury, it becomes a debate over the "effort of others" clause of the Howey test.
Uniswap is better placed than most cryptos in that the operational versions of their protocol (V2 and V3) are genuinely just software running on its own in the cloud — no management required.
But the SEC would likely point to V4, still in development, and argue the value of the UNI token is contingent on the efforts of its developers.
If so, it would set a high bar for the rest of DeFi to try to avoid the security label.
Rethinking Things
It's often said Uniswap fees will go to zero because that's what always happens in TradFi.
But Uniswap is already there in the sense that all fees get passed through to liquidity providers.
The fee-switch experiment is about whether a protocol can sustainably function when fees are not zero.
In the case of Uniswap, I think the answer is yes.
Uniswap is an exchange, not a broker. Nasdaq, NYSE and other exchanges are immensely valuable despite charging near-zero fees — they monetize in other ways, like selling data and licensing their brands.
I expect Uniswap could do something similar: They are already being offered as much as $25 million to deploy on L2s — a measure of their foundational value to DeFi.
ARK Invest’s Brett Wilson said on Empire that he sees decentralized exchanges doing $15 trillion of volume by about 2026.
If that daring prophecy is even half-right (let alone conservative, per Arthur C. Clarke), UNI will have value, irrespective of how the fee switch experiment plays out.
But it’s not just about Uniswap: If the fee switch fails, the rest of DeFi may have to rethink some first-principle assumptions about the future.
