Uniswap flips the switch: A $500 million gamble and a DeFi civil war

Author: Cathy

On November 11, 2025, DeFi giant Uniswap finally activated its long-dormant "fee switch."

The news instantly ignited the market.

Uniswap's governance token, UNI, long criticized by the community as a "worthless token except for voting," saw its price surge by nearly 40% in 24 hours. Analysts are hailing UNI's evolution from a "worthless governance token" into a "yield-generating asset" or even a "deflationary asset." CryptoQuant's CEO even predicts parabolic growth. Why was this switch stuck for two years? How profitable is this switch? How will it, through an extremely ingenious design, "inject" nearly $500 million in value into the UNI token annually?

01 Game of Thrones

To understand why it's "now," you must know how this proposal "failed seven times" over the past two years.

Although Uniswap claims to have "decentralized governance," venture capital giant Andreessen Horowitz (a16z) alone holds approximately 55 million to 64 million UNI tokens, giving them de facto "veto power." For the past two years, a16z has been the biggest obstacle to activating the fee switch. In December 2022, they personally cast 15 million negative votes, killing the proposal at the time.

Why is a16z opposed? Don't they like making money? Of course they do. But more than making money, this giant US-based VC fears one thing: legal risk. What they fear is the SEC's (Securities and Exchange Commission) "Howey Test." This is a legal constraint, one of the core criteria of which is whether investors base their profit expectations on the efforts of others. a16z's logic is simple: If the Uniswap protocol ("the other party") starts making money and distributes it to UNI holders ("investors"), this perfectly meets the definition of a "securities." Once UNI is classified as a security, a16z, as one of its largest holders, will face enormous legal and tax consequences. Therefore, the question is not "whether to open," but "how to open safely." In 2025, two key "breakthrough points" emerged: The birth of the DUNA model. Prior to the "UNIFication" proposal, a crucial "preliminary proposal" was passed in August 2025: Registering a legal entity called DUNA (Decentralized Non-Corporate Non-Profit Association) for the Uniswap DAO. This is a new type of legal structure introduced in Wyoming, a state known for its strong legal frameworks. You can think of it as a "legal bulletproof vest," specifically designed to provide "legal and tax liability protection" for DAO participants (such as a16z who voted). Interestingly, a16z itself is an active promoter of the DUNA model. Its legal experts have even publicly written that DUNA can "engage in for-profit activities," including "capturing revenue from the operation of the agreement." a16z's strategy is: "Put on the bulletproof vest (DUNA) first, then reach for the money (Fee Switch)." The favorable policy environment has brought another change: a change in US regulation. With Trump's election and the end of the era of SEC "crypto hawk" Gensler, the entire industry has entered a period of political stability. Uniswap founder Hayden Adams stated frankly in his proposal that they had "fought legal battles in the hostile regulatory environment of the SEC under Gensler" in the past few years, and that "this climate has changed in the United States." When the "bulletproof vest" is in place and the "regulatory clouds" dissipate, a16z's "veto power" naturally becomes ineffective. This power game ultimately ended with the tacit approval of VC giants. Having settled the political situation, let's look at the "protagonist" of this drama—money. What exactly did this switch turn on? It activated a massive and ingenious "value engine." The reason UNI tokens surged was because they transformed from a "useless" governance token into a "deflationary machine." The profit-making effect of this "UNIfication" proposal unfolded in two steps: Step One: "Shock Therapy," a one-time destruction of 100 million UNI tokens. The most dramatic aspect of the proposal was the one-time destruction of 100 million UNI tokens from the Uniswap vault. This represented 10% of the total supply, worth nearly $800 million at the time. The official explanation was "retroactive compensation"—if the fee switch had been turned on from the beginning, then that many should have been destroyed over the years. This was more like a clever "financial performance." It immediately created a huge "supply shock" in the market, with immediate results. BitMEX founder Arthur Hayes even compared it to a "Bitcoin halving," demonstrating its impact. The second step: the "deflationary engine," with nearly $500 million in continuous burning annually. This is the real "engine." The proposal will activate protocol fees in the v2 and v3 pools. Specifically, the total fees paid by traders (e.g., 0.3%) remain unchanged, but the revenue that originally went 100% to LPs will now be "taken" by the protocol.

• v2 Pool：Taking 1/6 of the LP fees (i.e., 0.05% of 0.3%).

• v3 Pool：Taking 1/6 to 1/4 of the LP fees, depending on the rate.

How much money is this? Based on Uniswap's nearly $2.8 billion in annualized fees, analysts estimate that this will generate approximately $460 million to $500 million in revenue annually. These revenues (potentially in ETH, USDC, etc.) will be used entirely to buy back and burn UNI tokens. This means that approximately $38 million worth of "die-hard buyers" will be continuously buying and burning UNI each month, causing it to remain deflated. You might ask: Isn't this just "dividends"? Are the legal risks of a16z a waste of time? No, this is precisely the most ingenious part of the proposal. Instead of distributing dividends, it designed a "destruction for value" mechanism, perfectly avoiding legal risks: The money earned by the protocol (ETH, USDC, etc.) goes into a contract called the "Token Jar." If UNI holders want to receive a share of the profits, they must actively destroy their UNI tokens in a contract called the "Fire Pit." In exchange for this destruction, you can take an equivalent amount of assets (ETH, USDC, etc.) from the "Token Jar." Did you understand? The protocol didn't "actively" give you money. You "actively" destroyed your own tokens to exchange for assets in the "jar." This "active" action legally distinguishes it from "passive income based on the efforts of others" (the core of the Howe Test). This is an extremely clever legal circumvention technique. 03 "DEX Civil War" The $500 million annual "deflationary engine" sounds wonderful, but here's a question: From whose pocket did this $500 million come? The answer is: Liquidity Providers (LPs). This is the dark side of the "UNIFication" proposal and the trigger for a DEX "civil war." The essence of the fee switch is a "redistribution of benefits." Traders pay the same amount, but LPs' revenue is directly slashed (from 1/6 to 1/4). LPs are the most obvious short-term losers in this reform; their revenue will genuinely decrease. This move immediately drew ridicule from competitors. The CEO of Aerodrome, a major competitor on the Base chain, publicly called Uniswap's move a "huge strategic mistake." This is not alarmist. The risk is real. A report by on-chain data analytics company Gauntlet pointed out that even a 10% increase in protocol fees could lead to a decrease in liquidity of approximately 10.7%. More extensive models predict that activating the fee switch could result in a 4% to 15% outflow of total liquidity (TVL). In the emerging battlefield of L2 (Layer 2 networks), LPs are like "mercenaries," going wherever the returns are highest. While competitors like Aerodrome are aggressively poaching talent with massive incentives, Uniswap is doing the opposite, "cutting salaries" for its limited partners (LPs). Some community members have even pessimistically predicted that, **once the switch is turned on, half of Uniswap's transaction volume on the Base chain might "disappear overnight."** So, are Uniswap's founder, Hayden Adams, and the Labs team foolish? Don't they understand that "salary cuts" will lead to LP attrition? No, they not only understand this, but it is very likely part of their plan. This "UNIFication" proposal is by no means an isolated "cost switch" proposal; it is a "combination punch." While "reducing salaries," it also provides a series of so-called "compensation measures," such as: PFDA (Agreement Fee Discount Auction): A complex new mechanism designed to "internalize MEV" (i.e., the profits of the front-running trading robot), which theoretically can bring some additional returns to LPs. V4 Hooks: Allows for "dynamic fees" or routing liquidity from other DEXs, theoretically optimizing LP returns. These fancy "compensation" measures are almost entirely unique to Uniswap V4. This is Uniswap's true "open strategy." LPs' returns in V2 and V3 pools are definitely decreasing, but the "compensation" is in V4. Uniswap Labs is using this governance proposal to create a strong economic incentive, forcing all LPs to migrate en masse from older V2/V3 versions to their latest V4 platform. They are not compensating LPs; they are "eliminating" those LPs unwilling to upgrade.

05 Summary

This shift by Uniswap marks the end of one era and the beginning of another.It completely ended the narrative of the "DeFi wild growth period" and "worthless governance tokens". It proved that protocols cannot live solely on "network effects"; they must create real "cash flow" for their "shareholders" (token holders).

This is essentially a huge gamble for Uniswap. They're betting that the new technology of V4, combined with the strong moat of their brand, will be enough to offset the 15% liquidity outflow. They are consciously sacrificing "mercenary liquidity" in exchange for "sustainable protocol profits" and "technology lock-in on the V4 platform." If they win, Uniswap will complete its transformation from a "product" to a "platform hegemon." If they lose, it will be devoured by competitors due to "strategic errors." This game has only just begun.