{"id":21209,"date":"2025-02-17T16:00:00","date_gmt":"2025-02-17T14:00:00","guid":{"rendered":"https:\/\/forklog.com\/en\/decentralisation-on-hold-will-defi-tokens-pay-dividends\/"},"modified":"2025-02-17T16:00:00","modified_gmt":"2025-02-17T14:00:00","slug":"decentralisation-on-hold-will-defi-tokens-pay-dividends","status":"publish","type":"post","link":"https:\/\/forklog.com\/en\/decentralisation-on-hold-will-defi-tokens-pay-dividends\/","title":{"rendered":"Decentralisation on hold: will DeFi tokens pay dividends?"},"content":{"rendered":"<p>In 2024, the DeFi sector\u2019s <span data-descr=\"total value locked\" class=\"old_tooltip\">TVL<\/span> doubled to more than $120bn, marking a <a href=\"https:\/\/forklog.com\/en\/news\/bear-market-consolidation-and-a-renaissance-defi-in-2024\">renaissance<\/a> for the industry. A change of guard in the White House eased regulatory pressure rooted in the <a href=\"https:\/\/forklog.com\/en\/news\/uniswap-labs-urges-sec-to-reconsider-potential-lawsuit\">notion<\/a> that tokens are securities. Against that backdrop, protocol teams revived discussions about the <span data-descr=\"in some publications\u2014revenue switch\" class=\"old_tooltip\">fee switch<\/span>\u2014a revenue-sharing mechanism that would pay dividends to DeFi-token holders. <\/p>\n<p>This ForkLog piece explains how the concept works and why company leaders keep delaying its implementation.<\/p>\n<h2 class=\"wp-block-heading\">How the fee switch works<\/h2>\n<p>The fee switch is a mechanism through which a DeFi protocol shares part of its profits with holders of the native token.<\/p>\n<p>Revenues for the main DeFi lines\u2014<span data-descr=\"decentralised exchange\" class=\"old_tooltip\">DEX<\/span> and lending platforms\u2014are generated from user fees. In most protocols, a significant share is directed to liquidity providers (<span data-descr=\"liquidity provider\" class=\"old_tooltip\">LP<\/span>). <\/p>\n<p>A fee switch means the platform\u2019s stewards withhold a slice of income previously sent to LPs and pass it to token holders. Stakers of the native token and governance participants thus gain additional financial upside for voting or delegating that right. <\/p>\n<p>Fee switches could address several problems with DeFi tokens at once:<\/p>\n<ul class=\"wp-block-list\">\n<li><em>adequate valuation.<\/em> Linking token market prices to real operating metrics makes them more appealing to long-term investors and curbs purely speculative moves;<\/li>\n<\/ul>\n<ul class=\"wp-block-list\">\n<li><em>escaping inflation.<\/em> The mechanism tackles a problem of the previous DeFi cycle\u2014capitalisation dilution from constant token issuance to reward participants. The inflationary model later depressed asset values. The new approach favours more active buybacks and burns, lifting value by scarcity rather than quantity;<\/li>\n<\/ul>\n<ul class=\"wp-block-list\">\n<li><em>gives tokens utility value.<\/em> They would provide not only governance rights and access to services, but also automated reward mechanics for staking and other interactions with the protocol.<\/li>\n<\/ul>\n<h2 class=\"wp-block-heading\">How major DEXs resist the fee switch<\/h2>\n<p>On 23 February 2024 the largest DEX, Uniswap, once again <a href=\"https:\/\/forklog.com\/en\/news\/uni-surges-55-following-proposal-to-share-fees-with-holders\">published a proposal<\/a> to redistribute protocol fees to UNI holders. In the 1\u20136 March \u201ctemperature check\u201d, an overwhelming majority <a href=\"https:\/\/snapshot.box\/#\/s:uniswapgovernance.eth\/proposal\/0xad7e3612d11d56b21f0b2274e4ce825163bc1873d0e2ef809a3a98733df992a7\">expressed support<\/a> for the fee switch.<\/p>\n<p>A final vote was set for 31 May 2024, but on the day the leadership cancelled it, saying:<\/p>\n<p><em>\u201cOver the past week, a stakeholder raised a new issue related to this work that requires additional diligence on our part. Because of the [\u2026] sensitivity of the proposed update, we made the difficult decision to postpone the vote.\u201d<\/em>  <\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">Last week, we announced that the first proposal to activate Uniswap Protocol Governance would be deployed onchain today. Over the last week, a stakeholder raised a new issue relating to this work that requires additional diligence on our end to fully vet. Due to the immutable\u2026 <a href=\"https:\/\/t.co\/g35pKG4UTA\">https:\/\/t.co\/g35pKG4UTA<\/a><\/p>\n<p>\u2014 Uniswap Foundation (@UniswapFND) <a href=\"https:\/\/twitter.com\/UniswapFND\/status\/1796590521072119927?ref_src=twsrc%5Etfw\">May 31, 2024<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<p>The community was unhappy. For example, crypto researcher Gabriel Shapiro said UNI token holders were being made \u201csecond-class citizens\u201d.<\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">token holders do not want to be second class citizens<\/p>\n<p>they want full alignment with the team, they want DAO politics done in public <\/p>\n<p>the excuse was always &#8216;securities law issues&#8217; \u2014but this would never make sense, why would securities law issues (designed to protect investors)\u2026 <a href=\"https:\/\/t.co\/ONuX3YLwPP\">https:\/\/t.co\/ONuX3YLwPP<\/a><\/p>\n<p>\u2014 _gabrielShapir0 (@lex_node) <a href=\"https:\/\/twitter.com\/lex_node\/status\/1797610459815682308?ref_src=twsrc%5Etfw\">June 3, 2024<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<p>By February 2025, Uniswap\u2019s fee-switch proposal had been rejected three times. According to <a href=\"https:\/\/oakresearch.io\/en\/analyses\/innovations\/fee-switch-game-changer-for-defi\">OAK Research<\/a>, wallets of major players\u2014the fund <span data-descr=\"Andreessen Horowitz\" class=\"old_tooltip\">a16z<\/span> and the protocol\u2019s founder, Hayden Adams\u2014were decisive, voting \u201cagainst\u201d and citing regulatory risks.<\/p>\n<p>In 2024 the platform indeed <a href=\"https:\/\/forklog.com\/en\/news\/secs-allegations-against-uniswap-spark-defi-community-backlash\">received notices<\/a> from the <span data-descr=\"US Securities and Exchange Commission\" class=\"old_tooltip\">SEC<\/span> and <a href=\"https:\/\/forklog.com\/en\/news\/cftc-fines-uniswap-labs-175000\">paid a fine<\/a> in a case brought by the <span data-descr=\"US Commodity Futures Trading Commission\" class=\"old_tooltip\">CFTC<\/span>. That may not be the only reason its leaders are avoiding dividend payouts to token holders. Governance remains rather centralised: according to <a href=\"https:\/\/dune.com\/KARTOD\/Uniswap-governance\">Dune<\/a>, only about 4.5% of UNI holders vote. <\/p>\n<p>OAK Research says that of the 30 largest delegates, 14 skipped the ten most recent votes and only seven authored even one proposal.<\/p>\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh7-qw.googleusercontent.com\/docsz\/AD_4nXf13fsa3snpyFVGaj8GzkLugOQwcx7YR_wdcjdjBCi0eryswjYomsSBMi2bEuOozCDNcFTLozHDocz0ny_KnuiurM3ibt8TkeLkmBNCIM-6xsadmXqEbhxlOtsll9HIc2qRK4wI?key=6aAcxL9mQG-Ah6kbtejD5Kar\" alt=\"Decentralisation on hold: will DeFi-protocol tokens pay dividends?\"\/><figcaption class=\"wp-element-caption\">Number of UNI holders and their voting activity. Source: <a href=\"https:\/\/dune.com\/KARTOD\/Uniswap-governance\">Dune<\/a>.<\/figcaption><\/figure>\n<p>Anders Helseth of K33 Research thinks UNI holders are unlikely to get a fee switch, and liquidity providers will keep winning the fight for trading fees. A large share of tokens sits with big investors who have little incentive to change the tokenomics.<\/p>\n<p>Another heavyweight\u2014second by TVL on <a href=\"https:\/\/defillama.com\/\">DeFi Llama<\/a>\u2014is Aave.<\/p>\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh7-qw.googleusercontent.com\/docsz\/AD_4nXfGaqTTtMzHCPa-5qFPr4oeXu7ZjBr9nM3QOjzCP9JTZpECHeBbKb8pAGO0TxeIyd9zLSmiQDfo_cwlxZ228_sCSl6zq-nD61F2DpzxujBCPVds74i8LKvw6L3KmSC401zEaUd9dg?key=6aAcxL9mQG-Ah6kbtejD5Kar\" alt=\"Decentralisation on hold: will DeFi-protocol tokens pay dividends?\"\/><figcaption class=\"wp-element-caption\">Top DeFi protocols by TVL. Source: <a href=\"https:\/\/defillama.com\/\">DeFi Llama<\/a>.<\/figcaption><\/figure>\n<p> The team behind the largest decentralised lending protocol <a href=\"https:\/\/forklog.com\/en\/news\/aave-token-surges-amid-protocol-economic-changes\">launched<\/a> a \u201ctemperature check\u201d in July 2024 for a new initiative to redistribute transaction fees.<\/p>\n<p>The \u201cbuy and distribute\u201d mechanism would direct part of revenues to buy AAVE on the secondary market for subsequent distribution to stakers.<\/p>\n<p>On 4 January 2025, project head Stani Kulechov, responding to news of a nearly formed $100m fund, posted on X: \u201cFee switch incoming.\u201d <\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">Fee switch incoming. <a href=\"https:\/\/t.co\/Rk5oMGg1Ch\">https:\/\/t.co\/Rk5oMGg1Ch<\/a><\/p>\n<p>\u2014 Stani.eth (@StaniKulechov) <a href=\"https:\/\/twitter.com\/StaniKulechov\/status\/1875534641496780836?ref_src=twsrc%5Etfw\">January 4, 2025<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<p>The experience of the sector\u2019s biggest names shows the obstacles DeFi must clear to reach genuine decentralisation. Yet after the change in the White House, protocol teams will likely vie to adopt new narratives, which may ultimately push them to upgrade.<\/p>\n<h2 class=\"wp-block-heading\">Early movers and newcomers<\/h2>\n<p>The fee-switch idea is not new, and while large protocols keep failing votes to adopt it, more modest projects have been using it for over five years.<\/p>\n<p>Among the first was Synthetix. The team <a href=\"https:\/\/blog.synthetix.io\/synthetix-2019-road-map\/\">proposed<\/a> sharing revenue with holders of the SNX token back in 2019. In 2020 the protocol moved to decentralised governance. Early in 2023 it deployed its third version, and by year-end scrapped SNX\u2019s inflationary model.  <\/p>\n<p>According to <a href=\"https:\/\/defillama.com\/fees\">DeFi Llama<\/a> on 17 February 2025, holders\u2019 daily profits were about $2,500.<\/p>\n<p>Another of DeFi\u2019s \u201cancients\u201d, SushiSwap\u2014a decentralised exchange spun out of Uniswap\u2014managed in 2020 to poach roughly 70% of its parent\u2019s liquidity via a \u201cvampire attack\u201d. The fork offered high liquidity-mining rewards to holders of the SUSHI token. <\/p>\n<p>Uniswap soon won its users back, while SushiSwap struggled for years with a poorly designed security set-up. At the time of writing, <a href=\"https:\/\/defillama.com\/fees\">daily income<\/a> for SUSHI holders is around $2,550.<\/p>\n<p>Some DEXs use a game-theory-inspired escrow mechanism\u2014ve(3,3). It lets participants lock tokens in exchange for a wrapped version with a ve prefix.<\/p>\n<p>The model usually combines three interdependent mechanics: buying and staking the token; locking it into a ve version; and freely selling the native coin into the market. If the first two exceed the last, the system benefits.   <\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">Staking = purchasing project tokens and staking them.<\/p>\n<p>Bonding = exchanging other tokens (such as DAI or LP tokens) for \ud835\ude03\ud835\uddf2\ud835\ude00\ud835\ude01\ud835\uddf2\ud835\uddf1 project tokens at a \ud835\uddf1\ud835\uddf6\ud835\ude00\ud835\uddf0\ud835\uddfc\ud835\ude02\ud835\uddfb\ud835\ude01\ud835\uddf2\ud835\uddf1 price.<\/p>\n<p>Selling = selling project tokens on the market.<\/p>\n<p>\ud83e\uddf5 4\/15 <a href=\"https:\/\/t.co\/QUxzZG6TWi\">pic.twitter.com\/QUxzZG6TWi<\/a><\/p>\n<p>\u2014 Stacy Muur (@stacy_muur) <a href=\"https:\/\/twitter.com\/stacy_muur\/status\/1668289975065124864?ref_src=twsrc%5Etfw\">June 12, 2023<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<p>In August 2023, the DEX Velodrome Finance launched a fork on the Base layer-2. The venue, Aerodrome, <a href=\"https:\/\/forklog.com\/en\/news\/base-networks-tvl-surpasses-2-billion\">captured<\/a> a significant share of liquidity on the network. The fork adopted the governance system and tokenomics. <\/p>\n<p>At Aerodrome, ve(3,3) works as follows:<\/p>\n<ul class=\"wp-block-list\">\n<li><em>trading fees.<\/em><strong> <\/strong>Each transaction generates fees that are redistributed to liquidity providers in proportion to their pool share;<\/li>\n<\/ul>\n<ul class=\"wp-block-list\">\n<li><em>incentive tokens. <\/em>Distribution of the native token AERO in certain pools spurs liquidity provision. Rewards are calculated based on the amount of liquidity supplied and the length of participation;<\/li>\n<\/ul>\n<ul class=\"wp-block-list\">\n<li><em>locking AERO for veAERO. <\/em>The system encourages long-term staking and governance, reduces sell pressure and optimises yields.<\/li>\n<\/ul>\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh7-qw.googleusercontent.com\/docsz\/AD_4nXeAV5Zx_RTNzSeT7hk67F7RFBvK9jz1dt_l4qv9AZdyJwgfbQjqwgVWcYsSAr_zuVx-LjEE0bdnwaRshaKR0ztrYPl_hBdeUWrba2J3bAcLlIrljco4vbKswwgg_dIKVoBeXN91Eg?key=6aAcxL9mQG-Ah6kbtejD5Kar\" alt=\"Decentralisation on hold: will DeFi-protocol tokens pay dividends?\"\/><figcaption class=\"wp-element-caption\">Top DeFi protocols by the profits paid to token holders. Source: <a href=\"https:\/\/defillama.com\/fees\">DeFi Llama<\/a>.<\/figcaption><\/figure>\n<p>PancakeSwap\u2014a popular exchange and a top-three payer to holders\u2014uses a model built on staking CAKE. Earnings accrue in a wrapped form, veCAKE.<\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">2\/3 \ud83d\uddf3\ufe0f veCAKE holders, have you voted on the new Gauges contract?<\/p>\n<p>\u2705Voting on the new contract is mandatory! <\/p>\n<p>\ud83d\ude0eSee how: <a href=\"https:\/\/t.co\/K0ZVDqer04\">https:\/\/t.co\/K0ZVDqer04<\/a> <a href=\"https:\/\/t.co\/YR9z5v36Fw\">https:\/\/t.co\/YR9z5v36Fw<\/a><\/p>\n<p>\u2014 PancakeSwap (@PancakeSwap) <a href=\"https:\/\/twitter.com\/PancakeSwap\/status\/1874759766217744588?ref_src=twsrc%5Etfw\">January 2, 2025<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<h2 class=\"wp-block-heading\">Politics nudges decisions<\/h2>\n<p>Over the past two years, the <span data-descr=\"US Securities and Exchange Commission\" class=\"old_tooltip\">SEC<\/span> has tightened oversight of the blockchain industry, classifying many digital assets as securities. Enabling a fee switch could lead to similar treatment of DeFi tokens, implying compliance with strict rules\u2014or fines.<\/p>\n<p>With Mr Trump\u2019s team in office, the mood has changed markedly. In one speech while still a vice-presidential candidate, JD Vance criticised the SEC\u2019s approach to crypto regulation, in particular its designation of utility tokens as securities. He urged the Commission instead to focus on meme coins, whose numbers are swelling and whose status needs defining.<\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">\ud83d\udc40\ud83d\udc40\ud83d\udc40 NEW VIDEO<br \/>Ohio Senator JD Vance on Gensler:<\/p>\n<p>He is way way way too political in his regulation of securities.  <\/p>\n<p>He has it backwards when wanting to ban useful tokens and seemingly not caring about those without specific utility.  <\/p>\n<p>Sen. Vance sees blockchain as key to\u2026 <a href=\"https:\/\/t.co\/yKoNmk4Bm4\">pic.twitter.com\/yKoNmk4Bm4<\/a><\/p>\n<p>\u2014 Bill Hughes \ud83e\udd8a (@BillHughesDC) <a href=\"https:\/\/twitter.com\/BillHughesDC\/status\/1762547166348775770?ref_src=twsrc%5Etfw\">February 27, 2024<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<p>On 12 February 2025, SEC commissioner and \u201ccrypto mom\u201d Hester Peirce sought to reassure meme-coin fans. She thinks this asset class is unlikely to attract the agency\u2019s attention.<\/p>\n<p>In March 2024, experts at Bernstein <a href=\"https:\/\/forklog.com\/en\/news\/bernstein-analysts-predict-a-big-bang-in-the-defi-sector\">said they were confident<\/a> that regulators would \u201cchange their narratives\u201d on tokens often branded as securities. They expect DeFi to recover faster.<\/p>\n<p>After the Uniswap and Aave cases and a softer regulatory stance, many in the industry began actively discussing flipping the fee switch. We will see how protocol teams balance their own revenues, those of liquidity providers and those of holders. <\/p>\n<p>If the rules do turn more favourable, that could spark a fresh wave of interest in DeFi and encourage widespread adoption of the mechanism.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In 2024, the DeFi sector\u2019s TVL doubled to more than $120bn, marking a renaissance for the industry. A change of guard in the White House eased regulatory pressure rooted in the notion that tokens are securities. Against that backdrop, protocol teams revived discussions about the fee switch\u2014a revenue-sharing mechanism that would pay dividends to DeFi-token [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":21208,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"select":"","news_style_id":"","cryptorium_level":"","_short_excerpt_text":"","creation_source":"","_metatest_mainpost_news_update":false,"footnotes":""},"categories":[1144],"tags":[130,1093,787,1258],"class_list":["post-21209","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-longreads","tag-decentralization","tag-defi","tag-dex","tag-tokenomics"],"aioseo_notices":[],"amp_enabled":true,"views":"46","promo_type":"","layout_type":"","short_excerpt":"","is_update":"","_links":{"self":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/21209","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/comments?post=21209"}],"version-history":[{"count":0,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/21209\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/media\/21208"}],"wp:attachment":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/media?parent=21209"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/categories?post=21209"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/tags?post=21209"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}