Uniswap fee distribution incentive could bode well for Ethereum-based tokens

• Uniswap approved its fee distribution incentive on Sunday following a proposal by the Foundation.
• Setting the pace for other protocols, Uniswap’s move could kickstart the next big narrative for ETH-based DeFi, DEXes and LSDs.
• ETH-based tokens are positioned to benefit, with DeFi, DEX coins likely to take prominence as Ethereum price extends past $3,000.

Uniswap (UNI) a decentralized protocol, recently passed the fee switch proposal, proposing that UNI token holders who have delegated and staked their tokens will be rewarded or rather, incentivized. The proposal was conceived in the Summer of 2022.

Also Read: UNI price drops over 10% as Uniswap DEX switches on their fee distribution incentive

Uniswap passes fee distribution incentive, possible implications

After around 14 months since the Uniswap Foundation posted an article playing the devil's advocate with legal issues in approving its fee switch proposal, the protocol finally followed through this past weekend. Despite articulating in the article that it did not want trouble, having acknowledged the “regulatory and private litigation climate for DeFi in the US,” the proposal passed in the end.

Among the statutes of the implementation of the proposal include the following, citing the official blog.

1. Upgrade Uniswap Protocol Governance to enable the permissionless and programmatic collection of protocol fees
2. Distribute any protocol fees pro-rata to UNI token holders who have staked and delegated their votes
3. Allow for governance to continue to control core parameters: which pools are charged a fee, and the magnitude of the fee

Staking UNI and getting protocol fees as a reward is almost tantamount to being a real shareholder of Uniswap DEX. Nevertheless, it marks an inadvertent move to poked fingers at the US Securities and Exchange Commission (SEC).

Nevertheless, the bold move has inspired many, with Frax Finance CEO Sam Kazemian saying, “We are going to follow Uniswap's lead in proposing it. It will be up to the community to pass it.” Uniswap is a potential forerunner as the decision is likely to influence other protocols to do the same. Such an outcome could kickstart the next big narrative with Ethereum-based decentralized finance (DeFi)-based DeFi, decentralized exchanges (DEXes), and Liquid Stating Derivatives( LSDs) likely to take the spotlight next.

Specifically, other networks could start distributing part of their protocol fees to stakers of their respective native tokens, allowing them to keep their utility and governance rights. Leading the chain, Ethereum protocol could reward ETH holders for staking their holdings following the chain’s migration from Proof-of-Work (PoW) to Proof-of-Stake (PoS).

Such a move could elevate stakers so that like validators, who receive a variable amount of ETH after their proposed blocks are approved, the stakers are also rewarded.

By encouraging staking through incentivization, it would bolster price increases by reducing the amount of tokens in circulation. For projects such as Ethereum, where the markets anticipate prospects of an ETH ETF, investors looking to make the most from their holdings without selling can put them to work by staking and restaking, amplifying scarcity. This could see Ethereum price extend its gains now that it has breached the $3,000 milestone.

For the layperson, staking entails depositing and locking up tokens to help validate and secure the consensus layer (the Beacon Chain for the case of Ethereum) and receive rewards for doing so.

On platforms such as liquid staking derivatives (LSDs) like Lido Finance (LDO), users can stake their ETH and receive stETH. For now, there are no fee distribution mechanisms, but if the network were to emulate the Uniswap then there would be rewards beyond the gains made when you stETH is traded or used for other DeFi applications such as lending.

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