Uniswap decided to decentralize its protocol governance to compete with the Sushiswap fork, but a new report suggests protocol control will remain centralized for quite a while.
Crypto research firm Glassnode suggested in a Sept. 24 report that Uniswap’s governance decentralization will be for appearances only. In the paper, Glassnode explains that Uniswap’s UNI governance token was introduced as an answer to Sushiswap’s SUSHI governance token.
The issuance of the decentralized finance (DeFi) token is presumably a measure meant to ensure that the original protocol remains competitive against its newer fork. Still, the report claims that Uniswap’s
“transition toward token-based governance via the UNI token falls far short of true decentralization, at least for the foreseeable future.”
The problem is that the only account with sufficient UNI tokens to submit a governance proposal—other than the Uniswap team and investors, who have pledged not to—is leading cryptocurrency exchange Binance.
As Modern Consensus recently reported, top cryptocurrency derivatives exchange OKEx has launched a full suite of trading products for UNI. Commenting on the listing, the exchange’s CEO Jay Hao said Uniswap was “the DeFi protocol with the most locked value and one of the largest DEXs in the space, solving the major problem that DEXs had with liquidity and also becoming a respected platform on which new, up and coming DeFi projects reach the market.”
Uniswap token distribution is to blame
Glassnode explains that Uniswap launched its UNI token via a community airdrop and liquidity mine, which started on Sept. 18, with an initial total supply of one billion units. Of those tokens, 15% were distributed to the community via airdrop, with the remaining 45% scheduled to be distributed over four years.
Of that, just over 10% is devoted to historical users, with any wallet that used the system before Sept. 1 having the right to claim 400 UNI tokens—worth nearly $2,000 at press time.
Furthermore, just under 5% is allocated to historical liquidity providers and a tiny 0.02% can be claimed by historical users of the Socks Exchange.
An additional 2% of UNI will be distributed at this time to community members through the liquidity mining mechanic
All of this boils down to 40% of the tokens being distributed among team members, investors and advisors.
Glassnode pointed out that the “Uniswap team and investors have allocated themselves an immense proportion of the total supply of UNI tokens.” The report suggests that this is a major problem:
“The pie chart feels more reminiscent of a 2017-style ICO than a 2020-style fair launch… This method of storing the tokens gives the Uniswap team and investors what essentially amounts to admin rights over the protocol.”
That is 40% of the total supply of the tokens, while the current circulating supply is far lower than 100%. Furthermore, while those tokens have a supposed vesting period of four years, the exact vesting schedule has not been made public, and the tokens appear to be fully liquid.
Nor is there a special-purpose smart contract that ensures that the vest period is respected as the tokens are held in a normal address and could be potentially used to vote on governance proposals. Glassnode does point out that Uniswap has pledged to “not participate directly in governance for the foreseeable future.”
If the team plays by the rules, there’s always Binance
Still, even if the team members decide to play by the rules, crypto exchange Binance could take hold of the protocol’s governance. The exchange’s address is the only one that holds enough liquid UNI to submit a governance proposal, with a balance of about 26 million tokens.
As a consequence Binance—a centralized exchange and direct Uniswap Competitor—will be the only entity able to control the UNI tokens held in the treasury, equivalent to 43% of the total supply. Glassnode suggests:
“Of course, if it decided to participate at all, Binance couldn’t be expected to create proposals that benefit Uniswap… Unless someone can lobby 10 million UNI worth of delegated voting power and at least 40 million votes, community-led governance is essentially impossible for the time being.”
It’s worth noting that Binance—along with Huobi—was one of the exchanges that voted its stored STEEM tokens to allow Tron CEO Justin Sun to seize control of the protocol during a fight with its community governance team.
That said, it must also be noted that Sun tricked Binance and Huobi by claiming that a hack of STEEM was underway—a move that angered Binance CEO Changpeng “CZ” Zhao.
The next day, Binance reversed its vote, with Zhao issuing what amounted to an apology on Twitter, citing his own poor oversight and a “[m]communication/upgrade rubber stamp.”
Binance, he promised, “had no interest in chain governance.”
He added, “We stay neutral.”