A day after Uniswap released its governance Token – UNI – the price dropped 23%. It continued to decline through Monday. Holders understood the utility of a new, small cap governance token, so they dumped their UNI. Here is why Uniswap Token price is not likely to recover.

The Wonders of a Uniswap Token

Imagine if we gave you the right to vote on the content that appears on our blog. To do so, we would airdrop tokens to our readers. Since those tokens have some kind of market value which is difficult to establish, you are better off selling them than using them.

Why on earth would you want to vote on the content we publish anyway? It is free to read and it does not yield any dividends. There are also thousands of other blogs to choose from if you want to consume a greater diversity of content.

You just got an asset for free and you can turn it into money. You are likely to dump it, especially if you cannot make a profit from holding it. The price of said asset will inevitably go down.

The same happens with Uniswap tokens:

• There are other decentralized exchanges
• They all serve the same purpose
• You derive no benefit from having a small say in what goes on with a specific exchange
• If the token does not yield any profit, you should dump it and engage in yield farming with the free money you just got – irony intended!

What does the Uniswap Token do Anyway?

UNI does not offer anything that could be attractive in the current DeFi environment:

• Its fee payout to holders – set at 0.05% – is off at the moment
• Governance structures allow those who control 1% of the tokens to submit a governance proposal
• If those holding only 4% of the total supply vote yes, the proposal passes

That is a very low threshold for a vote to pass. It favors bigger stake holders at the expense of smaller ones. Other Uniswap token characteristics are not appealing either:

• There is a 7-day voting period
• The governance structure is designed to delay execution by 2 days
• Uniswap team members will not take any legal responsibility for the consequences of those votes
• UNI holders should consult with legal experts and understand if their proposals comply with regulation before launching the proposed changes

In other words, UNI is a classic example of how to rig a system through organized lobbies that manage to hold a powerful enough minority together. The majority cannot organize properly against the lobby, but still suffers the consequences.

UNI Token Distribution

If you are part of such a governance structure just because you have swapped tokens on Uniswap before, you are heavily incentivized to dump. Your voice is unlikely to be heard, especially given the distribution of the token:

• A total of 1 billion UNI tokens will be minted
• 600 million UNI or 60% of the total, were airdropped to the community
• 21.51% are reserved for team members and future employees – due to voting threshold, this means UNI governance is not really decentralized
• 17.8% are reserved for investors – yes, Uniswap already raised $11 million USD in investment
• The rest of the tokens – about 0.07% – is reserved for advisors

This looks exactly like the distribution of an ICO back in 2017. The result should be the same: an asset that tends to depreciate.

You Want Governance? Take a Page Out of Bitcoin’s Playbook!

UNI is as similar as an ICO as its underlying governance system is different from that of Bitcoin. Why are we bringing that up? Because Bitcoin’s governance system works:

• To participate in it, you must run a Bitcoin node
• There is no financial incentive to run a node
• That also means there is no natural incentive to sell your vote either
• Consensus threshold is much higher than 4% of the network
• On the other hand, anyone can introduce a BIP – Bitcoin Improvement Proposal – even without commanding the support of 1% of the network

This governance system works. It has kept Bitcoin alive, performing just as advertised for years while simultaneously allowing the community to introduce necessary improvements.

Commoditized Votes for Sale

Bitcoin governance has its flaws. Participation for instance, is expensive for those who need Bitcoin the most. Even if you want to set up a cheaper Raspberry Pi node, it is going to cost you in time and hardware.

Keeping the node up and running also involves costs – electricity for instance – even if these costs are marginal.

It is, however, an opt-in system that is not commoditized. The Uniswap token is a fully commoditized vote that is cheap to set up and easy to operate. It is even easier to sell.

Those who got UNI tokens in the airdrop are likely to be involved in DeFi. They are profit seekers. Due to yields on other highly toxic synthetic assets, they would rather take the free money now to make more money on other platforms.

It is hard to see how DeFi investors would want a vote on a platform that serves to provide liquidity for them to cash out of other toxic tokens.

UNI Price Should Not Recover

Therefore, we do not expect UNI price to recover, unless something else changes. Maybe if that 0.05% fee jumps, then it would be reasonable for certain investors to hold more UNI to get the dividend.

Until that or the fundamentals of the token change, you might be better off unloading the token than buying it, especially if Ethereum fees continue to rise. But then again, if there are enough irrational people out there, then at some point you might see the price rise either way.

*This post does not constitute investment advice of any kind. Neither the author nor HodlHard are liable for any decisions you make based on the information above.

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