Sometimes people think about trading as it's just a form of gambling, but that's actually kind of crazy because trading is how you convert between different forms of value. In the same way, converting between different forms of energy has loss, and the more loss, the less abundance there is. That's the same thing for assets and ownership. So if you can make it lower cost and more frictionless to convert between two different things, there is more abundance of value.
Hayden, welcome to The DeFi Podcast. I'm so excited to have you on.
Really excited to be here.
And very excited to be talking about unification or turning on the fee switch for Uniswap, because it feels like the end of an era or the beginning of a new era. It's a very momentous time for DeFi, especially because it's Uniswap. Uniswap was one of the very early DeFi protocols, biggest DEXes, and very much in the middle of all this regulatory pressure. The fact that you feel it's time to turn on the fee switch is a huge signal for the space. I'd love to talk about the significance of this.
Yeah, for sure. There are a lot of different parts to this unification proposal, which is a joint governance proposal from Uniswap Labs and the Uniswap Foundation. There's a long history, and it definitely feels like the end of an era, especially for us. But I wouldn't be surprised if there was a broader industry trend around economics and around focusing, not having divergent focuses but a unified focus. For a long time, we were limited in terms of what we could build around the protocol. We built this protocol and it had this monumental rise, going from doing thousands of dollars of volume to millions to billions to now trillions of dollars in trading. For a very long period, we were building under this intense regulation-by-enforcement attack on the crypto industry. Many of my friends left the US, and some are coming back now. It was a relentless pursuit of good actors in the space. It's a very new era for crypto now. Not only that, Uniswap has matured, and there have been other things that have come into place, like a strategic focus around the Uniswap protocol itself. When I think about Uniswap Labs' role in the world and what I want to build towards, the products we've been building on top of the protocol are really powerful. For context, we built this core protocol, and for the past four years we've been focusing our core business model on a product built on top of the protocol. The foundation has been stewarding the governance system and the ecosystem around the protocol, but they were sort of separate. However, it's all coordinated, and we spoke for a while. When I think about what Labs has to offer, we are the foremost experts in automated market making and exchange protocols. I don't just want to build products for ourselves; I want to help all the other people building on top of Uniswap. The opportunity is not just building the most used front end on top of Uniswap; we can do a lot with our front ends, but it's about having Uniswap protocol as the DeFi exchange. That can be so much bigger than just us. Part of unification is shifting our focus from building products for ourselves to making it easier for other people to build on the protocol.
With the unification part of it is the fee switch, which you'll explain better.
Yeah. There's a long history of the fee switch always being in governance. The only thing different here is this is our first proposal, but other people have put forward proposals before. If you look through the governance forums, you can see the discussions. There were concerns, like things like lawsuits against token holders for governance votes. So there's the timing, but also other things have come into place. One example is the DUNA, a new type of entity from Wyoming that allows DAOs to have liability protection and tax clarity. Having the DUNA in place, which was a new law passed in the past couple of years, and Uniswap might be the first or one of the very first DUNAs, is a big part of the story. Also, Labs' new relationship with the DAO via a contractual service provider agreement aligns our business model with the DAO. There's been a lot of conversation about whether the fee switch should be on or not. There's always a trade-off: there are only so many market participants. With protocol fees on, it ultimately impacts swappers. Part of this proposal also introduces new ways that LPs can be more profitable, which helps make up for the fact that some fees now go to the pool.
Right. A lot of the perceived tension in the past few years with Uniswap is where value accrues from — the perceived tension between Uniswap equity and UNI token holders. I keep seeing complaints by UNI token holders about how there's no direct value accrual to the token without the fee switch. Now there's a clear path for UNI token holders to more directly benefit from the growth of Uniswap itself.
With a burn mechanism, with the fee switch on, you have tokens accruing across all these different trade pairs. That was an interesting engineering problem: how do you convert them? Ironically, the answer is not just trade on the protocol. They all accrue in a smart contract we call the token jar. The jar is filled with tokens, and whenever it's worth a fixed amount of UNI, anyone who burns that amount of UNI can claim the contents of the jar. It's a clean mechanism that can take in fees from v3, v4, Unichain, various versions of UniswapX. There are many different fee sources, not just one monolithic fee switch. All these fees need to be turned on, and they're collecting fees in different tokens. Part of what we're putting forward is a set of smart contracts to flow all that into this UNI burn system. With that on, there will be fees on the protocol that ultimately burn UNI and reduce supply over time. It's similar to Ethereum, where network fees are burned. There've been public conversations about fee burn versus staking and their trade-offs, and I think that's a clean way to implement it, especially for how Uniswap is architected.
Do you think that this debate about Uniswap equity holders and VCs gaining more value over time versus UNI token holders is fair? And do you think that changes now?
There is a realignment of the ecosystem. What we've seen so far is people are very positive about the direction. What we're trying to say with this proposal is that we see the opportunity in the Uniswap protocol being this huge thing, and we want to align our work to what grows and benefits the protocol. There's a signal to it: we're shifting our focus to be very protocol-centric, to support the teams building on top of it. There're things like the fee switch being turned on. We've seen a positive reaction from people who didn't like that we had front-end fees. One part of the proposal is turning off our front-end fees. That was debated externally, but I think if we're using it to fund development and growth, it's a positive thing. But I'm excited about shifting our focus. Labs pre-unification had two main sources of fees: front-end fees on our website and API fees. We found that many people didn't want to use our API because our business model charged fees on top, and they wanted to build their own front ends. We're taking our front ends and making them a more powerful distribution mechanism for the protocol, making the trading API completely free so anyone building on top can integrate it. That's a good growth driver. We also have aggregator hooks, an interesting solution to the fact that other on-chain liquidity protocols exist. We can integrate those into the Uniswap ecosystem in a mutually beneficial way. With Uniswap v4 and hooks, we can take router aggregator logic and put it in a v4 hook, allowing a route that routes through Uniswap and then sub-routes to other protocols if they have a better price, including the fee switch like any other v4 pool. This lets us tap into all liquidity sources, with no margin on volume through Uniswap pools. This is related to our focus: when Labs was a business with a business model of fees through our front end, it was hard to focus on the LP user experience, but that's valuable for the Uniswap protocol. With unification, we're excited to invest in liquidity creation, whether it's the LP front end or the new CCA protocol we put out to bootstrap liquidity for new and existing tokens. Those types of things become an increased focus.
So interesting. I think the fee switch definitely took the headlines, but this underlying shift on how Uniswap is structured might have an even bigger effect. The idea is that instead of the Uniswap Foundation being responsible for the protocol, that is moving to Uniswap Labs, a company previously focused on things built around the protocol, but now the focus will be on the protocol itself. That changes the business model from front-end fees and API fees to protocol fees.
Yeah. The top-line metric we'll be tracking at Uniswap Labs will be volume to the Uniswap protocol and how we can increase that. But the cool thing is, it's not just through our front ends; it's through the thousands of other ways people trade through the protocol, whether direct integrations or other front ends.
Do you want to become more like trading infrastructure for all of finance, like that's your vision, rather than the front end itself?
Yeah. To zoom out, I'm a big believer that just as most information was digitized and put on the internet, democratizing access to information, DeFi is trying to do that for assets and ownership. Value is moving onto blockchains, and the goal is to make it more accessible, more global, and ultimately unlock more value in the world. I come from a mechanical engineering background, and I think about finance in physics terms. The first blog post that inspired Uniswap from Vitalik was called 'On Path Independence,' a very long physics metaphor for trading. When you think about electricity, if you make it cheaper to convert between sunlight and household electricity, you've lowered the cost of electricity for the whole world, creating greater abundance of energy. Trading is how you convert between different forms of value. Making trading cheaper and better is a noble pursuit, not just gambling or speculation. We're at an inflection point where DeFi has started to prove and cement itself. With this new regulatory environment, we're starting to see more technical progress on Ethereum, layer 2 scaling, and connecting blockchains. The convergence of these things means bigger companies with existing assets and users are bringing those into crypto, and crypto-native assets are growing. I think of it like the internet: old businesses moved online, and new internet-native businesses were created. Real-world assets will move into DeFi, but there's also DeFi protocols and their native tokens. We're so early to what that could look like and how big it can be. There needs to be infrastructure to make it cheap and easy to create markets and exchange between different forms of value. I'm really excited about that.
I love this big picture vision. I think what enabled this accelerated trend in DeFi this year has been more regulatory clarity and not having such an adversarial administration going after developers. You were a prime example of that happening in the Biden administration. I'd love firsthand your view of what it was like to get a letter from the SEC. What runs through your mind? How does that affect your work and your health?
I've thought about writing a book just about my experience with the law and legal system. You don't realize how many different things start to happen when you build something successful. One of the first things was being debanked. I was debanked pretty early on, and it was a noticeable story. Almost all the early Uniswap engineers were also debanked. I tweeted about it, and that tweet was later cited in a congressional report on debanking. I got two weeks' notice that they were removing me as a customer. I asked why, and they said they couldn't tell me. They wanted me to come in and get a check for my full bank balance at a branch, which I didn't do because it was scary. I convinced them to wire it. Another crazy thing: I paid off my credit card before they closed my account, but they let a charge go through after cutting off my access, then wrecked my credit score by 150 points over one dollar in overage charges. It's an insane system. This debanking wasn't just me — multiple early Uniswap employees and the company were debanked several times. There was no law that said crypto debanking. What was disappointing was that there weren't clear rules; they applied 80-year-old rules meant for centralized intermediaries to a DeFi protocol, which is not a centralized intermediary. Software developers writing open source code are not the same as a centralized financial institution that custodies user funds. There was a major mismatch between the technology and the proposed regulations. On the impact on health, it was tens of millions of dollars in costs for us as a well-capitalized startup. I know crypto companies that were shut down. We received a Wells notice, which we rebutted, and the case was dropped this year. But leading up to that, there were thousands of hours of work across the company. I had to go to DC for a 16-hour deposition. In those moments, you don't understand the basics. There were also patent trolls and law firms that go around the world suing everyone, like class action lawsuits. We were hit by meritless class actions, and we've won them repeatedly, but they keep rebranding. We've had a pretty much undefeated legal record. But it's a distraction from building. What's most valuable is improving the technology and product. Fortunately, we've been able to maintain focus, and there are far fewer things happening now. Regulators are taking a more reasoned approach to DeFi. There's a market structure bill being discussed in DC, and our team goes there to talk about why DeFi is good for the world and why software developers shouldn't be regulated like centralized intermediaries.
Through this process of being distracted by lawsuits and SEC investigations, you lost time and money. How did it limit Uniswap? Would you have done things differently with clear regulation? Besides the fee switch, are there other things you would have done differently if you didn't have this cloud looming over you?
I don't want to go into too many details of the exact counterfactuals, but it's worth noting that I had an interesting exchange on Twitter with a former SEC regulator. He said that the fee switch being turned on meant it was always possible, but when government agencies are investigating you meritlessly and saying anything you do will be illegal, it has a chilling impact. The law isn't purely technical; you need a judge or jury that understands it. There's still risk even if you're on the right side. You have to be much more cautious. We always do legal analysis before making decisions and try to be good citizens and build from first principles. But the chilling impact affects every decision because even if a case has no merit, they might bring it anyway, and it depends on whether you get a good judge who understands it. We got a pretty good judge who said this is very different from a centralized intermediary, but that was on the civil side. There's always the risk of a bad judge. There was a case where the jury was in tears because they couldn't understand crypto market structure. So sometimes you don't do something even if you think it is fine because it could be misconstrued.
I think that was the case for everyone in DeFi. You know what you're doing is fine and legal, but you don't do it anyway. That impacted consumers negatively. The things that left the US were the best actors; the SEC seemed to go after the biggest, most legit actors, leaving less legit actors outside the country to build freely. That led to FTX, for example. Coinbase was hamstrung relative to FTX, which grew faster. Coinbase was a more legit actor building a higher quality product. If more people were using Coinbase, they wouldn't have lost money. The net impact has been negative. Even the meme coin meta became dominant because anyone building anything real was sued, so all that was left was things with no value, just memes, which were obviously allowed to exist.
Right. It's crazy that the thing most prone to scams and pump and dumps was the thing more clearly allowed. It's a very misaligned approach.
Totally. So now that the focus is on the Uniswap protocol, where does that leave the Uniswap wallet and how does Unichain fit?
These are good questions. Our mobile wallet on Android and our browser extension are really just free distribution on top of the protocol. They were monetized before, but if unification passes, based on the initial reaction and the indicative snapshot vote, it looks very likely. Those will become free products. They'll integrate with aggregator hooks and tap into more liquidity sources, but as free products, that will help them grow. They're still a part of what we build. We've built a trading API and our front end on top of it, and we started making the API available to others. In this model, if other front ends send volume to the protocol, that's good for us too. We support them. We want to take all these infrastructure pieces and make them available to others. We think of it as maintaining a standard. We can build things into our front ends that are valuable for the protocol that others might not do. So we invest heavily in liquidity creation, like the LP front end. LPing doesn't generate the fees that swapping does, but we invest in it within our product suite and wallet. We use our front ends as a way to create distribution for the protocol. We can take our protocol engineering team and support other teams building on top. Sometimes people think Uniswap is a big thing with 150 people, but the protocol engineers are foremost experts. We want to take our protocol engineering team and have them embed with other teams to support them. That's a big change with unification. We're creating an ecosystem engineering team that will embed itself in the ecosystem and support other builders integrating with the protocol. That can mean building hooks that allow other protocols to integrate seamlessly.
Protocol to support new asset classes. It can be building hooks that make LPs more profitable. It can be supporting other people that are building it, working with launchpads. We created the CCA thing which is a really cool way to boost up liquidity, but we can also embed that in other people's interfaces and support them in doing that, which is really interesting. Within this all, I think that maybe we believe there's going to be a lot of chains. Something that happened almost when we launched Unichain is we actually noticed some people were like, 'Oh, are we competitive now or not?' Our most recent chain deployment was Mode, already doing like 150 million a day in trading, deployed in the past week. We're continuing to support new chains. A version of Uniswap that is optimized for Uniswap-specific use cases, because most chains are for some use case or another, for some ecosystem or another. In some ways, a lot of them are trying to support a general use case. You hear 'basis for everything' or 'for everyone,' I don't remember the exact slogan. A lot of people are trying to do very general-purpose things. I think that we like the idea of an area where we just optimized for things like DeFi. That's even how we got to fast blocks and the TE building and some of the features of Unichain. One thing that's been interesting is we've started to do partnerships with other teams. There are Uniswap deployments on most major L2s and L1s, EVM ones. But they started to be like Unichain has started to become a place where people are bridging in non-EVM assets which don't really have another chain that they're living on. We have things like Zcash pools and Dogecoin pools which don't really have a DeFi ecosystem; they're non-EVM chains. A lot of those pools are starting to be created on Unichain as a default. So that's been a really interesting thing, and kind of partner assets. The other thing with protocol fees on Unichain that might make it unique is that there's no need for protocol fees to be on-chain because the chain-level fees are internalized and go to the same burn as the protocol fees. In some ways, maybe one role that Unichain can play in the world is if you want a deployment that has protocol fees off, that's a chain where there's no chain-level fees. We're also looking at maybe subsidizing gas. So if you're using Unichain and our front end on top of Unichain, you maybe have no protocol fee, no chain fee because we subsidized it, no front-end fee, and you might basically have almost completely free trading. The reason that makes sense is because if that generates additional other activity and arbitrage and other people interacting with the chain, those fees are internalized. So there's an interesting role that Unichain can play within the Uniswap ecosystem. But again, there's a lot of chains and we're continuing to invest in our support of them. Part of Unification is us wanting to build more closely with other L2s and L1s. I don't really want the message to the world to be that we're trying to eat your lunch if you're an L2. It's more like we're trying to explore a differentiated kind of thing for Uniswap. When I say all value is going to be tokenized, I mean all value in existence. There's plenty of value to go around. Part of it is also a technical testing ground and a way for people to build on Unichain.
