End of years of "free-riding"? Is UNI's current valuation reasonable?

Written by: Carlos & Luke Leasure

Compiled and organized by: BitpushNews

Uniswap has become a typical representative of the ubiquitous “equity-token” structural contradiction in the industry. For many years, Uniswap Labs has accumulated all the revenue generated by the protocol, while UNI token holders have failed to benefit.

Yesterday, Uniswap founder Hayden Adams, representing Uniswap Labs and the Uniswap Foundation, published a governance proposal aimed at unlocking Uniswap protocol fees and unifying ecosystem incentives, which is an unexpected victory for token holders.

The Uniswap protocol includes a fee switch that can only be activated through UNI governance voting. This proposal will activate the fee switch and introduce a programmatic token burn mechanism, while retroactively burning 100 million UNI tokens from the treasury to compensate for the value accumulation missed by token holders over the past years.

At the same time, the proposal also stipulates that after deducting the data costs of the first layer (L1) and the 15% fee paid to Optimism, all fees from Unichain's sequencers will be transferred into this burn mechanism.

In terms of incentive alignment, this proposal will also incorporate most of the foundation's functions into Labs and create an annual growth budget of 20 million UNI, with the aim of allowing Labs to focus on the adoption of the protocol while reducing its commission rates on front-end interfaces, wallets, and APIs to zero.

Since Uniswap will establish a clear value accumulation mechanism between the token and the protocol's success, what is the fair value of UNI?

In the past two years, Uniswap has lost its dominance in the DEX (decentralized exchange) space, with its trading volume market share dropping from over 60% in October 2023 to less than 15% last month.

The shift in DEX market share reflects Solana's growing dominance in on-chain activity during the same period, as well as the rise of protocols like Aerodrome, which have successfully maintained a leading position relative to Uniswap on the Base chain.

If we observe Unichain, its network activity remains relatively sluggish, with weekly DEX trading volume continuing to decline since July.

The trading volume recorded last week was 9.25 billion dollars, the lowest value since mid-April.

Unichain's network revenue presents a more optimistic picture, although we have seen a decline in revenue in recent weeks.

In the past 30 days, Unichain's network revenue totaled $460,000, which translates to an annualized income of approximately $5.52 million.

With a profit margin of 84%, this will generate $4.64 million in revenue for Uniswap Labs under the current structure; after the proposal is approved, this revenue will enter the burn mechanism.

That said, Unichain is just a small part of the total protocol revenue, with most of the income still coming from the implementation of v2 and v3 versions.

Kunal, a researcher from Blockworks Research, built an outstanding dashboard based on the “UNIfication” proposal to display the estimated token burn for Uniswap.

If this mechanism had been enabled earlier, the protocol should have burned nearly 26 million dollars worth of UNI in the past 30 days;

Since the beginning of the year, nearly 150 million dollars will be destroyed.

The table below compares UNI with other decentralized exchanges (please note that we have included Pump due to its AMM mechanism).

From this table, it can be seen that although the direction of the “UNIfication” proposal is correct, even considering the retrospective destruction of 100 million UNI, the valuation of UNI is still relatively high compared to the median and average of its peers' price-to-sales ratios.