Original Author: Tanay Ved

Original Translation: Saoirse, Foresight News

Key Points

• Uniswap's fee switch links UNI tokens to protocol usage through a token supply burn mechanism. Currently, the fees generated by the protocol will be used to reduce the supply of UNI, transforming the UNI token from a purely governance function to an asset that can directly achieve value accumulation.
• Early data shows that the protocol generates annual fees of approximately $26 million, with a revenue multiple of about 207 times; around 4 million UNI tokens will be continuously burned each year, and this initiative has already integrated high growth expectations into the $5.4 billion valuation of UNI tokens.
• DeFi is gradually transitioning to a "fee-linked" token model. Mechanisms such as token burns, distribution of rewards to stakers, and "vote-escrowed (ve)" locks are all aimed at aligning token holders more closely with the economic system of the protocol, thereby reshaping the valuation logic in this field.

Introduction

At the end of 2025, the Uniswap governance approved the "UNIfication" proposal, officially launching the long-awaited protocol "fee switch." This is one of the most far-reaching token economic changes among DeFi blue-chip projects since 2020, as the market increasingly focuses on "real yields" and "sustainable value accumulation driven by fees." Now, this fee switch establishes a more direct connection between the UNI token and Uniswap's revenue and trading activity, while Uniswap itself has become one of the largest decentralized exchanges (DEX) in the cryptocurrency space.

In this article, we will delve into the token economic system of Uniswap after the fee switch is enabled, assess the dynamics of UNI token burns, the fee mechanism, and its impact on valuation, and explore the significance of this shift for the entire DeFi sector.

Disconnection Between DeFi Tokens and Protocol Value

One of the core challenges facing the DeFi sector is the disconnection between "strong protocols" and "weak tokens." Many DeFi protocols have achieved clear product-market fit, high usage rates, and stable revenues, but the tokens they issue often serve only governance functions, providing little direct access to protocol cash flows for holders. In this context, funds increasingly flow into Bitcoin, layer-1 blockchains (L1s), meme coins, and other areas, while the trading prices of most DeFi tokens are severely disconnected from the actual equity of protocol growth.

Comparison of indexed performance between DeFi tokens (AAVE, UNI) and mainstream cryptocurrencies (BTC, ETH)

Uniswap launched as a decentralized exchange (DEX) on the Ethereum network in November 2018, designed to facilitate order book-less, intermediary-free exchanges of ERC-20 tokens. In 2020, Uniswap issued the UNI token and positioned it as a governance token—this approach aligns with other DeFi blue-chip projects like Aave, Compound, and Curve, where the core purpose of issuing tokens is often governance voting and user incentives.

Trend of monthly trading volume (in USD) for various versions of Uniswap (V2, V3, V4) on the Ethereum network, source: Coin Metrics Network Data Pro

With version iterations, Uniswap has become a core component of on-chain financial infrastructure, handling billions of dollars in trading volume and generating substantial fee income for liquidity providers (LPs). However, like most DeFi governance tokens, UNI token holders cannot directly receive a share of the protocol's income, leading to an increasing disconnection between the scale of the protocol's underlying cash flow and the economic interests of token holders.

In reality, the value generated by Uniswap primarily flows to liquidity providers (LPs), borrowers, lenders, and related development teams, while token holders can only obtain governance rights and inflationary rewards. This contradiction between a "purely governance" token and the "demand for value accumulation" laid the groundwork for the introduction of the Uniswap fee switch and the "UNIfication" proposal—this proposal explicitly links the value of UNI tokens to protocol usage, aligning token holders more closely with the economic system of the decentralized exchange (DEX).

Uniswap Fee Switch: Fee and Burn Mechanism

With the approval of the "UNIfication" governance proposal, the Uniswap protocol introduced the following key adjustments:

1. Activation of protocol fees and UNI burn mechanism: The "fee switch" is activated, importing the protocol-level pool fees from Uniswap V2 and V3 on the Ethereum mainnet into the UNI token burn mechanism. By establishing a programmatic link between "protocol usage" and "token supply," the economic model of UNI shifts from "pure governance" to "deflationary value accumulation."
2. Execution of retrospective treasury token burns: A one-time burn of 100 million UNI tokens from the Uniswap treasury to compensate for the fees that token holders have missed over the years.
3. Inclusion of Unichain revenue: The fees generated by the Unichain network (after deducting Ethereum Layer 1 data costs and a 15% share for Optimism) will all be included in the aforementioned "burn-driven" value capture mechanism.
4. Adjustment of organizational incentive structure: Most functions of the Uniswap Foundation are integrated into Uniswap Labs, and a growth budget of 20 million UNI per year is established to allow Uniswap Labs to focus on protocol promotion; at the same time, the commission rate in interfaces, wallets, and API services is reduced to zero.

The complete process of converting protocol fees into UNI token burns after the fee switch is activated, source: Uniswap UNIfication

Currently, Uniswap operates in a "pipeline" model and uses dedicated smart contracts to handle the release and conversion of assets (such as UNI token burns). The specific process is as follows:

1. Transactions on Uniswap V2, V3, and Unichain generate fees;
2. A portion of the fees belongs to the protocol (the remainder is allocated to liquidity providers);
3. All protocol-level fees flow into a single treasury smart contract called "TokenJar" on each chain;
4. The value in TokenJar can only be released when UNI tokens are burned through the "Firepit" smart contract.

Protocol fee data after the fee switch is activated (starting December 27, 2025), source: Coin Metrics ATLAS

According to Coin Metrics ATLAS data, in the first 12 days after the fee switch was enabled, a significant amount of protocol fees flowed into the system. The chart below tracks the estimated daily protocol fees (in USD) and the cumulative total, showing that under the initial configuration, the fee switch quickly monetized Uniswap's trading volume—within just 12 days, the cumulative protocol-level fees reached approximately $800,000.

If current market conditions remain stable, the protocol's annual revenue is expected to be around $26 million to $27 million (for reference only), but actual revenue will depend on market activity and the promotion of various pool and chain fee mechanisms.

UNI token burn data after the fee switch is activated (excluding the 100 million retrospective burn), source: Coin Metrics ATLAS

The above chart shows how protocol fees are converted into a reduction in the supply of UNI tokens (excluding the 100 million retrospective burn). As of the time of data collection, the total amount of UNI tokens burned has reached approximately 100.17 million (equivalent to about $557 million), accounting for 10.1% of the initial total supply of 1 billion tokens.

Based on the burn data from the first 12 days after the "UNIfication" proposal took effect, the annual burn rate of UNI tokens is estimated to be around 4 million to 5 million tokens. This data highlights that the current usage of the protocol can generate "cyclical, programmatic" UNI burns, rather than merely inflationary token issuance.

Valuation and Impact on the DeFi Sector

After the fee switch is enabled, the valuation of UNI tokens is no longer limited to "governance function," but can be assessed from a "cash flow perspective." With UNI's current market capitalization of $5.4 billion, compared to the approximately $26 million annual protocol fees initially shown in TokenJar data, its revenue multiple is about 207 times—this valuation is more akin to high-growth tech assets rather than a mature decentralized exchange (DEX). If the treasury burn portion is excluded, UNI's annual burn volume is approximately 4.4 million tokens, accounting for only 0.4% of the current supply, indicating that the "burn rate" is at a relatively low level compared to its valuation.

Trend of market capitalization changes for Uniswap token UNI, source: Coin Metrics Network Data Pro

This situation highlights a new trade-off: although a clearer value capture mechanism enhances UNI's investment attributes, the current data suggests that the market has extremely high expectations for its future growth. To reduce this revenue multiple, Uniswap needs to implement a combination of measures: expand the scope of fee capture (such as covering more liquidity pools, launching the V4 version "hook" feature, conducting fee discount auctions, optimizing Unichain), achieve sustained growth in trading volume, and offset the annual growth budget of 20 million UNI and other token releases through deflationary mechanisms.

From an industry structure perspective, the "UNIfication" proposal promotes the development of the DeFi sector towards a model where "governance tokens must be clearly linked to protocol economics." Whether it is Uniswap's token burn, Ethena's "direct fee distribution to stakers," Aerodrome and other DEXs' "vote-escrowed locking + fee/bribe sharing," or the hybrid mechanisms like Hyperliquid's perpetual contract model, they are essentially different forms of "protocol fee sharing," with the core aim of strengthening the connection between tokens and protocol economics. As the world's largest decentralized exchange (DEX) adopts a "fee-linked + burn-driven" design, future market evaluations of DeFi tokens will no longer be limited to "Total Value Locked (TVL)" or "narrative popularity," but will focus more on the "efficiency of converting protocol usage into lasting value for holders."

Conclusion

The activation of the Uniswap fee switch marks a critical turning point: the UNI token has transformed from a "pure governance asset" to an "asset clearly linked to protocol fees and usage." This shift makes UNI's fundamentals more analyzable and investable, but it also subjects its valuation to stricter scrutiny—current valuations already incorporate strong expectations for future fee capture capabilities and growth potential.

In the future, two key variables will influence UNI's long-term trajectory: first, to what level Uniswap can elevate protocol-level fees without harming the economic interests of liquidity providers (LPs) and trading volume; second, the evolving stance of regulators towards "fee-linked tokens" and "buyback and burn token" models. These two factors will jointly shape the long-term risk-return characteristics of the UNI token and provide important references for how other DeFi protocols can share value with token holders.

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