Written by: Tanay Ved
Compiled by: Saoirse, Foresight News
Key points
- Uniswap's fee switch links UNI tokens to protocol usage through a token supply burn mechanism. Currently, fees generated by the protocol are used to reduce the supply of UNI, transforming the UNI token from one with only governance functions into an asset capable of directly accumulating value.
- Early data showed that the protocol's annualized fees were approximately $26 million, with a revenue multiple of approximately 207 times; it will continue to burn approximately 4 million UNI tokens annually, a move that has already incorporated high growth expectations into the $5.4 billion valuation of the UNI token.
- DeFi is gradually shifting towards a fee-linked token model. Mechanisms such as token burning, staker reward distribution, and "vote custody (ve)" locking are all designed to align token holders more closely with the protocol's economic system, thereby reshaping the valuation logic of the field.
introduction
In late 2025, Uniswap's governance team passed the "UNIndication" 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—a time when the market is increasingly focused on "actual returns" and "sustainable value accumulation driven by fees." Now, this fee switch establishes a more direct link between the UNI token and Uniswap's revenue and trading activity, and Uniswap itself is one of the largest decentralized exchanges (DEXs) in the cryptocurrency space.
In this article, we will delve into the token economy of Uniswap after the fee switch is enabled, assess the dynamics of UNI token burning, the fee mechanism and its impact on valuation, and explore the significance of this shift for the entire DeFi field.
The disconnect between DeFi tokens and protocol value
One of the core challenges facing the DeFi space is the disconnect between "strong protocols" and "weak tokens." Many DeFi protocols have achieved clear product-market fit, high usage, and stable revenue, but their issued tokens often only serve governance functions, offering holders almost no direct access to the protocol's cash flow. In this context, funds increasingly flow into Bitcoin, underlying public chains (L1s), Meme tokens, and the like, while the trading price of most DeFi tokens is severely out of sync with the actual equity gained from protocol growth.
A comparison of the exponential performance of DeFi tokens (AAVE, UNI) with mainstream cryptocurrencies (BTC, ETH).
Uniswap launched as a decentralized exchange (DEX) on the Ethereum network in November 2018, designed to enable order book-free and intermediary-free exchange of ERC-20 tokens. In 2020, Uniswap issued the UNI token and positioned it as a governance token—a move consistent with DeFi blue-chip projects such as Aave, Compound, and Curve, whose core purpose for issuing tokens is often governance voting and user incentives.
Monthly transaction volume (in USD) of Uniswap across different versions (V2, V3, V4) on the Ethereum network. Source: Coin Metrics Network Data Pro
With each iteration, Uniswap has become a core component of on-chain financial infrastructure, handling billions of dollars in transaction volume and generating substantial fee revenue for liquidity providers (LPs). However, like most DeFi governance tokens, UNI token holders do not directly receive a share of the protocol's revenue, leading to a growing disconnect between 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 the relevant development team, while token holders only receive governance rights and inflationary rewards. This contradiction between a "governance-only" token and the "demand for value accumulation" laid the foundation for the introduction of Uniswap's fee switch and the "UNIization" proposal—which explicitly links the value of the UNI token to protocol usage, bringing token holders more closely aligned with the economic system of decentralized exchanges (DEXs).
Uniswap Fee Switch: Fee and Destruction Mechanism
With the adoption of the "UNIFication" governance proposal, the Uniswap protocol introduced the following key adjustments:
- Activate Protocol Fees and UNI Burning Mechanism: Activate the protocol's "fee switch" to channel protocol-level liquidity pool fees from Ethereum mainnet Uniswap V2 and V3 versions into the UNI token burning mechanism. By establishing a programmatic link between "protocol usage" and "token supply," UNI's economic model transforms from "governance-only" to "deflationary value accumulation."
- Perform a retrospective treasury token burn: Burn 100 million UNI tokens from the Uniswap treasury in a single transaction to compensate token holders for the fee revenue they have missed out on over the years.
- Unichain revenue will be incorporated into the aforementioned "burn-driven" value capture mechanism: all sorting fees generated by the Unichain network (after deducting Ethereum Layer 1 data costs and Optimism's 15% share) will be incorporated into the aforementioned "burn-driven" value capture mechanism.
- Adjusting the organizational incentive structure: Integrating most of the Uniswap Foundation's functions into Uniswap Labs and establishing an annual growth budget of 20 million UNI, allowing Uniswap Labs to focus on protocol promotion; at the same time, reducing its commission rate on interface, wallet, and API services to zero.
The complete process of converting protocol fees into UNI tokens and burning them after the Uniswap fee switch is enabled. Source: Uniswap UNInformation
Currently, Uniswap operates on a "pipeline" model, using dedicated smart contracts to handle asset release and conversion (such as UNI token burning). The specific process is as follows:
- Transactions on Uniswap V2, V3, and Unichain incur transaction fees;
- A portion of the transaction fees goes to the agreement (the remainder is distributed to liquidity providers).
- All protocol-level fees flow into a single on-chain smart contract called "TokenJar";
- The value in TokenJar can only be released when UNI tokens are destroyed through the "Firepit" smart contract.
Protocol fee data after Uniswap fee switch was enabled (from December 27, 2025). Source: Coin Metrics ATLAS
According to Coin Metrics ATLAS data, a significant amount of protocol fees flowed into the system in the first 12 days after the fee switch was enabled. The chart below tracks the estimated daily protocol fees (in USD) and the cumulative total, showing that with the initial configuration, the fee switch quickly monetized Uniswap trading volume—accumulating approximately $800,000 in protocol-level fees in just 12 days.
If current market conditions remain stable, the protocol's annualized revenue is estimated to be between $26 million and $27 million (for reference only), but the actual revenue will depend on market activity and the progress of the rollout of various liquidity pools and on-chain fee mechanisms.
UNI token burning data after Uniswap fee switch was enabled (excluding the retroactive burning of 100 million tokens). Source: Coin Metrics ATLAS
The chart above illustrates how protocol fees translate into a reduction in the UNI token supply (excluding the retroactive burn of 100 million tokens). As of the time of data collection, the total UNI token burn has reached approximately 100.17 million (equivalent to approximately $557 million USD), representing 10.1% of the initial total supply of 1 billion tokens.
Based on the burning data from the first 12 days after the "UNInformation" proposal took effect, the annualized burning rate of UNI tokens is estimated to be approximately 4 to 5 million. This data highlights that the current use of the protocol can generate "periodic, programmatic" UNI burning, rather than simply inflationary token issuance.
Valuation and its impact on the DeFi sector
With the fee switch enabled, the valuation of the UNI token can no longer be limited to its "governance function" but can be assessed from a "cash flow perspective." Based on UNI's current market capitalization of $5.4 billion, compared to the initial TokenJar data showing approximately $26 million in annualized protocol fees, its revenue multiple is about 207 times—a valuation closer to high-growth tech assets than mature decentralized exchanges (DEXs). Excluding the treasury burn portion, the annualized burn amount of UNI is approximately 4.4 million tokens, representing only 0.4% of the current supply, a relatively low "burn rate" relative to its valuation.
Market capitalization trend of Uniswap token UNI, source: Coin Metrics Network Data Pro
This situation highlights a new trade-off: while a clearer value capture mechanism enhances UNI's investment appeal, current data suggests the market has extremely high expectations for its future growth. To reduce this revenue multiple, Uniswap needs to take a multi-pronged approach: expanding fee capture (e.g., covering more liquidity pools, launching the V4 "hook" feature, conducting fee discount auctions, and optimizing Unichain), achieving sustained growth in trading volume, and offsetting the annual growth budget of 20 million UNI and other token releases through deflationary mechanisms.
From an industry structure perspective, the "UNIFication" proposal is driving the DeFi sector towards a model where "governance tokens must be explicitly linked to protocol economics." Whether it's Uniswap's token burning, Ethena's "direct fee distribution to stakers," Aerodrome and other DEXs' "voting custody lock + fee/bribery sharing," or hybrid mechanisms like Hyperliquid's perpetual contract model, they are all essentially different forms of "protocol fee sharing," with the core purpose of strengthening the connection between tokens and protocol economics. With the world's largest decentralized exchange (DEX) adopting a "fee-linked + burn-driven" design, the market's evaluation criteria for 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."
in conclusion
The activation of Uniswap's fee switch marks a key turning point: the UNI token has transformed from a "pure governance asset" into an "asset explicitly pegged to protocol fees and usage." This shift makes UNI's fundamentals more analyzable and investable, but it also subjectes its valuation to more rigorous scrutiny—current valuations already incorporate strong expectations for future fee capture capabilities and growth potential.
Looking ahead, two key variables will influence UNI's long-term trajectory: first, the level to which Uniswap can raise protocol-level fees without harming the economic interests and trading volume of liquidity providers (LPs); and second, the evolving attitudes of regulatory bodies 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 will also provide important insights into how other DeFi protocols can share value with token holders.
