October 24, 2024
Drama Flares in Defense of Decentralization
Dear Subscriber,
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| By Jurica Dujmovic |
Earlier this week, my colleague Marija Matic broke down the latest exciting news from Uniswap (UNI, “C+”), the leading decentralized exchange.
If you want to make money in the next leg of the crypto bull market (which Juan Villaverde plans to tell you all about this coming Tuesday) …
The announcement of Unichain, Uniswap's ambitious Layer-2 scaling solution, isn’t something you want to sleep on.
After all, the UNI token enjoyed a 10% price bump on the news.
No wonder, really. Not when you consider Unichain’s promises to …
- Cut transaction costs by 95% compared to Ethereum’s fees, and
- Facilitate near-instant transactions.
Now, this isn’t a suggestion to buy UNI at these lofty levels.
Not just because we don’t want to chase it higher. But because there may be a power struggle ahead.
Remember, Uniswap is decentralized. So there’s no single authority to make decisions.
All choices are voted on by UNI token holders as part of a decentralized autonomous organization, also called a DAO.
Naturally, the goal with any DAO is to ensure a democratic approach to governance.
But Uniswap’s democracy may be in jeopardy.
A Pair of Power Struggles Underway
In September, Bubblemaps exposed the extent of venture capital influence over Uniswap's governance.
Its report revealed how a16z — one of crypto's most prominent VC firms — had orchestrated a sophisticated system of control through 10 wallets.
Each wallet received exactly 2.5 million UNI from a single, central wallet.
That amount is no coincidence: 2.5 million UNI tokens is the minimum threshold required to submit governance proposals.
This move by a16z was part of a wider pattern.
Previously, there was a straightforward proposal to expand Uniswap's reach by deploying BNB Chain. This would potentially capture $1.2 billion in total value locked and add 1 million to 2 million new users.
However, things devolved quickly.
The community initially favored Celer's cBridge to bridge assets to BNB. But then, a16z's Eddy Lazzarin intervened to push for LayerZero (ZRO, Not Yet Rated).
Now, ZeroLayer is an impressive bridge. It connects over 50 blockchains.
Our Weiss Crypto teammate and small-cap expert Dr. Bruce Ng called it “the internet of blockchains” when he and Juan Villaverde recommended it to their New Crypto Wonders Members.
It is also, critically, a bridge in which a16z had led a $135 million investment round.
LayerZero lost the vote.
The problem wasn’t that shareholders had their say. Rather, it’s that 15 million of the 17 million votes received were cast from a single party — a16z.
Not only does that make clear the danger of centralization. It also highlights how concentrated power in Uniswap’s DAO has become.
Now, UNI token-holders are starting to speak up.
Billy Gao, head of governance at Stanford University's blockchain club and a significant UNI token-holder, has emerged as a leading critic.
His focus is now on Unichain’s launch. Because, looking past the hype, we can see further evidence of decentralization. Namely in how Unichain intends to make good on its promise of near-instant transactions.
To make that happen, Unichain uses Optimism's (OP, Not Yet Rated) technology stack, which has a target block verification time of 250 milliseconds per block.
But this decision was notably made without community consultation. And it may not be the best decision.
Gao publicly called attention to the fact that a better potential alternative exists: Arbitrum’s (ARB, “B-”). Arbitrum Orbit offers a verification time of 100 milliseconds out of the box.
Amid the BNB bridge debate and the Bubblemaps report, this decision has raised concerns about potential conflicts of interest, particularly given the shared cap table (i.e., the list of those with equity ownership) between Uniswap and Optimism.
DAO Drama from an Investor Perspective
For investors, these recurring governance issues present a complex calculus.
On the one hand, Unichain's technical specifications suggest significant improvements in transaction speed and cost on Uniswap.
But on the other, the governance crisis raises questions about Uniswap's long-term commitment to decentralization.
Without crypto’s core ideal of decentralization, Uniswap may not be able to survive.
Crypto purists will likely use other DEXes in their search for true decentralization. And there are more convenient centralized exchanges for traders to use.
Still, the protocol's $2.4 trillion in historical trading volume and position as DeFi's leading decentralized exchange stand in stark contrast to its seemingly centralized decision-making process.
And many within the DAO —Including Stanford's blockchain club — have called for new mechanisms to incorporate community feedback while maintaining development efficiency.
However, delegates’ ability to express dissent is limited.
In fact, their primary way to put their foot down is the nuclear option — defunding the Uniswap Foundation.
Obviously, I hope it doesn’t come to that. The market tremors from such a move would be tough to navigate.
But I encourage investors and users of Uniswap to exercise caution as the power struggle plays out.
There are better opportunities out there for crypto investors right now. And my colleague Juan Villaverde is getting ready to tell you all about them this coming Tuesday at 2 p.m. Eastern.
You know his Crypto Timing Model is calling for a key low in November. But what you may not know is this low will likely signal the start of what Juan’s calling “Crypto’s Golden Window.”
In his briefing, he’ll reveal what exactly his model sees coming …
Just how impressive this golden window can be …
And he’ll name the three cryptos he believes will outperform in the coming rally.
It’s free to attend. All you have to do is save your seat.
Best,
Jurica Dujmovic
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