Is Uniswap governance in danger?

tl;dr: No. Safe from CEXs. But it is not good from the other perspective.

People say CEXs will control the governance of Uniswap by the deposits of users. It makes sense in some points like the daily trading volume of Uniswap surpasses Coinbase’s, and many CEXs rush to list DeFi tokens. They may want to control the Uniswap ecosystem. However, can they?

I did a simple analysis of UNI token distribution to check the possibility of the case. You can see the spreadsheet here.

The spreadsheet is self-explanatory so you just can read the spreadsheet and close this article if you want.

The conclusion is, it is hard to say that the CEXs can control the Uniswap, at least for a year. Let me explain the details.

Data & Labeling

I downloaded the token holder data from Etherscan, and labeled each address from #1 to #200. The Upper 200 addresses hold 93.16% of the current circulation. Label was like below.

  • Treasury: Locked UNI for the future distribution

  • Token Distributor: The smart contract distributes UNI to the community

  • UNI Mining pool: Incentivized liquidity pools on Uniswap

  • Team/VC/Advisor: As it is - Labeled together on the data sheet, but for the summary sheet, just used the numbers of the official introduction post on Uniswap blog

  • Exchange: CEXs

  • Liquidity/Defi pool: DEX liquidity pool (e.g. Balancer) or DeFi pools (e.g. CREAM Finance)

  • Contract: Smart contracts using proxy

  • System: EOAs holding UNIs that are collected from many different EOAs

  • User: Just normal EOAs

Team/VC/Advisors received UNI from one address so it is easy to track.

You can see the pie chart above for the distribution and it is easy to find the problem of the current status. Anyway, let’s stick to the original question: is Uniswap governance in danger of CEXs’ attack?

Analysis

Basis & Assumption

  • Let’s see only this year. So Team/VC/Advisor will not vote more than the vested tokens - the 1/4 of their holdings (though they are just normal EOAs).

Naive View

Let’s put User, Contract, Liquidity/Defi pool, and UNI Mining pool as the neutral group.

Each group’s UNI holding is...

  • Good group: 100M UNI

  • Bad group: 41.42M UNI

  • Neutral group: 49.59M UNI

100 > 41.42+49.59

The good group wins even all of the neutral group vote for the bad group’s idea. Yay!

Strict View

Add all of the UNI holders and UNIs in the token distributor to the neutral group (hard to imagine though).

Each group’s UNI holding is...

  • Good group: 100M UNI

  • Bad group: 41.42M UNI

  • Neutral group: 128.58M UNI

100 < 41.42+128.58

The good group’s voting power is weaker than the bad group plus the neutral group! Oh my… But is it realistic?

Putting aside the assumption that all of the UNIs in the token distributor are on the same side with the bad actors, we have to see the voter turnout. In the case of Compound and Yearn, the voter turnout is lower than 40%. And this 40% is including the VCs’ votes. These projects are one of the most active products so expecting the same level of the voter turnout for Uniswap would be a reasonable and very conservative assumption.

So, 40% of the neutral group’s voting power is 51.42M.

100 > 41.42+51.42

Ta-da! The good group wins!

Wait, is it really “good”?

No. As mentioned at the beginning, the current status is not good. Uniswap tries to build a position that “Uniswap is a community-driven product”, saying “60% goes to the community!” However, the Team/VC/Advisors can dominate the governance as seen above, at least for a while.

In order to submit a governance proposal, it needs 10M UNI. Only 17 addresses holding more than 10M, and only one address is “outsider” - Binance. Other 16 addresses are teams, VC/advisors, and treasuries.

Even Andre Cronje who is “the guy” in the scene got the 2M of voting power by delegation currently (a few hours ago it was only 500k - happy to see the number go up).

Like the pie chart above, the team and investors have huge power over the system currently. Though they said like below, at least the investors can influence the governance.

The Uniswap team will continue to have no involvement in v2 protocol development, auditing, and other matters. Similarly, team members will not participate directly in governance for the foreseeable future, although they may delegate votes to protocol delegates without seeking to influence their voting decisions.

But as mentioned above, they want to put the brand “a community-driven project”, I expect that the team or investors will remain passive. And I think they will join the party when a CEX starts to participate in the governance. Maybe the first one will be Huobi. Or not ¯\_(ツ)_/¯

Actually I agree with Vitalik’s tweet that the best choice for the early-stage project is founder dictatorship, but… just disappointed a little.

Why coin voting?

One more thing I feel disappointed about the Uniswap’s governance system is the simple 1-coin-1-vote system. Many people in the industry criticized this system as the plutocracy, but the projects use this structure for their governance. A simple governance system is easy to explain, but I think it is too simple and dangerous. We can do better. I hope Uniswap and the big defi projects accept the quadratic voting or some structures counting in the loyalty. Let’s talk about it later.