Decentralized exchange (DEX) Uniswap’s native token UNI climbed 60% on Feb. 23 to a two-year high of $12.48 following a governance proposal to introduce a fee reward mechanism for holders.

The token has since given up some of its gains and was trading at $11 as of press time — up 48% on a daily basis, according to CyptoRanking data.

UNI was last trading at these price levels in January 2022.

The primary driver behind the price rise is a new proposal to overhaul the DEX’s governance system. It aims to tackle the crucial issue of low engagement and “stale” delegation by directly incentivizing active participation.

Active governance

According to the proposal, Uniswap currently faces a troubling reality: despite its governance system holding the reins of the protocol’s future, participation remains sluggish.

Less than 10% of UNI tokens, the lifeblood of voting, are actively used, and a significant portion of existing delegation stands idle, failing to contribute to crucial decisions. The lack of engagement poses a potential threat to Uniswap’s long-term stability.

The proposal wants to solve this issue by creating a compelling incentive for token holders that involves linking UNI token delegation and staking to a share of the protocol’s fee revenue. This creates a direct connection between active participation and potential rewards, aiming to foster a more engaged community and attract new delegates.

The mechanism will be implemented via two new smart contracts that are meticulously designed to automate protocol fee collection and distribute them fairly to stakers based on their delegated UNI tokens.

The proposal lays out every detail of these contracts, including security audits and code descriptions, to remain fully transparent with the community.

Voting scheduled

The community has reacted positively to the development, and the surge in UNI’s value indicates a buying frenzy ahead of the voting snapshot.

After open discussion and refinement on the Uniswap forum, the community will hold two votes to determine whether it should be adopted — a snapshot vote on March 1 and an on-chain vote on March 8.

If successful, the community will then have the final say on activating the fee mechanism through a separate vote. This ensures every voice is heard and allows for further deliberation before taking the final step.

This proposal’s potential ramifications extend beyond Uniswap itself. Should it be implemented successfully, it could become a reference point for other decentralized protocols seeking to enhance active participation and responsible governance practices.

However, careful evaluation is necessary to understand the potential effects on liquidity and trade execution, as acknowledged within the proposal itself.

The proposal mirrors Osmosis DEX’s recent prop 651, which introduced similar incentives for token holders. The protocol has generated and distributed a little over $4 million in taker fees to OSMO stakers.

Osmosis Lead Llama Emperor Osmo told CyptoRanking:

“The recently suggested changes within Uniswap only help to cement that Osmosis governance acted with the sustainability and long-term viability of the Osmosis DEX in mind. Similar to what Prop 651 did for Osmosis, Uniswap aims to transform its UNI token from a governance-only token to one with a legitimate value accrual mechanism.”

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