Decentralization in Question: Will DeFi Token Holders Be Able to Expect Dividends?
Date: 2025-02-18 Author: Oliver Abernathy Categories: BUSINESS
The change of administration in the US has led to a relaxation of regulatory pressure, which has allowed the issue of fee switches, a mechanism for redistributing income in favor of token holders, to be revived. However, despite discussions, the implementation of this concept faces obstacles.
Fee switches are a method for DeFi protocols to allocate a portion of their revenue to reward token holders. In the standard model, revenue is generated through user fees, which in most cases are distributed among liquidity providers (LPs).
With fee switches, a portion of these fees is retained by the platform and passed on to token stakers, providing them with additional income. This mechanism can solve several key problems of DeFi tokens:
1. Value justification: Linking the token price to the platform's real income attracts long-term investors and reduces the impact of speculation.
2. Inflation control: Unlike previous DeFi cycles, where the constant issuance of tokens eroded their value, the new model involves burning a portion of the tokens, increasing their value.
3. Functional utility: Tokens become not just a voting tool, but also a way to generate income, which makes them more attractive.
On February 23, 2024, Uniswap put a fee switch proposal up for discussion. During the first vote in March, the idea received widespread community support, and the final vote was scheduled for May 31. However, at the last minute, the platform's management decided to cancel it, citing the need for additional verification.
This caused discontent among participants, including crypto analyst Gabriel Shapiro, who noted that UNI holders were effectively removed from decision-making. By February 2025, the fee switch proposal had already been rejected three times. According to OAK Research, large investors such as a16z and Hayden Adams consistently voted against it, citing regulatory risks.
Uniswap's decentralized governance remains a formality: less than 5% of UNI holders participate in voting, and half of the top 30 delegates have ignored the last ten decisions. K33 Research analyst Anders Helseth believes that the implementation of a fee switch is unlikely, since large investors are not interested in changing the system.
In July 2024, Aave initiated discussions on a fee switch in the form of a "buy and distribute" mechanism, in which part of the fees are used to buy back AAVE tokens and then distribute them among stakers. In early 2025, Stani Kulechov, the head of the project, confirmed the growth of the payout fund, hinting at the imminent implementation of the mechanism.
Some protocols, like Synthetix, have been using fee switches for over five years. In 2019, the team implemented a revenue-sharing scheme for SNX holders, and in 2023, it abandoned the token inflation model. SushiSwap was able to temporarily lure a significant portion of Uniswap liquidity in 2020 by offering generous SUSHI staking rewards, but subsequently ran into security issues.
Other DEXs, such as Velodrome Finance, use the ve(3,3) model, where participants lock up tokens in exchange for wrapped versions with additional incentives. PancakeSwap uses a similar system, paying out revenue in the form of veCAKE.
The SEC has been strict in crypto regulation for two years, and the introduction of a fee switch could have triggered the classification of DeFi tokens as securities. However, the arrival of a new administration has changed the situation. In 2025, J.D. Vance, as a vice presidential candidate, criticized the SEC’s approach, suggesting a focus on meme coins rather than utility tokens.
These changes could play into the hands of DeFi protocols, pushing them to implement fee switches. However, the final decision will depend on the ability of projects to balance the interests of investors, liquidity providers, and regulators. If the policy does become more favorable, DeFi could see a new round of growth.
