Uniswap's Retroactive Airdrop Vote Put Free Money on the Campaign Trail

Governance, it is often said, is one of the most important issues in the crypto industry. But whether democracy makes blockchain products better or just devolves into fights over wealth remains an open question. 

One relevant test case just closed on Uniswap, though, offering a glimpse of what may be more akin to election-season stumping than boardroom politics (just with a lot more Discord). The specifics are secondary but here they are: A proposal to distribute $11.6 million worth of UNI to 12,619 wallets failed to pass because an insufficient number of UNI holders participated.

And because governance is seldom unpacked at length, here's a detailed blow-by-blow of one of the most closely watched governance decisions in the history of decentralized finance (DeFi). 

It was an episode that turned Uniswap's pleasant September surprise into a mildly acrimonious bummer.

The story starts on Sept. 16, when Uniswap, Ethereum's favorite decentralized exchange (DEX), began the process of decentralizing itself. 

To do so, the firm behind the token-swap site decided to airdrop 150 million UNI governance tokens to a bunch of Ethereum denizens who had touched Uniswap in one way or another over the years. Going forward, the tokens would be the means by which a new class of overlords could determine Uniswap's fate.

The most notable part of this airdrop was its magnanimity: Every wallet that had even tried to use Uniswap since its inception could claim 400 UNI, worth well over $1,000 at the time.

Read more: Uniswap's Distribution Is Built on Something That Can't Be Forked: Actual Users

But everybody is never pleased. Shortly after the UNI token distribution, Dharma – the DeFi lending startup that became a savings startup that became a trading startup – raised an objection on behalf of its users. Many Dharma customers had missed out on the UNI airdrop because their use of Uniswap had been masked by Dharma's proxy smart contract.

On Sept. 17,  Dharma CEO Nadav Hollander announced his intention to ask UNI holders to retroactively airdrop 400 UNI (5,047,600 tokens in total) to the 12,619 accounts that had used Uniswap through a third-party dapp. MyEtherWallet, Argent and Dharma topped a list of nine dapps that had put DeFi composability into practice and built on top of Uniswap.

The proposal went to a vote on Sept. 24. It closed on Oct. 31 and it failed, even though "yes" votes held a vast lead. The final count came out to 37.5 million UNI (worth a little over $86 million) in favor of the proposal and 1.3 million UNI against it. 

However, under the current rules, winning a vote isn't enough. A proposal also needs at least 40 million UNI voting in favor to legitimize the vote.

Read more: Uniswap Proposal to Airdrop More UNI Falls Short in Governance Vote

Because this, like most votes on blockchains, was a vote of tokens and not individuals. Felix Machart, a researcher at venture fund Greenfield One, who wrote a study on blockchain governance, commented on it to CoinDesk, saying, "You can buy yourself voting power, so it is more like shareholder democracy."

Maybe so, but the case of Dharma's bid for retroactive airdrops may point to a future in which on-chain decision-making looks more like congressional decision-making than corporate governance.

Of note: Uniswap didn't just release UNI out of nowhere. If DeFi Summer had been an action movie in the Marvel franchise, Uniswap would be the young superhero learning to test his powers in the opening act and facing off in the climax against an opponent that looked like his bigger, meaner twin.

That opponent for venture-backed Uniswap was SushiSwap, the instigation of the mysterious NomiChef, who innovated vampire mining and launched his Uniswap fork with a governance token baked in.

Indeed, when NomiChef abandoned the project to DeFi wizard Sam Bankman-Fried of synthetics exchange FTX, some wondered if Uniswap's days as the market-making king were numbered.

But a few chess moves later, Uniswap announced UNI. In doing so, it broke from other governance token distributions that had come before. Previously, these schemes only worked on a forward basis, announcing ways that liquidity providers would be rewarded with a new token for deposits.

Uniswap would also reward everyone who had already helped it establish a market. Not limited to depositors, the team rewarded traders too. Anyone who'd ever touched Uniswap got a thank-you note worth 400 UNI. As CoinShares' Meltem Demirors said at the time, that made it "really special."

Read more: SushiSwap Will Withdraw Up to $830M From Uniswap Today: Why It Matters for DeFi

Uniswap founder Hayden Adams did not respond to a request for comment for this story, but it is reasonable to suspect that the team moved up its timeline for dropping UNI in order to deliver the coup de grace to SushiSwap's SUSHI and the many other lesser forks that had come along.

Whether that was the intention or not, it worked.

The airdrop created roughly three kinds of UNI holders, who collectively have control of the current version of Ethereum's most popular buying-and-selling robot.

Most new holders would have only 400 UNI. 

Past liquidity providers would have a modest amount more. 

Meanwhile, staff, investors and advisers collectively received about 40% of the total supply of UNI, though it was all locked up in a four-year vesting period (meaning a little would shake loose every day). Vesting only makes tokens illiquid, though. It doesn't mean they can't be used to vote. That said, the Uniswap team promised it would not participate directly in governance decisions.

Read more: What Is Yield Farming? The Rocket Fuel of DeFi, Explained

All told, the surprise UNI drop made as many as 250,000 tiny holders (the users) about 50,000 moderate-sized holders (the liquidity providers) and a few dozen really big whales (the staff, investors and advisers). Many of those who could sell, did.

The whale factor is important because of the way the governance rules work. It takes 10 million UNI backing a proposal to move it to a vote. After that, the measure passes with a simple majority, but only if votes in support exceed 40 million UNI (that's how quorum is defined – it ensures adequate voter participation to make the vote legitimate).

There's also been a lot of selling and consolidating. As of this writing, several days after the vote ended, only 95,300 wallets hold UNI, according to Etherscan. The nation of UNI is small.

On an Oct. 22 episode of the YouTube DeFi show, Trust Bubble, Hollander said, "Tokenized governance, in general, is a flawed system, in that it reverts to plutocracy. ... Unfortunately, we don't know of a better system for now."

A UNI holder expressed a similar view in the forum on Sept. 21. "Currently it seems impossible for ordinary users to make any changes," a commenter named dharper wrote.

But for the entrepreneurs building on Uniswap (for whom no UNI airdrop was allocated), advocating together has at least helped them find a common cause: showing their users they could lobby for their interests when it comes to free crypto.

Shane Hong of the Kyber Network, another decentralized exchange, told CoinDesk, "I think this is the first time many different DeFi projects are working together on a common goal."

Dharma worked to gather as many other third-party apps that had enabled users to interact with Uniswap as it could. All the startups with users in a similar position worked together over GitHub to assemble a list of addresses that could be shown to have interacted with proxy addresses that then used Uniswap.

The first list was comprised of the aforementioned 12,619 addresses that had used nine different dapps to indirectly use Uniswap. This was the list involved in the vote that ended Saturday. Had the first proposal passed, a second list of 26,598 accounts (those who had touched Uniswap via five different DEX aggregators) would have also been put forth.

In a phone call with CoinDesk, Hollander said his view of Uniswap stakeholdership was necessarily expansive. The fact that some were a step removed shouldn't matter, he said, because the whole idea of DeFi and its money legos is to build upward.

"Anybody who interacted with Uniswap, no matter how many levels of indirection, was acting as a market taker," he said. "They would count as being an early supporter of Uniswap."

But again, a unique wallet address does not always equal a unique individual.

Shortly following Hollander's initial post, some commenters wrote in the governance forum of "overlap" concerns, or the contention that many third-party app users had probably already ridden the UNI gravy train.

Hollander disputes this view.

"I would say a solid majority of our users interacted with Uniswap for the first time through Dharma," he said. "I would push back on the assertion that this is, in some way, a frivolous or redundant airdrop."

Hiturunk is a computer science student in Arkansas who has risen to prominence in Uniswap governance circles. 

A longtime lurker in crypto going all the way back to Mt. Gox, Dharma's proposal was the first to stir him to speak up and find others aligned with his viewpoints. On that episode of Trust Bubble, he was there to say that a retroactive UNI airdrop was the wrong frame for this whole conversation.

"I think we need to restructure the proposal process so we're talking about a Uniswap Improvement Proposal," Hiturunk said, referring to the process for updating most open-source projects, including Ethereum and Bitcoin. 

Each dapp's team, he felt, should make its case one by one, not in one proposal representing nine different organizations. It's worth noting the same user who voiced their "overlap" concerns would later write that they could support a retroactive distribution to Dharma's users but not necessarily those of other startups Dharma had allied with.

Hiturunk would end up galvanizing a subset of users around him, becoming the figurehead of what came to be known as the Penguin Party. (Hiturunk told CoinDesk in a phone call that they are penguins because that's the mascot for Linux.)

He and his allies espouse an ethos from the open-source software movement, he said, where expenditures should be used in ways that benefit everyone (which usually means expenditures on developing more software rather than fresh giveaways).

Read more: SushiSwap Migration Ushers in Era of 'Protocol Politicians'

If SushiSwap's debut ushered in the era of protocol politicians, the Penguin Party might represent the emergence of protocol populists. 

That said, Machart, Greenfield One's governance researcher, contended that advocacy for the little guy might be better served by working to change future processes before they are initiated. For example, groups like Radical Exchange espouse voting models where people with more assets have more say but not wildly more say than smaller holders.

"It's wishful thinking that this is representing 'one person, one vote,'" Machart said. "Maybe it will evolve toward that in the future."

Dharma did not have the votes in UNI on its own to get its proposal passed.

"Basically we were in this position where we had this cold-start problem," Hollander told CoinDesk.

While Dharma was trying to galvanize a vote to redistribute community UNI, a crew of DeFi scions from Aave, Yearn and the Gauntlet Network were working to rewrite the voting rules. They introduced a proposal to lower the threshold to propose a change and to lower the amount of UNI required to establish a quorum.

Gauntlet's Tarun Chitra etched out his rationale on the Uniswap governance forum, estimating a quorum size of around 30 million UNI would be sufficient to beat collusion between large holders (namely, exchanges) who might hurt the protocol.

Needing at least some of the people who had delegated to this initiative to support the Dharma proposal for it to have any hope at all, Hollander and his cohort got behind the rules revision and pushed for it to succeed. It won the majority of votes by far but also narrowly failed to reach the 40 million UNI quorum for passage.

"Nothing else was going to happen until that happened," Hollander explained on Trust Bubble, because Gauntlet and its allies weren't going to vote on anything but the rules adjustment. Until that happened, Gauntlet's constituency wouldn't vote on anything else. "We stand by the proposal. We believe in it as well," Hollander said.

But such is the cost of protocol politics.

That initial vote failed and a vocal minority didn't like the appearance of attempting to change the rules. Once the Dharma team immediately submitted a proposal that many of the same UNI holders were ill-disposed to, tensions started to run higher.

"I expected this proposal to be very contentious," Hollander said toward the start of the Trust Bubble show. "I would say we have entered the realm of expected contentiousness."

The show's host, Chris Blec, a familiar DeFi gadfly on Twitter, had invited Hollander and basically anyone to discuss the issues. As things started to get a bit heated, Blec noted, "Nobody's breaking anybody's rules. Nobody's cheating. … Everything that's happening is by the code." 

But he also offered, "The system is kind of broken. I think it's really important as we go along that we call out these kinds of issues."

Read more: Crypto VC Firm Assesses the 'State of Blockchain Governance'

Many of Blec's questions for Dharma hinged on why the proposal needed to happen as soon as it did. "The basic gist is: We wanted to go out and propose this as soon as possible. This is not something we wanted to drag out as long as it has been," Hollander answered.

After the livestream, Blec posted a poll on the Uniswap forums, urging Dharma to delay. It got 104 votes but even then the majority was on the side of getting the vote over with.

So Dharma moved.

On Oct. 24, the actual vote went up. According to a capture of Etherscan a few days before, there were a little over 90,000 accounts that held UNI at that time, down considerably from the 300,000 eligible to claim it on Sept. 16.

This would be the first of two proposals to go. The first would serve the various dapps that had enabled users to touch Uniswap and the second larger slate would specifically cover the DEX aggregators. Whether that second vote will happen following the first vote's defeat is now an open question.

Both on Blec's show and with CoinDesk, Hollander took pains to frame further distributions as a good one for UNI holders. More small fish would have UNI; therefore, there would be more power to mobilize for smaller holders. Of course, on the other hand, no small portion of them would probably sell, pushing UNI's price down.

When a governance token and a growth token are one and the same, such differences of opinion might be expected.

For his part, Hiturunk was also concerned about selling pressure. Uniswap is running a special promotion right now, promoting liquidity in four market-making pools, rewarding depositors in each with extra UNI tokens through early November. Hiturunk's Penguins are moving toward asking for a vote soon to extend the promotion and add an ETH/UNI pool, to help diminish that sell pressure.

Putting the retroactive UNI airdrop proposal up for a vote, with code to execute the distribution ready, reignited a conversation that had been well underway in the forums. All kinds of points were made there, but a few are worth highlighting.

A user going by bfrazier72 contended that Dharma and Matcha users should worry about Dharma and Matcha. "You guys want free tokens? Ask Dharma, Matcha etc for their own token," bfrazier72 wrote.

Another, heyJonBray, attributed the Dharma proposal to sour grapes by folks who missed out. "All of us, right now, are currently missing opportunities we don't even know about," heyJonBray wrote.

And lastly, a user going by jimz faults ambiguous language about intent from Uniswap's original blog post. He wrote, "Yes, it's about entitlement, but that's because who is and who isn't entitled in the promise made here is unclear and a binary choice."

Foreseeing little likelihood of consensus, Hollander opted to see if he had a silent majority on his side. "We want to get this vote out there. If it succeeds great, if it fails we can move on," he told Blec and company.

It's clear that people in crypto communities don't really know how to go about building support in a political effort yet, nor what will or won't bring people to their sides.

The Penguin Party has been working as a team of developers to build tools that help users delegate to them and then express views about what the party should do. It has actually already released a token of its own, called FISH.

"Everything is based around our use of Discord and being active in the Uniswap community," Hiturunk said. Most of the grassroots energy is spent in the various forums.

Hiturunk told CoinDesk that he would prefer to see community funds used for "features that are mutually beneficial to everyone and move Uniswap as its own company forward for everyone."

The Penguin Party's FISH holders ultimately voted unanimously to reject the retroactive airdrop, in a vote that represented about 600,000 UNI (roughly half the vote that went negative).

Hollander's side organized in a somewhat more Silicon Valley way, though in fairness that was probably the only realistic way to do it.

"The UNI distribution is not as egalitarian as I might want," Hollander told CoinDesk. "Empirically that's just the way that it is."

There just isn't a mass of active UNI governance participants out there. "In an ideal world we'd have such a decentralized forum we could just go out and do a grassroots forum campaign," Hollander said.

Uniswap's staff has said they would sit on the sidelines; but the project's backers are known, so that's where Hollander went first. He said he tried to persuade some of the known whales, who he knows as a founder of a venture-backed company in the Bay Area, to support his effort. As of Oct. 22, though, he said he only knew the identity of one of the big wallets that had delegated to his cause.

Hollander didn't even know, at the time of his conversation with Blec, whether or not he'd have the support of Chitra, who had spearheaded the effort to lower the UNI needed to establish a quorum. "It's very unclear if he's going to want to participate in this proposal," he said.

Gauntlet ultimately announced in a Twitter thread on Oct. 26 that it would not participate, largely because the vote was qualitative, not quantitative.

It came tantalizingly close, but Dharma and its allies failed to get there.

However, Uniswap's latest vote has shown the beginnings of what looks more and more like a political process, in which well-resourced constituencies form loose coalitions while scrappy activists stir up dissent.

If the outcome has left some dissatisfied, Greenfield One's Machart offers a philosophical consolation. "People are unhappy with how corporations work. Global corporations can hardly be regulated on a global level," he said. "So maybe we need some forms that go beyond?" 

Machart implied that the current governance foibles in crypto could be beta tests of new forms of democratic global oversight.

But at the micro level, in the present, an exchange between the provocateur and the entrepreneur just before voting began may be somewhat illuminating here.

"Nothing has gotten done in Uniswap governance yet. Nothing has gotten moved," Hollander said on Trust Bubble. "The Uniswap governance community is underdeveloped."

The host, Blec, didn't see that as an issue.

"The solution was proposed before we even established this was a problem," Blec said. He thought there should have been a vote on the problem area first and then on a specific intervention, such as the retroactive airdrop.

Hollander dismissed that, saying, "What you're advocating for is a sort of spiritual governance vote."

But Blec countered, "Decentralization is supposed to be hard. Decentralization isn't supposed to be easy." So far, so true.