Uniswap founder Hayden Adams has publicly defended the sustainability of Automated Market Makers (AMMs), countering criticism from analyst Guil Lambert. Lambert argued that AMMs are structurally unsustainable because liquidity providers (LPs) are not paid enough, as fees scale with realized volatility while LPs need compensation based on the higher implied volatility to survive.
Adams pointed to real-world growth in Uniswap liquidity pools as evidence of the model's viability. He emphasized that the upcoming Uniswap V4 upgrade, featuring "hooks," is specifically designed to enhance LP profitability and address long-term sustainability concerns.
Adams argued that AMMs remain competitive across different market structures. For low-volatility pairs like stablecoins, AMMs offer steady yield to participants with cheaper capital, allowing them to outprice professional firms. For high-volatility, long-tail assets, AMMs win because other market structures don't scale effectively. He noted that LPs for these assets are often the projects themselves or early supporters whose primary goal is creating liquidity, not maximizing profit through delta-neutral market making.
The discussion comes amid significant developments for Uniswap. The protocol activated its "fee switch" on December 27, a mechanism to share protocol revenue with UNI token holders. This proposal initially caused a 35% increase in the UNI token's price. Since activation, Uniswap has generated nearly $600,000 in fees in approximately 10 days, projecting an annualized fee revenue of over $24 million. The protocol has also burned 96,000 UNI tokens, with an annualized burn rate of about 3.893 million UNI.
According to Dragonfly partner Omar Kanji, since the fee switch was turned on, Uniswap's value hit 240 times its annualized fees. The fully diluted value of the decentralized market is reported at $540 million, with yearly fees around $2.3 million. Despite the positive fee news, the UNI token price declined by 5.7% over the last 24 hours and 1% over the last week at the time of reporting.
Adams concluded by agreeing on the fundamental need to improve LP returns, stating, "Def agree on improving LP returns." The industry is closely watching the development of Uniswap V4 and its hooks as a potential solution to the critical question of long-term LP profitability and the sustained health of decentralized liquidity.
