When Uniswap tokenholders approved the creation of a DeFi Education Fund (DEF), they authorized the DEF to deploy 1M UNI over the next several years. Given the unpredictable and quick-to-change regulatory climate, the DEF also received considerable discretion over its operations as mentioned in the proposal: “due to the dynamic and somewhat unpredictable state of global policy proposals, we believe the grant-making committee should have considerable discretion to allow for flexibility and speed.”
On Monday afternoon, DEF sold half of its 1M UNI allocation in exchange for USDC to begin its work and fund future operations.
The DeFi community’s inclination toward scrutiny and efforts to hold representatives to the highest standards are critical for effective governance and bode well for the future of the Uniswap Treasury. While the DEF has committed to being fully transparent about its activities, we recognize that Monday’s sale prompted questions and want to address them directly.
Why the sale was made
Because we expect the vast majority of DEF’s expenses will be dollar-denominated, the UNI funds must be diversified into dollars. Diversifying half of the 1M total allocation provides the DEF with a sustainable budget to weather any market downturns and allows the DEF to rapidly get to work.
Time is of the essence. Regulators and policymakers worldwide are now monitoring DeFi closely. Although some of them understand the benefits DeFi offers, many others are skeptical about a decentralized financial system that lacks the intermediaries they typically regulate. Last week, Senator Elizabeth Warren wrote to the Chairman of the SEC, Gary Gensler, demanding regulatory action that would directly impact existing decentralized trading protocols and related applications. And European regulators are exploring rules that could significantly impede innovation.
In short, we believe regulatory risk is the single greatest threat to the DeFi services and liberties to which the community has become accustomed over the past few years. DEF seeks to protect these through a pragmatic approach, by funding advocacy to legislators and regulators on behalf of the DeFi industry.
How we made the sale, and why we did it that way
Though using Uniswap for the balance sheet diversification operation would have been preferable, today, there is not sufficient liquidity to support a sale of such size with best possible execution.
Instead, Genesis was chosen as a market maker because of their (i) reputation as a top market maker, (ii) competitive fee schedule, and (iii) quick and easy onboarding.
None of the sale mechanics were private or hidden, and all of the transactions are available for public audit. We asked Genesis to sell 500k UNI on July 10, and by ~3PM EST on July 12, Genesis completed the UNI sale from its own UNI holdings at an average price of $20.4. We sent Genesis 500k UNI from our multisig later on Monday, and they sent us ~$10.2M in USDC. Going forward, we hope to use the Uniswap Protocol for any diversification. (We expect, barring any unforeseen events, that future sales will be in smaller quantities, and liquidity on the Uniswap Protocol is expected to grow).
Finally, we note that the sale represented <5% of daily UNI trade volume and was not likely to have a negative impact on the UNI market price. UNI traded down on Tuesday in line with crypto assets broadly.
Ensuring transparency and managing potential conflicts of interest
We are committed to transparency as funds are deployed, consistent with the approved proposal, and are taking several measures to ensure this occurs.
We will publish an annual budget in <90 days. Financial activity will be transparent. A DEF Policy Director, who will work full-time for market-competitive rates as approved by the Committee, will determine and manage an annual budget. This DEF Policy Director hiring process is still ongoing. We encourage additional applicants to apply here.
Uniswap governance will be able to block transactions and revoke funds using the Tally Failsafe tool. Failsafe is currently being audited and will be introduced as soon as it is in a safe-to-use production state. We expect to deploy funds in a front-loaded way and place half in the Failsafe when it is ready for distribution over four to five years.
The DEF proposal authors are not on the committee, and they are not involved in the committee’s use of funds. A graduate school student group, the Harvard Law School Blockchain and FinTech Initiative, authored the DEF proposal. The seven members selected to serve on the committee — six of whom are well-respected lawyers — have cumulatively spent decades advocating on behalf of innovative technology and counseling technology start ups.
DEF committee members are aligned with DeFi’s success and most are not being compensated for their time. The DEF steering committee includes some of the strongest, most dedicated legal and organizational minds in DeFi. Four of the seven committee members hold senior legal roles at the top DeFi software development companies, and have been working for years to educate about DeFi independently and on their own time for the better of the DeFi ecosystem. One committee member, Larry Sukernik, is the founder of DAO-focused company called Reverie. The final two committee members, Sheila Warren and Katie Biber, have publicly expressed support for DeFi’s growth and have considerable experience interfacing with regulators around the world. Most members are volunteering their time and are well-known to and endorsed by other well respected industry representatives including Coin Center’s Jerry Brito and ConsenSys’ Matt Corva.
Voting delegates are independent from parties that have delegated. Multiple university student groups have been delegated votes by tokenholders who have sought to distribute voting influence and encourage broader grassroots participation. These student groups vote entirely independently. Two delegate groups — Blockchain at Berkeley and Blockchain at Michigan — voted against the DeFi Education Fund proposal; two others — MIT Bitcoin Club and Blockchain at UCLA — elected to abstain; and those that voted for each submitted lengthy posts explaining their rationale for voting in favor.
Committee members will not be permitted to make UNI transactions within a 7-day window of any DEF treasury activity. A DEF committee member sold $50k of UNI in a completely unrelated transaction on behalf of a grant recipient group (of which he was a member) around the same time as the DEF’s UNI sale. This $50k transaction occurred after the DEF’s UNI sale. Going forward, we will prohibit committee members from engaging in UNI transactions within a 7-day period to avoid any perceived conflicts or confusion.
We are certain that the DeFi Education Fund will contribute to DeFi’s success — and the growth and success of its projects and participants. Legislators and regulators are becoming increasingly aware of DeFi, but there is significant work to do to ensure that DeFi’s value proposition and potential is communicated and understood. Anyone who wants to build DeFi projects — or build on them — would benefit from legal clarity and an informed regulatory environment. This is a pivotal time to ensure that their actions are productive and permit future innovation. Finally, to ensure continued transparency, DEF will post monthly community updates on progress, grant allocations, and tactics.