In 2024, the Total Value Locked (TVL) in the DeFi sector doubled, surpassing the $120 billion threshold. This resurgence was largely driven by a shift in the U.S. regulatory environment following a change in the White House administration. With reduced regulatory pressure-previously based on the classification of DeFi tokens as securities - protocol teams resumed discussions about the implementation of the "fee switch." This mechanism aims to redistribute revenue by allowing token holders to receive dividends.
Despite these discussions, many DeFi platforms have postponed or outright rejected the implementation of fee switch policies. This hesitation raises concerns about whether DeFi governance is truly decentralized or if it remains under the influence of major stakeholders.
How Does the Fee Switch Work
The fee switch is a mechanism through which a DeFi protocol redistributes part of its revenue to native token holders. Typically, DEXs and lending platforms generate revenue from user transaction fees, most of which are allocated to liquidity providers (LPs).
By activating the fee switch, the protocol would retain a portion of the revenue previously directed to LPs and instead distribute it to token holders. This would effectively turn governance participants into financial beneficiaries, rewarding them for staking tokens or participating in decision-making.
The implementation of the fee switch presents several advantages for DeFi tokens:
- Valuation Stability. Linking token market value to real economic performance enhances their appeal to long-term investors and reduces speculative price volatility.
- Inflation Control. The mechanism addresses the previous DeFi cycle’s issue of excessive token issuance, which diluted capitalization. Instead, it promotes buybacks and token burns, fostering price appreciation rather than supply expansion.
- Increased Utility. Beyond governance rights and service access, tokens would also provide direct financial incentives, reinforcing their role within the ecosystem.
Resistance from Major DEXs
Uniswap, the largest decentralized exchange, has repeatedly faced opposition to activating the fee switch. On February 23, 2024, the platform proposed redistributing trading fees to UNI token holders. Although the "temperature check" vote between March 1-6 demonstrated strong community support, the final vote scheduled for May 31 was abruptly canceled.
The platform's leadership cited the need for additional scrutiny, stating:
“Over the past week, a key stakeholder raised concerns requiring further examination. Given the sensitivity of the proposed update, we have made the difficult decision to postpone the vote.”
The delay sparked frustration within the community. Crypto researcher Gabriel Shapiro criticized the decision, arguing that UNI token holders were being treated as “second-class citizens.”
By February 2025, the fee switch proposal had been rejected three times. According to OAK Research, major stakeholders - including Andreessen Horowitz (a16z) and Uniswap founder Hayden Adams - played a crucial role in blocking the initiative, citing regulatory risks as their primary concern.
Regulatory scrutiny has indeed been a significant factor. In 2024, Uniswap received notices from the SEC and paid fines to the CFTC. However, governance centralization also plays a role - data from Dune Analytics reveals that only ~4.5% of UNI holders participate in voting. Furthermore, out of the 30 largest delegates, 14 have missed the last ten votes, and only seven have ever submitted a proposal.
Aave’s Alternative Approach
Aave, the second-largest DeFi protocol by TVL, has taken a different approach. In July 2024, the platform launched a “temperature check” on a revenue distribution initiative known as "buy and distribute." This mechanism allocates a portion of Aave’s income toward purchasing AAVE tokens on secondary markets, which are then redistributed to stakers.
On January 4, 2025, Aave founder Stani Kulechov hinted at imminent changes, tweeting: “Fee switch is coming.”
Pioneers and Emerging Trends
While major protocols continue delaying the fee switch, smaller projects have embraced this model for years. Synthetix, for example, implemented a revenue-sharing model in 2019, allowing SNX token holders to earn passive income. In early 2023, the protocol launched its third version and abandoned its inflationary token model. By February 2025, daily earnings for SNX holders amounted to approximately $2,500, according to DeFi Llama.
Another example is SushiSwap, a Uniswap fork that successfully attracted ~70% of Uniswap’s liquidity in 2020 through a “vampire attack.” Despite facing long-term security issues, SushiSwap’s revenue-sharing model continues to generate ~$2,550 daily for token holders.
Some newer decentralized exchanges (DEXs) have adopted innovative game-theoretic staking models, such as ve(3,3). This approach allows participants to lock their tokens in exchange for wrapped versions, incentivizing long-term engagement while optimizing rewards.
One notable implementation occurred in August 2023 when Velodrome Finance launched a fork on Base L2, named Aerodrome. The platform quickly captured significant liquidity, integrating ve(3,3) mechanics for revenue redistribution, including:
- Trading Fees. Collected from transactions and distributed proportionally among LPs.
- Token Incentives. AERO token rewards are allocated based on liquidity provision and staking duration.
- Token Locking and Conversion. AERO holders can exchange their tokens for veAERO, promoting long-term staking and governance participation.
Similarly, PancakeSwap has adopted a staking-based model for CAKE tokens, rewarding users with a wrapped version (veCAKE) to facilitate sustained liquidity and governance.
Political Influence and Future Predictions
Regulatory policies have played a crucial role in shaping DeFi tokenomics. Over the past two years, the SEC has intensified its crackdown on crypto assets, classifying many tokens as securities. Activating the fee switch could expose DeFi tokens to similar regulatory scrutiny, leading to compliance challenges or financial penalties.
However, the political landscape shifted in 2025. During his campaign, then-vice-presidential candidate J.D. Vance criticized the SEC’s regulatory stance, arguing that its focus should shift from utility tokens to memecoins.
On February 12, 2025, SEC Commissioner Hester Peirce, known as "Crypto Mom," reassured investors that memecoins were unlikely to face strict regulatory actions.
In March 2024, analysts from Bernstein predicted that regulatory authorities would adjust their stance on DeFi tokens, recognizing their distinct characteristics from traditional securities. If regulatory conditions become more favorable, DeFi projects may intensify discussions around fee switch implementations, potentially sparking a new wave of adoption in the crypo sector.
As DeFi protocols navigate the delicate balance between profitability, liquidity provider incentives, and token holder rewards, market participants should closely monitor developments in governance structures and regulatory policies. If conditions align favorably, the widespread adoption of the fee switch could redefine DeFi token utility, making them an even more attractive investment class.
