Threat of Uniswap Replication Triggers Rare Clash With A16Z

On April 1, all hell might break loose. At least, that’s how Uniswap’s supporters see it.

On that day, Uniswap V3 will enter the public domain, allowing anyone to launch copycat exchanges. Clones could sprout like wildflowers after a desert storm. And that proliferation of Uniswaps has some in the community nervous.

Disputing the Criticism

Andreessen Horowitz is worried, too. But the storied venture capital firm, which is a top VC backing Uniswap, has found itself at odds with the exchange’s community. For the first time, a16z, as it’s known, has voted against a Uniswap proposal, angering critics who recoiled at the sight of a venture capital firm using its clout in one portfolio company to benefit another. A16z has disputed the criticism.

Traditionally, disagreements over strategy at a startup company are debated and settled in private. Among decentralized protocols, however, decisions are made by token holders, which are akin to shareholders in a publicly traded company. And their votes are there for anyone to see and scrutinize.

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This is no small matter. Uniswap, a unicorn valued at more than $1B, is a giant of DeFi. It’s the No. 1 decentralized exchange when measured by trade volume, and over the past seven days, more than $6B in trades have been made on the platform.

The ability to copy, tweak and improve on others’ work is central to the ethos of crypto. Two popular exchanges, Sushi and PancakeSwap, are both built using the Uniswap codebase. But that ability to duplicate, or “fork,” existing protocols can also spell chaos, as clones make it difficult to identify the original and allow bad actors to create copies with altered – and, potentially, malicious – code.

Many Uniswaps

The Uniswap community rushed to deploy Uniswap V3, which was first released on Ethereum, across new blockchains before April 1. Should Uniswap fail in its scramble, the exchange could find itself competing against many “Uniswaps”, each running on a copy of the original’s industry leading software. Should it succeed, Uniswap will likely attract users and liquidity sufficient to maintain an edge over any would-be pretenders.

Its most recent attempt, and likely its most consequential, has been a struggle.

Though Uniswap V3 has already been deployed to several blockchains, those blockchains had their own bridge to and from Ethereum. But BNB, a blockchain popular in much of the developing world, does not. Although it was successful, a proposal to deploy Uniswap V3 there has proven controversial.

Raising Questions

At the heart of the matter was the question of which technology would be used to connect — or “bridge,” in crypto parlance — the original Uniswap on Ethereum to the new deployment on BNB.

It has also raised questions about the influence of venture capital in companies that are ostensibly decentralized, where an uneven distribution of so-called governance tokens concentrates power in the hands of early investors.

In December, the mononymous CEO of crypto firm Plasma Finance, Ilia, suggested in the Uniswap governance forum that Uniswap V3 deploy on BNB.

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GFX Labs, another crypto firm and one that often participates in governance debates, said it was likely a savvy business decision — the dominant decentralized exchange on BNB, PancakeSwap, was a clone of an older, less efficient version of Uniswap, and V3 would likely eat its lunch.

That thesis had already played out on Polygon, another popular blockchain. A Uniswap fork called QuickSwap had a majority of the decentralized exchange market share on Polygon.

Governance Forum

“Within two months of Uniswap v3’s deployment, it took over most of Polygon DEX’s market share,” GFX said.

Quickly, several companies jumped into the governance forum to suggest their bridge be used to connect Uniswap to BNB. The financial benefit is likely small, GFX co-founder Getty Hill told The Defiant, but the boon to their reputation could prove valuable down the road.

Debate raged, politely. Analysis, from GFX and others, was shared, some of it critical. Bridge protocols penned rebuttals. Participants complained they had little time to read either. Meanwhile, Uniswap Foundation founder Devin Walsh shepherded the conversation. (The Foundation was founded last summer in order to improve the governance process and distribute grants to worthy projects.)

A16z partner Porter Smith supports Uniswap’s deployment to BNB.

“Uniswap proposals have been relatively uncontroversial,” Hill said. “Granted, there’s been actually just very few Uniswap proposals in general. So there haven’t been too many opportunities for controversial things to come up.”

The bridges “are all, generally, relatively new tech,” Hill said, noting that Wormhole was an exception. “With so many different interests involved, I guess it just became a lot a lot bigger than folks had originally anticipated.”

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Debate narrowed to four bridge protocols, and Walsh organized a vote to determine which would be used to deploy Uniswap V3 to BNB.

Around this time, a16z joined the conversation.

The venture capital firm is the largest in crypto. It has raised a staggering $7.6B to invest in crypto ventures on behalf of its clients. Its crypto portfolio is loaded with top-shelf names such as MakerDAO, dXdY, and OpenSea.

Millions of Tokens

On Aug. 6, 2020, a16z led a Series A investment round in Uniswap, and following subsequent rounds the Silicon Valley firm now controls millions of UNI tokens, which it can use to vote in a similar way investors vote equity shares in listed companies. The Uniswap protocol is governed by people who hold UNI, and one token is worth one vote.

Porter Smith, a deal partner on the crypto team at a16z, wrote in the governance forum that a16z supported the deployment to BNB in order to “avoid the copy-paste rush that will likely ensue otherwise.”

Deploying to BNB would ensure users there “can trust they’re using the original code base – preempting possible bad actors or just carelessness,” he added. Clones would still pop up, but deploying V3 “at least … offers an official version to users seeking that forum.”

Due to a technical issue, however, a16z couldn’t participate in the vote to decide which bridge would be used. If it could have, however, it would have used its 15M UNI tokens to vote for LayerZero. As it happens, LayerZero is another a16z portfolio company.

Best Bridging Solution

“We believe that LayerZero offers the best bridging solution,” Smith wrote, before throwing in a disclaimer: “For transparency, we invested in them. We believe they are the most secure, decentralized, and philosophically aligned partner for Uniswap.”

A16z chief technology officer Eddy Lazzarin asked that the community count the 15M tokens, or votes, the firm would have cast for LayerZero. But Walsh, of the Uniswap Foundation, rejected the suggestion. Without a16z’s tokens, Wormhole, a competing bridge protocol, won with almost two thirds of the vote.

The venture capital firm quickly said it would oppose the final vote, in which UNI holders were asked to approve the deployment of Uniswap to BNB via Wormhole. It was a matter of security, Smith said.

First Time

“The Wormhole bridge suffered a $326M exploit last year,” Smith wrote. “The bridge then had another critical vulnerability that put all $1.8B [crypto deposits] at risk.”

But critics saw something more sinister — a venture capital firm using its clout in one portfolio company to benefit another. It was the first time a16z had ever voted against a Uniswap governance proposal, and the first time it had cast a vote since October.

“Don’t like a16z putting their interests ahead of protocol’s more than i dislike BNB, so count me in!” a UNI holder who voted in favor of the deployment wrote.

The venture capital firm’s partners insisted this wasn’t the case. Through a spokesman, a16z declined to make a partner available for an on-the-record interview, but directed The Defiant to statements shared on social media.

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“We’ve delegated the majority of our UNI holdings to a variety of orgs, without any preconditions on how they vote,” Smith wrote on Twitter.

Although it had voted with 15M tokens, a16z owns far more. Another 40M that belong to a16z have been delegated to outside organizations, such as Blockchain at Michigan and GFX.

“If you actually go down the list of voters, it’s a bit ironic,” Hill, the GFX co-founder, said. “Many of the votes that other folks are [casting] on the other side of [a16z] here are [a16z’s] own [tokens].”

Delegates

That includes GFX, which voted for the deployment. A16z asks its delegates to sign an agreement which stipulates, among other things, that the venture firm won’t pressure its delegates to vote a certain way.

“I’ll applaud them for that,” Hill said. “While they certainly have been more involved in this proposal than historical ones, you don’t see other venture capital firms really engaging in this type of delegation effort. And if it weren’t for them doing this Uniswap governance would look very different.”

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The proposal ultimately passed Friday morning with almost two-thirds support. Crypto venture firm Variant and a16z delegate Blockchain at the University of California Los Angeles cast late “no” votes, but were unable to affect the outcome.

As Uniswap mulls deployment to several more chains before April 1, Walsh is trying to assemble an independent working group that can make bridge decisions impartially. Walsh declined an on-the-record interview when contacted by The Defiant.

Competing Protocols

Hill said the vigorous debate over which bridge to choose missed the forest for the trees.

“We know there are competitors who are going to be launching competing protocols, just forking Uniswap,” he said, adding that the only defense is to deploy V3 far and wide. “We need to zoom back out and really focus on the bigger picture.”