Key Takeaways
On Oct. 2, Uniswap announced Unichain, an Ethereum Layer-2 specifically designed for decentralized finance (DeFi). The main reason for this switch is the high transaction costs on Ethereum and the fragmented liquidity of being split across different chains.
By moving execution to a Layer-2, Uniswap aims to reduce transaction costs by as much as 95%. Unichain will also improve speed through its one-second block times to boost market efficiency.
Unichain will partner with the Optimism Superchain to solve interoperability and cross-chain liquidity issues.
Let’s analyze the Uniswap movement from its perspective and from that of Ethereum, possibly the biggest loser of this move.
In a long X thread, The DeFi Report founder Michael Nadeau outlined the repercussions of Uniswap’s move to its layer-2, Unichain. The biggest actor affected by the move is Ethereum.
So far, Uniswap has contributed $2.7 billion in settlement fees to Ethereum and its Layer-2s. While Uniswap has benefitted immensely from Ethereum’s security, it also contributed heavily to the ecosystem’s activity.
Uniswap accounts for 14.5% of Ethereum’s gas fees amounting to $1.6 billion worth of burned ETH. Once Uniswap moves this activity to Unichain, the Ethereum supply could become even more inflationary.
So, Ethereum may lose the most once this process becomes final. He also poses several questions regarding the move’s effects, such as if Uniswap liquidity providers will move to Unichain, and the possibility of Unichain fully separating from Ethereum in the future.
Throughout Uniswap’s history, liquidity providers in Ethereum have earned $711 million in fees, while total fees in all chains are $944 million. If these providers move from Ethereum to Unichain it would adversely affect Ethereum’s Total Value Locked (TVL).
Gas settlement fees paid to validators and sequencers total $381.8 million, $373 million of which are on Ethereum.
These fees are not earned by Uniswap, but rather by the validators of the chain in which Uniswap is deployed and the liquidity providers in those same chains.
The only fees earned by Uniswap are the interface fees that capture value from users trading through the website. These fees have generated roughly $63 million in the past six months.
So, while Uniswap has created an estimated $6.4 billion in value creation, the protocol, investors, and token holders have captured less than 1% of that.
UNI token holders could also benefit from the move since they will be able to stake UNI and earn a portion of the transaction fees and Miner Extractable Value (MEV) coming from sequencing transaction orders.
However, the shift is not as straightforward. Uniswap needs the roughly $5 billion worth of assets locked to move to the new chain. If not, there will be insufficient liquidity in the new chain, making trades less efficient because of higher slippage.
Some large liquidity providers have already said that they do not want to use a 3rd party bridge and would not make the move to Unichain.
Additionally, the network would likely be less secure. While Uniswap could offer more incentives to liquidity providers if they move to Unichain, there is no such plan in place yet.
The biggest winners from this move are likely Uniswap Labs and UNI holders. Uniswap Labs is set to gain a much bigger portion of the revenue generated by the protocol while UNI holders will also earn more settlement fees and MEV.
Optimism Labs stands to be another winner because Uniswap will pay a portion of the settlement fees for supporting it.
Ethereum validators could be the biggest losers since settlement fees will move to Uniswap. So, unless they also move and provide liquidity, they stand to lose a large portion of the fees.
ETH token holders are likely the next biggest losers since the ETH supply could become even more inflationary when subtracting the ETH burned as gas from Uniswap transactions.