Dan Elitzer predicted the emergence of Unichain in 2022 due to inefficiencies and value loss in the Uniswap system, and now this Layer 2 solution based on OP Stack has been launched to improve DeFi transaction efficiency and liquidity.
Author: Eren, Heechang
Translation: Blockchain in Vernacular
In 2022, Dan Elitzer mentioned Unichain as an inevitable development, believing that it would emerge due to inefficiencies and value loss in the existing Uniswap system. He pointed out that Uniswap traders currently face three costs: exchange fees paid to liquidity providers, transaction fees paid to Ethereum validators, and MEV costs.
This prediction has now become a reality, as Uniswap, the most widely used decentralized trading protocol in the crypto space, announced the launch of its own Layer2 solution, Unichain. The OP Stack-based Rollup aims to address key challenges in the DeFi ecosystem, focusing on improving DeFi's transaction execution environment, enhancing user experience, and solving the problem of liquidity fragmentation.
1. Background: The rationale behind Unichain
1) Dan Elitzer’s prediction
Dan's research revealed that transaction fees and MEV costs paid to Ethereum validators and market makers exceeded the exchange fees earned by liquidity providers. This means that entities outside Uniswap are in a more advantageous position in value capture, resulting in external extraction of value that should belong to Uniswap users, liquidity providers, or UNI Token holders.
To summarize his argument about the necessity of Unichain: Unichain can help reduce inefficiencies in value capture due to transaction fees and MEV costs, thereby bringing more value to UNI holders. Operating its own chain will allow Uniswap to significantly reduce transaction fees, especially to the benefit of small traders. Additionally, solutions like threshold encryption or batch swaps can help traders minimize MEV costs.
The most significant advantage of Unichain is its ability to better incentivize Uniswap participants. Currently, UNI Token holders have limited value capture options, mainly limited to governance decisions, such as adjusting exchange fees. A dedicated chain will enable UNI holders to profit from transaction fees and internal MEV, enhancing the Token’s value proposition. This approach not only rewards UNI holders but also creates a more efficient trading platform for users, potentially cementing Uniswap’s position as the leading decentralized trading platform.
2) Unichain: Capturing more value and unifying the platform
Source: Uniswap, Flashbots, and OP-Stack: The Holy Trinity Behind Unichain — 100y
Unichain is built as a Superchain using OP Stack, introducing two major innovations to improve the efficiency, user experience and liquidity management of L2 blockchains.
The first key feature is Verifiable Block Building, developed in partnership with Flashbots. This system includes a mechanism called Flashblocks, which reduces the actual block time to 200-250 milliseconds by splitting each block into four sub-blocks, thereby speeding up state updates. In addition, Unichain uses a trusted execution environment (TEE) to separate the sorter and block builder, and taxes MEV opportunities through a priority sorting mechanism, allowing applications to directly extract and internalize MEV.
The second major feature is the Unichain Validation Network (UVN), a decentralized network of node operators that independently validate the blockchain state. UVN provides fast finality and settles cross-chain transactions with economic security. When a new block is created on Unichain, validators must prove the legitimacy of the chain, reducing the security risk posed by a single sorter. To become a validator, UNI must be staked, and based on the staked weight, if selected into the active node set, they will perform validation and receive rewards accordingly. This operating model allows UNI holders to delegate their stake to validating nodes and receive distributed rewards.
2. Key points: DeFi development direction proposed by UniChain
DeFi is no longer limited to a single application, but has chosen an increasingly complex development path. DeFi applications are actively internalizing the value they generate, operating their own application chains or L2s, and developing wallet services. Application-Specific Sequencing (ASS), which allows applications to directly withdraw MEV, has also attracted much attention. Among these trends, the launch of Unichain clearly shows a future: DeFi with enough users and scale will ensure the security of its own infrastructure.
1) DeFi is getting fatter
DeFi is choosing more complex development paths to internalize value that was originally extracted externally, improve user experience, or provide independent "money Legos" through the interoperability of its own financial products.
This trend is reflected in the fact that some applications that do not use L2 or L3 execution methods choose ASS designs to prevent exposure to MEV extraction when ordering transactions. For example, controlling the order of transactions that rely on external oracle data allows applications to directly capture MEV (Oracle Extractable Value, OEV), or preventing MEV exposure by using a solver network for intent-based batch auctions. Other applications improve the user experience and prevent value from flowing to external third-party infrastructure by developing auxiliary infrastructure, such as wallets or mobile interfaces optimized for applications.
A. Application Specific Sorting (ASS): CoW AMM
CoW AMM protects liquidity providers (LPs) from MEV by bundling trades into a single off-chain batch and auctioning the arbitrage portion. In a CoW AMM, solvers compete for the right to rebalance the CoW AMM pool whenever an arbitrage opportunity arises. The solver that provides the most favorable trading conditions for LPs and leaves the most profit (residue) for the liquidity pool will be awarded the right to rebalance the pool. Through this batch auction, CoW AMM is able to capture the MEV value extracted by arbitrage bots when the liquidity pool rebalances price differences and eliminate the rebalance loss risk (LVR) of LPs.
B. Mobile/Wallet: Jupiter/Uniswap Wallet
Looking at the current market share of devices people use, mobile accounts for 63% and desktop accounts for 37%, indicating significant growth in the mobile environment. Therefore, building a mobile environment has become increasingly important in encrypted application development.
Recently, Jupiter also launched its mobile app, which can handle all operations from swaps, slippage, priority fee adjustments to deposit functions in a mobile environment. Users can trade at the best price without fees through Jupiter routing, while getting an optimized DeFi experience.
In addition, Uniswap has also developed and deployed its own wallet service, through which users can conveniently exchange from Uniswap's liquidity pool at the routing price, and Uniswap Labs charges front-end fees through wallet-side exchanges to create sustainable cash flow.
In this way, DeFi is not just about implementing decentralized exchanges (DEX), money markets, or options DeFi contracts, but about implementing increasingly complex DeFi by introducing ASS or developing additional infrastructure in-house. This allows applications to create advantages by maximizing the internalization of value, redistributing it to participants, or providing an enhanced application experience. However, Unichain's choice of its own second-layer solution (L2) with a larger vision of becoming "the home of cross-chain DeFi and liquidity" suggests that DeFi's expansion beyond a single application to L2 is an important option to achieve greater potential.
2) From Dapp to L2
With the launch of Unichain, the roadmap for applications to expand to L2 has become clearer. Many applications have begun to choose to expand to L2 to improve infrastructure and user experience, starting with a single DeFi product (such as stablecoins or liquidity staking) and gradually expanding their vision. This L2 transition creates significant value for applications in two main aspects:
First, L2 infrastructure can create multiple values through unique mechanisms. For example, selling block space based on block demand has been a proven successful business model in the crypto industry, while sorter revenue and MEV extraction have brought considerable cash flow to L2 operators. Unichain's L2 architecture provides new possibilities for operating MEV in different ways through Priority Ordering. Unichain separates block builders and sorters through a trusted execution environment (TEE), allowing applications to directly control MEV and operate the obtained MEV after reaching an agreement with users. In other words, Unichain provides a platform environment where applications and users, rather than sorters, control MEV under consistent rules, demonstrating a meaningful methodology that application-specific L2 can adopt in controlling MEV.
Another major value that applications can enhance by transitioning to L2 comes from the perspective of token economics. For a long time, Uniswap's $UNI token has had limited demand and little utility other than governance functions. For this reason, some people proposed the Fee Switch mechanism early on, suggesting that Uniswap's revenue be distributed to $UNI holders, but due to regulatory issues, progress has not been positive.
In this context, the launch of Unichain provides UNI with a practical opportunity. In order to participate in UVN as a validator, UNI must be staked, thereby establishing a certain cryptoeconomic security, and UNI holders can receive distribution rewards by delegating their stake to the validation node. Therefore, the transition of applications to L2 creates multiple possibilities for the accumulation of value for native tokens, from sorter income to MEV and staking rewards.
While the L2 transition can significantly increase value in both of these areas, is it the ideal direction for the Ethereum ecosystem? Like all solutions, it has two sides. From the perspective of the entire Ethereum ecosystem, more than 100 different L2s are dividing the liquidity on the Ethereum chain. In addition, compared with the activity level of L2, less value is accumulated to the Ethereum main chain. This leads to the parasitic problem of L2 being economically dependent on Ethereum.
3) The cumulative value of Ethereum is damaged
Source: Artemis
Ethereum’s current system for extracting value from L2 solutions has issues. These issues become more apparent as more applications start to build their own L2s. Currently, L2s only account for about 0.9% of Ethereum’s total gas, which shows a disconnect between the growth of L2s and the value added by the mainnet. Recent updates such as EIP-4844 have further reduced the fees that L2s pay to Ethereum, which may reduce the demand for ETH as gas fees.
This situation has raised concerns that L2 could become a parasite on the Ethereum economy. Despite Ethereum's large ecosystem and strong developer community, its economic model is being questioned. Reduced fees from L2 means less revenue for the Ethereum network, which could weaken the value of ETH. I believe that while L2 solutions benefit from Ethereum's mature system, they may not fully support the economic health of the main chain.
However, as the L2 ecosystem expands, it may attract more liquidity, potentially establishing ETH as the primary currency for economic activity within Ethereum. While this may sustain the use of ETH as an asset, the question remains: can it continue to grow as an asset?
3. Other people’s opinions
1）Jon Charboneau
Jon Charboneau’s opinion “It’s as logical to say L2 is to Ethereum as it is to say Tesla is to California” (Source: X (@jon_charb))
2) Mason Nystrom from Pantera
Key insights about Unichain and why it matters:
Token Value Accumulation: UNI evolves from a governance token to a fee accumulating token. Validators with the highest UNI stake are rewarded by validating the network and collecting fees. Unichain supports the “Fat App” theory: applications control the economy and block space by creating their own chains. Uniswap’s chain will capture fees from a variety of transactions, including trades, borrows, and perpetual contracts, beyond traditional DEX activity. Internalizing MEV: Unichain’s verifiable block construction and “flash block” sorting show potential. Applications are exploring ways to internalize MEV or redistribute it to users and stakeholders. Unichain vs Ethereum: Unichain could have a significant impact on the Ethereum mainnet. DeFi activity may be attracted to Unichain because UNI stake is used for sorter fees and improves user pricing. Vertical Integration: Larger applications are incentivized to control the entire stack - from applications (Uniswap wallets, frontends + Uniswap X) and protocols (Uniswap V4, V3, V2) to chains (Unichain).
3) Ryan Watkins from Syncracy Capital
Source: Applications capture fees, blockchain stores value — Syncracy Capital
In this article, Ryan Watkins questions the view that only Bitcoin and stablecoins are valuable blockchain applications. He believes that we have entered an era of blockchain multi-applications. Platforms like Ethereum and Solana now host many applications that generate significant revenue and grow rapidly. Despite this, these applications are still underestimated compared to the underlying blockchain infrastructure. Trends show that applications are receiving more and more blockchain fees, often surpassing infrastructure assets. This shift is likely to mark a key turning point in the development of blockchain.
The rise of fat apps in blockchain represents a shift toward increasing application autonomy. The driving force behind the development of fat apps is the need for better scalability, better user experience, and greater economic control over base layer infrastructure. With the evolution of chain abstraction and smart wallets, this application-centric approach is expected to become more seamless, potentially reshaping the way value is distributed and controlled in the blockchain ecosystem.
Link to this article: https://www.hellobtc.com/kp/du/10/5472.html
Source: https://4pillars.io/en/opinions/unichain-was-inevitable
