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Crypto Moves #48 – Uniswap’s Unichain Is Net Positive, End of Story

Over the past week, my X feed has been flooded with doomsday predictions claiming that Uniswap launching its own Ethereum rollup will be the final blow to Ethereum. This is absolutely not the case. In the short term, it will have no impact on the activity of Uniswap’s mainnet application. In the longer term, it will actually support Ethereum’s rollup-centric roadmap by being an interoperable liquidity hub. As rollups are about to start paying for blobs, Ethereum’s transactional revenue is still sustained even as activity moves from mainnet to rollups.
2024-10-17

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Last Thursday, Uniswap, the leading decentralized spot exchange, announced its upcoming Layer 2, also known as rollup, on Ethereum, called Unichain. For a detailed explanation of Ethereum rollups, please see Crypto Moves #16.

This new rollup will be based on Optimism’s Superchain technology, which also powers Coinbase’s Base rollup and the soon-to-launch Layer 2 from Sony. With Unichain, Uniswap aims to reduce transaction costs, reduce block times to 1 second (with 250-millisecond blocks on the horizon), and improve liquidity across Ethereum rollups, specifically those using Optimism’s Superchain.

A key part of the project is the creation of a decentralized validator network. UNI token holders will be able to monitor and verify the actions of the Unichain sequencer, similar to how Ether holders stake on Ethereum. Unichain will also offer provable block-building capabilities. The rollups is slated to go live next month, with the validator network and block-building features expected to launch in early 2025.

At present, rollups within the Superchain ecosystem do not offer any better interoperability than other rollups. This fragmentation leads to challenges with asset, user, liquidity, and application flows, as each blockchain operates somewhat independently. In short, data and assets do not move seamlessly or cheaply between blockchains.

Optimism is actively working on full interoperability across all Superchain blockchains, and potentially with other rollups, such as Arbitrum and its Superchain alternative called Arbitrum Orbit. The goal is to enable seamless asset and data flow, but this is not expected until sometime next year. In our view, it is unlikely to happen before the second half of 2025.

If Unichain can achieve full interoperability across Superchain and eventually all rollups, it could become the primary liquidity hub for Ethereum rollups, allowing them to share aggregated liquidity instead of being siloed. This would significantly amplify Ethereum’s network effect across rollups compared to today’s fragmented state.

That said, there is a notable concern being raised, particularly on X (formerly Twitter). Uniswap is currently the largest source of transaction fees on Ethereum, with users recently contributing about 10% of Ethereum’s transactional revenue by interacting with the application. This raises questions about how Unichain might impact Ethereum’s transactional revenue moving forward.

Chart 1: Uniswap Interaction of Ethereum’s Transactional Revenue

In dollar terms, Uniswap has contributed $500,000 to $800,000 of Ethereum’s daily transactional revenue in recent days, which typically ranges from $5 million to $7 million.

Chart 2: Ethereum’s Transactional Revenue

Ethereum’s transaction fees play a critical role in its “ultrasound money” narrative, which hinges on the idea that higher transactional revenue results in more Ether being burned. This reduces the total supply of Ether, as detailed in Crypto Moves #12 and again in #44, leading Ethereum to be deflationary over the past two years since the Ethereum merge.

While losing 10% of Ethereum’s transactional revenue overnight would not be a positive development, it is far from catastrophic. Some have suggested on X that this could spell the end of Ethereum, but there is simply no reason to believe that. Even in this worst-case scenario, it is not the end of the world.

That said, this worst-case scenario will never become reality. Uniswap on Ethereum’s mainnet is not going anywhere. Despite the rise of rollups in recent years, Uniswap’s mainnet deployment remains its most widely used by a significant margin. This trend is expected to continue for quite some time, as Unichain will likely take a while to gain significant traction. It will only begin to fully realize its potential once full interoperability across the Superchain is achieved, which is still some time away.

Chart 3: Uniswap Revenue by Blockchain

Looking at the broader ecosystem, this trend is also clear when considering the total stablecoin supply, which is crucial for Uniswap’s functionality. Although rollups have experienced notable growth in stablecoin supply this year, Ethereum’s native stablecoin supply remains significantly higher and has even increased over the course of the year.

Chart 4: Ethereum’s Total Rollups’ Stablecoin Supply

In conclusion, Uniswap’s presence on Ethereum mainnet remains strong, and it is unlikely to see a significant decline in activity anytime soon, especially within the next six months.

Paying for Blobs: The Mid- to Long-Term Solution

At some point, it is very likely that Uniswap will see reduced activity on Ethereum as it transitions to Unichain, particularly once Optimism rolls out Superchain interoperability. This shift is both natural and positive. Rather than relying on the limited activity on Ethereum’s mainnet and charging high transaction fees, Ethereum should focus on expanding the overall scope of its network. The goal is to generate substantial transactional revenue from a much broader user base and a wider range of onchain activities. If Ethereum fails to scale and adapt, it risks becoming obsolete within the next five years.

To achieve this, Ethereum must lower transaction fees by scaling its blockchains, but at the same time, significantly increase the volume of activity. In our view, this transition is net positive, overall leading to higher total transactional revenue. A central liquidity hub for rollups, such as Uniswap’s Unichain, is crucial for this strategy. Just as Ethereum’s Layer 2s have seen their stablecoin supply nearly quadruple this year (as shown in Chart 4), the total number of daily transactions has also surged, particularly after the Proto-Danksharding upgrade in March, discussed in Crypto Moves #16 and #20.

Chart 5: Ethereum’s Rollups’ Daily Transaction Count

Chart 2 shows that Ethereum’s transactional revenue took a significant dip following the implementation of Proto-Danksharding. Even though rollups have not contributed much in transaction fees, or “rent,” to Ethereum since the upgrade, they are poised to do so as their growth continues.

Chart 6: Rent Paid by Rollups to Ethereum

Right now, we are at a crucial turning point as rollups are on the verge of beginning to pay for what are known as “blobs.” These blobs are large data segments that can be included in Ethereum blocks, but they are kept separate from the transaction data required for smart contract execution. The purpose of these blobs is to temporarily store the large data chunks from rollup transactions, such as compressed transaction batches or zero-knowledge proofs. After roughly 18 days, these blobs can be deleted from the Ethereum blockchain, as they are no longer needed for verifying and settling transactions.

Each Ethereum block can hold up to six blobs, with a target of three blobs per block. The price of a blob will fluctuate based on demand. If a block includes more than three blobs, the price rises; if it has fewer than three, the price falls. In fact, when fewer than three blobs are used, the remaining blobs, aside from transaction fees posted to Ethereum, are essentially free.

We are getting close to hitting the target of three blobs per block, driven by the continuous growth of Ethereum rollups. This implies that rollups will soon start paying for blob storage on Ethereum, although the exact cost is still unclear. For context, back in late March, when Ethereum was hitting the three-blob-per-block target, nearly 1,000 Ether was paid for blob inclusion. This gives a sense of the scale that rollup activity could reach as it grows.

Chart 7: Average Ethereum Blob Count per Block, Since Proto-Danksharding

Chart 8: Average Ethereum Blob Count per Block, Past Five Days

We expect that rollups will begin paying for blobs on Ethereum regularly by the end of this year, even before Unichain gains significant traction. Once Unichain starts seeing more usage, some of which will likely come from Uniswap’s main application on Ethereum’s mainnet, it is hard to imagine that there will not be a substantial fee market for blobs. Supporting this argument is the fact that Sam Altman, CEO of OpenAI, has today officially launched another rollup called World Chain, which is also built on Optimism’s Superchain. This should contribute significantly to Ethereum’s transactional revenue.

As for Ethereum mainnet, Uniswap’s native token (UNI) will remain on the mainnet, which will continue to serve as its main hub. For UNI holders to participate as stakers on Unichain, they will need to deposit their tokens into a smart contract on Ethereum mainnet. This ensures that, no matter what happens with Unichain, Ethereum mainnet will always play a key role in Uniswap’s ecosystem.

Additionally, staking UNI on Unichain could potentially allow stakers to receive a portion of transaction fees, which would be a first for Uniswap holders. This could allow UNI holders to finally benefit from the value generated by the application, possibly putting an end to the ongoing decline in the token’s value, as discussed in Crypto Moves #41.

Chart 9: Uniswap Price

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