Author: @arndxt_xo
Translation: Plain Language Blockchain
1. The Origin of Unichain
The birth of Unichain may mark the beginning of the decline of Ethereum's dominance, as mainstream protocols like Uniswap transfer value and activity away from Ethereum, ultimately relegating Ethereum to a simple settlement layer.
The influence of Uniswap is undeniable.
As the largest decentralized exchange (DEX), Uniswap has millions of users, and a large amount of liquidity on Ethereum is traded through its protocol.
Now, Uniswap has announced the launch of its own blockchain, Unichain, which may mark a strategic shift in the blockchain paradigm - from the traditional "fat protocol theory" to the upcoming "fat application theory".
As Uniswap seeks to consolidate its dominant position, this development raises key questions about Ethereum's future, the value of ETH as an asset, and the potential restructuring of decentralized finance (DeFi) liquidity and user experience.
Here, I have compiled some of my thoughts and findings:
Key Highlights:
Shift to "Fat Application Theory" Strategy Uniswap takes control of its own blockchain through Unichain, capturing more value from transaction fees and infrastructure.
Solve Scalability Issues with Flash Blocks and TEEs Faster transaction speeds (200-250 milliseconds) and lower gas fees improve user experience and network performance.
Minimize MEV Reducing MEV attacks through fair gas auctions could save users up to $1 billion per year.
Liquidity Aggregation The centralized liquidity hub on Unichain reduces fragmentation and improves cross-layer pricing efficiency for Layer 2.
Impact on Ethereum's Role Supports Ethereum's Rollup-centric roadmap, strengthening ETH's position as a secure settlement layer. (This view is controversial)
Enhanced Security through Unichain Validation Services Improving network integrity and decentralization by allowing UNI Token holders to participate in transaction validation.
New Competitive Landscape in DeFi Sets an example for other DeFi applications to launch their own chains, driving vertical integration and infrastructure control.
Uniswap's Dominance in DeFi through Data Analysis Uniswap has been a key pillar in the DeFi space, occupying a significant market share: According to dune analytics, Uniswap accounts for about 46% of DEX trading volume on Ethereum.
Cumulative Trading Volume: Since its inception in 2018, Uniswap's cumulative trading volume has surpassed $1.7 trillion.
User Base and Adoption
Unique Trading Users: Over 71,500 unique trading users have interacted with Uniswap's smart contracts.
Daily Active Users: Uniswap currently has around 1.2 million daily active users, demonstrating its widespread adoption.
2. Total Value Locked (TVL)
TVL: Uniswap's total locked value is around $6 billion, making it one of the most liquid DeFi protocols. The birth of Unichain may mark the beginning of the decline of Ethereum's dominance, as mainstream protocols like Uniswap transfer value and activity away, relegating Ethereum to a simple settlement layer.
3. Why Uniswap is Building Unichain
Motivation: Solve Scalability Issues with Layer 2 Solutions
The scalability issues of Ethereum are well known.
High gas fees and slow transaction speeds have been hindering the user experience and limiting the network's ability to accommodate its growing user base.
Ethereum has adopted a Rollup-centric roadmap, aiming to alleviate these issues by shifting most transactions from the mainnet (Layer 1) to Layer 2 (L2) solutions, which can process transactions more efficiently.
Unichain is built using the open-source OP Stack framework developed by Optimism, with the intention of running within Superchain - an interoperable blockchain network that shares common standards.
By leveraging this technology, Unichain aims to solve the following problems:
1) Solve Scalability and Performance Issues
The congestion and high gas fees on the Ethereum network have been persistent obstacles. Uniswap's shift to Unichain aims to:
Improve Transaction Speed: Target block time of 200-250 milliseconds, much faster than Ethereum's average of 12-15 seconds.
Reduce Transaction Costs: Lower fees make DeFi more attractive to a wider user base.
2) Control Infrastructure and Customization
Running on its own dedicated blockchain allows Uniswap to:
Implement Protocol-Level Optimizations: Customize the blockchain according to Uniswap's specific needs, such as custom transaction ordering.
Introduce Advanced Features: Implement innovations like Flash Blocks and MEV minimization strategies.
3) Reduce Liquidity Fragmentation
By creating a centralized liquidity hub, Uniswap users will benefit from:
Aggregating Liquidity Pools: Unichain aims to consolidate the liquidity currently scattered across multiple Layer 2 solutions and sidechains.
Improve Pricing and Slippage: Deeper liquidity will provide traders with better pricing and lower slippage.
4. From "Fat Protocol" to "Fat Application" Theory
1) Brief Overview
Fat Protocol Theory: Argues that in the blockchain ecosystem, the protocol layer (like Ethereum) can capture the most value because it underpins all applications. Fat Application Theory: Proposes that dominant applications can capture more value by controlling more of the technology stack.
A. Fat Protocol Theory
The fat protocol theory was first proposed by Joel Monegro in 2016. It suggests that in the blockchain ecosystem, most of the value accrues to the protocol layer, rather than the application layer. This contrasts with the traditional internet model, where the application layer (like Facebook, Google) captured the majority of the value, while the underlying protocols (like TCP/IP, HTTP) were relatively "thin" in terms of value capture. Key points of the fat protocol theory:
Value Accrual: Protocol Tokens (like Ethereum's ETH) appreciate in value as they become the core of the network's operation, with their scarcity and network effects driving demand.
Network Effects: As more applications and users build on a particular protocol, the protocol itself becomes more valuable, consolidating its dominant position.
Composability: Applications are built on top of these protocols, benefiting from the protocols' security and decentralization, but individual applications capture less value.
B. Fat Application Theory
The fat application theory challenges this view, arguing that dominant applications can capture significant value by controlling more of the technology stack, essentially "moving down" the stack. This theory is based on the idea that applications can differentiate themselves and build moats through proprietary features, user experience optimization, and control over the underlying infrastructure.Key points of the fat application theory:
Value Capture at the Application Layer: Applications can capture more value through vertical integration, not only owning the user interface but also controlling some of the underlying infrastructure.
Differentiation: By controlling more of the technology stack, applications can provide unique features and optimizations that competitors cannot obtain.
User Experience: Focusing on seamless, efficient, and user-friendly experiences can drive user adoption and loyalty, further increasing the value of the application.
2) Uniswap's Strategic Shift
Through the launch of Unichain, Uniswap is:
Expanding Downstream in the Technology Stack: Controlling the underlying protocol to capture more value.
Enhancing Value Capture: Potentially increasing revenue through transaction fees and other mechanisms.
Strengthening Ecosystem Control: Guiding the development and innovation within its ecosystem.
3) How the Shift Towards "Fat Apps" Theory Will Unfold
A. Intensified Competition Between Applications
With Uniswap launching Unichain, the shift towards the "Fat Apps" theory will significantly reshape the blockchain ecosystem. This change may lead to:
Intensified competition between applications, as other successful DeFi platforms may follow Uniswap's lead and launch their own chains.
This vertical integration allows applications to control their infrastructure, not just improving the user interface but also providing more powerful performance and functionality.
This will create a new competitive landscape, where applications differentiate themselves not only through functional differences but also through the efficiency and scalability of their underlying infrastructure.
B. Ecosystem Fragmentation and Integration
However, this transition also brings dual risks and opportunities of ecosystem fragmentation and integration.
On one hand, the proliferation of application-specific chains may lead to fragmentation, increasing interoperability challenges and potentially impacting the overall user experience, which is crucial for mass adoption.
On the other hand, dominant applications may attract smaller projects to build within their ecosystems, forming new centers of activity and potentially facilitating the consolidation of resources and user bases.
This evolution will impact the value dynamics between the protocol layer and the application layer. If applications start capturing more value, the dominance of the underlying protocols may relatively decline, as network effects tilt towards these application ecosystems, as users and liquidity coalesce around them.
C. Impact on the Value of the Protocol Layer
The shift towards the "Fat Apps" theory poses a challenge to the traditional dominance of the protocol layer.
As applications like Uniswap launch their own chains, they start capturing more value, reducing their reliance on the underlying protocols, especially in terms of transaction fees and infrastructure.
This may lead to a shift in network effects, where users and liquidity become more concentrated in these application-specific ecosystems, rather than the broader protocol layer.
Consequently, protocols like Ethereum may relatively decline in value capture, while the dominant applications will become the new centers of activity and influence in the blockchain ecosystem.
5. Impact on Ethereum and ETH as an Asset
The launch of Unichain has sparked discussions about the future role of the Ethereum mainnet and the value accrual of ETH as an asset. There are views that migrating DeFi activities to Layer 2 solutions may diminish the importance of the mainnet and negatively impact the value of ETH. Another perspective worth considering is presented here: https://x.com/arndxt_xo/status/1843769349620019586
However, proponents argue that this evolution aligns with Ethereum's long-term vision. By serving as a secure, decentralized settlement layer, the Ethereum mainnet can focus on providing data availability and finality, while Layer 2 solutions handle scalability and user-facing applications. This symbiotic relationship may actually strengthen the value proposition of ETH, as it becomes the underlying asset supporting a wide range of Layer 2 networks.
My thoughts on this are also shared here: https://x.com/arndxt_xo/status/1844432389784940754
Potential Negative Impacts on ETH
Reduced ETH Demand: If Unichain uses a different native Token as the payment method for transaction fees, the demand for ETH may decrease.
Reduced Ethereum Transaction Fees: The migration of activities to Unichain may lead to a decrease in the fees collected by Ethereum validators.
Loss of Liquidity: The concentration of liquidity on Unichain may reduce the liquidity on the Ethereum mainnet and other Layer 2 solutions.
@0xmughal has also shared their findings and thoughts on this: https://x.com/0xMughal/status/1844419182877868182
Counterarguments: Potential Upsides for Ethereum
Alignment with Ethereum's Rollup-Centric Roadmap: Unichain still relies on Ethereum for security and data availability.
ETH as the Settlement Layer: Ethereum can strengthen its position as the underlying settlement layer for multiple Layer 2 solutions.
Potential Increase in Ethereum Utilization: Enhanced scalability may attract more users into the entire ecosystem.
6. Unichain's Technical Innovations
Unichain introduces a series of technical innovations aimed at enhancing speed and security. These advancements include Flash Blocks and Trusted Execution Environments (TEE), which function to:
Achieve sub-second transaction finality.
Reduce manipulation risks, ensuring faster and safer transactions for users.
Another key innovation is Unichain's approach to minimizing Maximum Extractable Value (MEV).
Through a fair priority gas auction system, Unichain ensures transparent and equitable transaction ordering, reducing the occurrence of harmful MEV attacks like sandwich attacks. This system is expected to save users up to $1 billion annually by curbing these exploitative practices that often drive up transaction costs.
To further enhance security and decentralization, Unichain introduces a validator service, where a set of validators continuously verify the operations of the sequencer responsible for transaction ordering. This additional security layer not only ensures the integrity of the network but also encourages community participation, allowing UNI Token holders to participate in network validation, creating a more decentralized and robust ecosystem.
7. Conclusion
Unichain is a bold move by Uniswap, solidifying its position as a DeFi leader and redefining the way decentralized applications operate. By directly addressing scalability issues, minimizing MEV losses, and concentrating liquidity, Uniswap is taking an approach that few others have dared to, taking control of its own future. This strategic shift challenges the traditional role of Ethereum, but aligns perfectly with its rollup-centric vision.
I see this as a pivotal moment for DeFi. Uniswap's decision to control more of the technology stack feels like the evolution we've long been anticipating in this space. I expect other DeFi projects to follow suit, rethinking the way value is created and captured. Unichain represents the next wave of decentralized finance, and I believe this is just the beginning of the DeFi journey we're witnessing.
Link to the article: https://www.hellobtc.com/kp/du/10/5488.html
Source: https://x.com/arndxt_xo/status/1844764163094286523
