Will Unichains Expansion Weaken LP and Ethereums L2 Sector Leading to a Major Shakeup

Will Unichains Expansion Weaken LP and Ethereums L2 Sector Leading to a Major Shakeup

Will Unichains Expansion Weaken LP and Ethereums L2 Sector Leading to a Major Shakeup

Blockworks Research analyst boccaccio recently shared his views on Unichain, a Layer 2 network being built by Uniswap. He believes that the launch of Unichain could continue to weaken liquidity providers (LPs) and Ethereum, posing a potential threat to other Layer 2 solutions.

Under the current design framework, in order to become a validator on the Uniswap Validation Network (UVN), node operators need to stake UNI tokens on the Ethereum mainnet, and the active validator set will be determined by a few participants with the highest UNI staking weight. boccaccio believes that the weight staking validation mechanism of UVN could result in a majority of Unichain’s “Maximum Extractable Value (MEV)” and transaction fee rewards being controlled by a few individuals (worst case being Uniswap Labs, best case being financial institutions).

For Uniswap, the biggest challenge in launching Unichain is how to attract users to this new system when other Layer 2 solutions, such as Base on Superchain, are already available. Currently, Uniswap’s goal seems to be to ensure that Unichain has enough liquidity to make its exchange costs cheaper than other options (even considering cross-chain interoperability costs), with the long-term aim of making Unichain a liquidity layer.

boccaccio believes that in the early stages, Unichain may compete with other L2 solutions, especially Optimism, which is on the Ethereum superchain. However, Ethereum will still retain a significant amount of liquidity that is difficult to easily transfer to other networks. On the other hand, boccaccio also points out that Unichain may potentially address the long-standing discussion about Uniswap’s fee switch mechanism, with a potential solution involving Uniswap allocating a portion of the MEV income to UNI token stakers on the Ethereum chain.

Finally, boccaccio emphasizes the significant impact of Unichain on asset issuance on Ethereum and L2. Although existing liquidity cannot be directly transferred, protocols, applications, and users may choose to issue tokens on the new Unichain. In this case, Unichain not only threatens the transaction volume of Ethereum L1 and other L2s but also affects the issuance of on-chain assets.

From the perspective of Unichain’s plans, it is a solution that differs significantly from the existing L2 ecosystem. If Unichain can successfully capture transaction volume and distribute it to token holders and stakeholders, especially if it can solve cross-chain exchange and trading of ETH, WETH, USDC, and USDT, then it may succeed. Moreover, if it can capture these cross-chain fees and return them to UNI token holders, it may even significantly change the value proposition of UNI.