Will Uniswap's Unichain Kill DeFi?

This past week, Uniswap announced that it will be releasing its own L2 superchain called “Unichain” and shifting there. 

Many believe that this move will fragment liquidity by pulling trading activity from Ethereum and other networks. As Uniswap consolidates settlement fees and MEV capture on its own chain, liquidity providers and traders will likely concentrate their capital on Unichain, reducing the liquidity available on Ethereum, Arbitrum, and Base. 

Uniswap In Numbers

Uniswap is one of the most popular DeFi apps in the world.

Over the last six years, it has processed: 

• $2.4T in volume

• Supported over 4M users. 

• Achieved almost half a billion trades.

Along with all these numbers, it is important to keep in mind the sheet dominance of Uniswap when it comes to comparing with other DEXes.

As per Dune Analytics, Uniswap V3 accounts for almost 50% of the trading volume generated by all decentralized exchanges.

Now, imagine the effect that suddenly removing all these users, liquidity, and fees generated can have on underlying L1s like Ethereum?

How Unichain Will Compound the Liquidity Problem

Following Unichain’s launch, Uniswap will now consolidate much of its economic activity on its own L2. As Uniswap controls the validators on Unichain, it can distribute rewards from MEV and settlement fees to UNI token holders and LPs, giving them additional reasons to shift away from Ethereum and other L2s. 

This will lead to a redistribution of capital that could weaken the liquidity depth and efficiency of other chains, creating gaps and increasing the cost of transactions for users who remain outside Unichain. Liquidity providers who previously spread their capital across multiple platforms to capture trading activity may now be incentivized to focus on Unichain, causing liquidity pools on competing chains to diminish.

Here are some more points to consider:

• As liquidity fragments across Unichain and other networks, market participants will face higher slippage and less favorable trading conditions on non-Unichain platforms. 

• The divergence of liquidity may increase operational complexity for traders who must navigate multiple L2s to find optimal liquidity and trading opportunities, ultimately driving a deeper divide in the Ethereum ecosystem.

Liquidity Fragmentation Is Killing DeFi

Regular readers of the newsletter will know that we have covered the topic of liquidity fragmentation before and why it is silently killing DeFi.

Unlike CeFi, DeFi doesn’t really have large-scale centralized market makers. They are highly dependent on running their operations via users providing liquidity. This is what the current TVL distribution across various blockchains looks like.

As you can see, while Ethereum is still the market leader, the rise of so many other L1 and L2 platforms have fragmented almost 46% of the market liquidity. What happens when every single popular application suddenly decides to have their own dedicated blockchain?

Why Is This A Problem?

Liquidity fragmentation leads to several key issues in the crypto market. First, it creates market inefficiency, as liquidity is split across multiple platforms, making it difficult for traders to access optimal prices and increasing transaction costs due to slippage. This inefficiency is especially visible during periods of market stress, when price discrepancies across platforms widen, and arbitrage opportunities become harder to capture.

Second, fragmentation introduces significant user friction. Traders must navigate multiple platforms and networks to execute trades, which complicates the user experience and increases costs. Aggregators help but don't fully resolve the underlying problem, making DeFi less accessible, especially for casual users.

Finally, liquidity fragmentation stifles innovation and development. Developers face challenges bootstrapping liquidity and must rely on third-party providers, diverting resources from building competitive products. Fragmented liquidity also reduces market depth, heightens volatility, and complicates cross-chain interoperability, increasing risks and costs for users and developers alike.

What’s The Solution?

Ethereum developer Justin Drake, during a Bankless podcast, proposed shared sequencing as a solution to the fragmentation problem.

This concept involves a single unified liquidity layer responsible for ordering transactions across multiple rollups and L2 solutions simultaneously. Instead of these rollups operating in silos, shared sequencing links them up with synchronous composability.

How will this work?

• Create a unified liquidity layer where liquidity is currently dispersed across multiple platforms and rollups can be pooled together. 

• Allow traders and dapps to access liquidity from different chains within the layer without needing to bridge assets or operate across multiple ecosystems.

What are the advantages of this approach? 

• A single sequencer ensures that transactions across rollups can be processed in a synchronized and atomic manner, preventing price discrepancies and reducing slippage.

• Shared sequencing, reduces the need for developers to focus on liquidity bootstrapping and cross-chain interoperability. This allows them to focus on innovating their products, knowing that the liquidity layer will be accessible across Web3.

• Developers can update their applications and liquidity strategies in a unified manner, without needing to worry about the fractured infrastructure of the current Web3 ecosystem.

Of course, it’s not all sunshine and rainbows. While shared sequencing addresses many of the issues associated with liquidity fragmentation, it is not without its challenges

Real-time settlement is also required to fully achieve the goal of universal synchronous composability. Achieving both shared sequencing and real-time settlement will require further advancements and innovations.

So, What Should I Focus On?

A lot of projects eventually will lose a lot of liquidity as they fail to control their liquidity getting locked up in silos via further fragmentation.

In that case, what should you - as a trader or an investor - focus on?

Our advice? Cut through the noise and focus on what matters. 

There are a lot of wonderful projects in web3 where you can make meaningful trades and life changing money. However, there is so much noise that it’s very easy to get lost.

It is for this reason that we have gathered trading and crypto experts from all over the world and created our Circle group - The Coiners.

In the Coiners, you will discover genuine hidden gems and projects with real value and potential. Gain the insights and tools you need to navigate the market with confidence. 

Speaking of which, VirtualBacon himself will be conducting his third livestream of the month. But this time, he will be joined by one of our newest experts SimpleJack!

Together, they’ll dive deep into the current market conditions, giving you critical insights into Bitcoin’s latest move.

Bitcoin spiked to the last higher high resistance we need to break in order to start a full market rally. The question is not if, but when will this breakout happen

Key Topics of Discussion:

• Bitcoin's recent spike and its last key resistance before a full market rally.

• Expert analysis on short-term levels and the reload zone to watch if we get a pullback.

Time: October 16th at 11AM EST

Don’t get lost in the hype—get the knowledge to succeed.