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Transforming DeFi: The Strategic Leap of Unichain
• Uniswap Labs announced Unichain, whose testnet launched on October 10 and mainnet is launching in November, relying on the tech infrastructure from Ethereum layer-2 Optimism’s OP Stack, and block builder Flashbots.
• Unichain is a DeFi-specific scalability solution aiming to offer a universal liquidity hub, with an emphasis on transaction speed and superior security.
• Uniswap’s token UNI will be used, or staked, to validate Unichain transactions and earn part of the network’s sequencer fees – of which the stack will be decentralized using what’s known as the Unichain Validation Network.
• This is a key development, as it will transform UNI from a governance token into a utility token, thereby completely changing its investment case.
Uniswap is the crypto market’s largest decentralized exchange (DEX) and the pioneer of the crypto-native automated market maker (AMM), which later became an industry standard for most DEXs. While Uniswap has maintained over 46% of the market share, its dominance has been eaten away by emerging DEXs, as shown below in Figure 1, that offer revenue sharing with token holders rather than just for liquidity providers.
Figure 1 – Decentralized Exchanges Volume
Source: Dune
Driven by this increasing competition, Uniswap Labs revealed Unichain, a Layer 2 (L2) Superchain, built using OP Stack, which is a modular, open-source software stack developed by Optimism, one of Ethereum’s leading scalability solutions. The primary goal of the OP Stack is to create scalable, secure, and interoperable blockchains, with Unichain being a prime example.
What is Unichain?
In essence, it’s a DeFi-centric Ethereum scaling solution designed to cater to users’ financial activities. By integrating advanced cross-chain functionality through technologies like cross-chain intents (ERC-7683), which we’ll delve into later, and the LayerZero bridge, Unichain addresses key challenges in the DeFi ecosystem:
- Transaction Speed: Block times are reduced to one second, with plans for 250ms sub-blocks – faster than many other L2s.
- Cost Efficiency: Transaction costs are projected to decrease by approximately 95% compared to Ethereum’s Layer 1, as can be observed below in Figure 2.
- Cross-Chain Liquidity: Unichain aims to create a unified ecosystem for seamless multi-chain asset trading, all whilst abstracting the technology’s complexity away from the user. Otherwise, users are required to utilize third-party bridging solutions and asset wrappers, which exposes them to heightened smart-contract risk.
- Incentive Structure: A robust reward system that compensates both token holders and liquidity providers for their liquidity and security contributions.
While Unichain aims to tackle liquidity fragmentation across networks, this gradual process will stretch beyond the initial mainnet launch. The protocol will need to incentivize users and liquidity providers to migrate their liquidity to Unichain as the premier network over time. Thus, liquidity fragmentation could worsen in the short term as this reorganization takes place.
Figure 2 – Average transaction speed vs. Fees of Ethereum’s Layer 2s
Source: Dune
What makes Unichain stand out?
- Interoperable and a Multi-Chain Cohesive Ecosystem:
The quest of lowering transaction costs came at the expense of fragmented liquidity, complicating the user experience. Unichain is designed to simplify swapping across different chains. They worked with OP Labs, the builders behind Optimism (Ethereum’s third largest L2 by TVL of $680M), to make it easy to send messages between L2s in the Optimism Superchain using the network’s stack native interoperability technology. For other chains, Uniswap Labs is improving cross-chain compatibility through initiatives like the Cross-Chain Intents standard, known as ERC-7683.
In this view, Unichain’s Total Addressable Market can have a target of $4.9B, illustrated below in Figure 3.
Figure 3 – UNI’s TVL Across Chains
Source: DeFiLlama
What is ERC-7683, and what is its impact?
Introduced in April 2024, the Cross-Chain Intents standard enhances blockchain interoperability by standardizing off-chain messages and on-chain settlement. This framework simplifies cross-network transactions for users, allowing them to submit a general request—such as swapping Token X on Ethereum for Token Y on Arbitrum—without needing to choose specific bridges, DEXs or solutions. Once a request is made, specialized agents called ”fillers” compete to execute the transaction efficiently. This approach streamlines the process, making it easier for users to trade across several networks like they would in a traditional fintech application that has multiple currency accounts, all whilst fostering competition among service providers across the crypto ecosystem. This will ultimately improve the user experience, which is one of the most important factors in driving mainstream adoption.
- Vertical Integration:
Unichain represents a strategic shift in Uniswap’s operational model, enhancing its control over revenue streams and transaction processing. By evolving into an execution network similar to Base and Arbitrum, Unichain now captures additional value through:
o Transaction / Gas Fees – previously allocated to the networks Uniswap lives on. As shown below in Figure 4, Uniswap will be able to preserve about close to $374M in fees, once they’re able to settle these transitions on its own network.
Figure 4 – Uniswap Economics by Blockchain
Source: TheDeFiReport, TokenTerminal
o Swap fees: allocated to liquidity providers (LPs), which had previously been managed and distributed to contributors.
o Front-end fees: the protocol’s only source of revenue that it retains. It has already been in place and managed by the exchange’s front-end interface, as shown below in Figure 5. Uniswap has generated close to $50M in front-end fees since inception.
o Maximal Extractable Value (MEV): previously absorbed by the networks Uniswap was deployed on. Unichain could retain a significant portion of the $83B paid on Ethereum if they had internalized MEV from the offset, as seen below in Figure 5.
Figure 5 – Total Volume of Sandwich attacks on Ethereum, via Uniswap
Source: Dune
This transformation allows Uniswap to optimize its revenue structure and maintain greater oversight of the entire transaction lifecycle, from execution to settlement. The new model not only improves Uniswap’s economic efficiency but also positions it to offer enhanced services and potentially lower costs for users, all while retaining more value within its ecosystem. Uniswap’s substantial DEX volume across multiple networks, as illustrated in Figure 6, positions the new network for significant growth. By consolidating this activity within its ecosystem, Unichain stands to benefit from a powerful network effects.
Figure 6 – Uniswap Volume Across Different Chains
Source: Dune
Unichain’s architecture also enhances the platform’s capabilities with features like fair transaction ordering, which helps prevent market manipulation strategies such as front-running and back-running. Additionally, by utilizing a dedicated validator set on Ethereum, Unichain can effectively mitigate toxic flows, thereby reducing Maximal Extractable Value (MEV) losses, which we talk about next, helping to foster a fairer trading environment.
- Lower MEV Loss: Unichain’s collaboration with Flashbots introduces an advanced block production system that enhances market efficiency and mitigates MEV concerns. By utilizing Trusted Execution Environments (TEEs), this system achieves faster block times, improved transaction ordering transparency, and reduced failed transactions. While TEEs do not replace decentralized consensus, they provide enhanced trust and security compared to traditional block builders. This approach effectively limits validators’ ability to manipulate transaction order for profit, creating a more equitable environment.
- Unichain Validation Network: UNI stakers will form a decentralized network of full nodes that replace the actions of the centralized sequencer. Overall, they will provide several key benefits, including:
o Enhanced Decentralization: An additional layer of security that allows independent nodes of operators (token stakers) to verify the state of the blockchain – helping to reduce the risks associated with single sequencer architecture commonly found in other L2 solutions.
o Faster Finality: Quicker settlement of cross-chain transactions, driven by the flashblock technology.
o Increased Token Utility: Instead of simply serving as a governance token, UNI will now play a critical part in the ecosystem. Validators will have to stake the token to participate in the network validation – allowing token holders and not just liquidity providers to earn rewards.
So, what does that mean for Uniswap, Ethereum and the other L2s Uniswap was deployed on?
Unichain’s launch will introduce seamless cross-chain swaps directly through the Uniswap Interface and Wallet, significantly enhancing accessibility to cross-chain markets and their liquidity.
The platform will utilize UNI tokens for network security, with staking occurring on the Ethereum mainnet. This integration increases UNI’s utility and potential demand. However, it’s important to note that the staking yield from transaction fees is distinct from the pending fee switch affecting the broader Uniswap community. Both mechanisms serve to incentivize token holders.
Unichain’s introduction may signal a shift towards app-specific chains retaining substantial user activity. This could create a network effect, attracting more users and liquidity and potentially drawing in other DeFi protocols focused on multi-network presence rather than developing proprietary chains. As seen below, Uniswap has about 14M cumulative users spread across the multiple networks it is deployed on, depicted below in Figure 7. Thus, consolidating this user base could create an unmatched DeFi hub.
Figure 7 – Uniswap Users and New Users
Source: Dune
For Ethereum, Unichain’s launch may lead to a reduction in revenue, as Uniswap has been a significant contributor to transaction fees on the mainnet. Consequently, this could further decrease Ethereum’s deflationary activity. However, if an explosion of activity occurs, we can expect a surge in the amount of ETH used by L2s to settle their activity on the mainnet.
To recap, Uniswap’s evolution into Unichain represents a pivotal shift for the UNI token, transforming it from a governance-focused asset into a multifaceted, value-generating instrument. This transition elevates UNI’s status in the crypto ecosystem, positioning it competitively alongside established proof-of-stake tokens like ETH.
What’s happening this week?
Source: Forex Factory, 21Shares
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The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
Pyth Network is a high-frequency oracle leveraging Solana’s technology, offering a robust solution for off-chain data sharing for primarily decentralized finance applications (DeFi). It provides services like real-time price feeds and benchmarks, accessible to a wide range of financial service providers.
What are Oracles?
Blockchains in and of themselves are useful already, for trustless and permissionless transactions without censorship. No trust or verification from the user is required because it is stored on a decentralised ledger with global consensus. What if certain transactions require reliable and real-time data from external sources that do not necessarily have a global consensus or can be stored on the same ledger? For example:
• Products that rely on price feeds of assets from other blockchains or real-world markets: Many decentralized finance (DeFi) applications, like decentralized exchanges or lending platforms, need accurate and timely information about asset prices (e.g., stocks, cryptocurrencies, commodities). Since these prices are continuously changing in real-world markets, blockchains need a way to securely access this off-chain data.
• Products that require verifiable and secure random numbers: Randomness is crucial for a variety of blockchain use cases, such as lotteries, gaming, and even secure cryptographic protocols. However, generating truly random numbers on-chain is challenging without introducing bias or predictability. Off-chain randomness, when provided by a reliable source, is often needed.
• Products dependent on historical price data: Some DeFi platforms and financial products might need access to archived price data for risk assessment, backtesting trading strategies, or offering historical analysis. Since blockchains primarily focus on storing current state information, they need external sources to provide this historical data efficiently.
To address these challenges, Oracles were introduced. Oracles serve as bridges between blockchains and the external world, providing smart contracts with access to off-chain data. They connect external data providers—such as market data owners, web APIs, or IoT devices—to decentralized applications across multiple blockchains. Oracles enable these applications to securely and reliably obtain real-time data, execute transactions based on external events, and interact with data that cannot be directly stored on-chain.
Why can this data be trusted?
Oracles provide a robust mechanism for ensuring the integrity and reliability of off-chain data before it is used on the blockchain. An oracle network verifies the:
• Authenticity: To ensure that the data is genuine and comes from a legitimate source, oracle networks source data from multiple trusted providers or verifiable APIs. This process reduces the risk of malicious or false information being introduced into smart contracts.
• Accuracy: Accurate data is crucial for smart contracts to function correctly. Oracles achieve this by aggregating data from several independent sources. Instead of relying on a single provider, an oracle network will query multiple data sources and compare their responses.
• Reliability: Oracle networks enhance reliability by using decentralized nodes, which increases resilience against failures or malicious activity. If one data source or node fails or provides incorrect information, the other nodes in the network can continue to operate and provide valid data.
Source: VanEck Research
The demand for accurate and reliable off-chain data is growing as the number of real-world use-cases and adoption of blockchain increases. Users of applications are more than willing to pay for an oracle service that is accurate and reliable and covers a large variety of use-cases.
Pyth Network versus Other Oracles
Read the blog post of Battle of the Oracles to learn more about the different oracles solutions. To recap, Pyth Network is a high-frequency oracle leveraging Solana’s technology, offering a robust solution for off-chain data sharing for primarily decentralized finance applications (DeFi). It provides services like real-time price feeds and benchmarks, accessible to a wide range of financial service providers. PYTH is the governance token and utility token of the Pyth Network. Supply and demand for the PYTH token is directly related to level of usage and total demand of Pyth’s services and Pyth Network’s Tokenomics.
Total Value Secured by Oracles
Source: Defillama. Data as of 19/08/2024. Historical performance is no guarantee for future results. This should not be understood as financial advice for any of the digital assets mentioned in the figure.
While Chainlink holds the lion’s share of the total value secured by oracles, Pyth has shown by far the largest growth in terms of TVS, number of protocols supported and number of DApps. Pyth is expanding rapidly, across different networks and protocols, supporting more DApps, data providers and integration partners every day. In the same time frame, Chainlink’s marketshare has decreased. Comparing the main metrics of MCAP/TVS ratio and MCAP/TTV ratio, we notice that based on market capitalization (circulating supply), Pyth is undervalued whereas the TVS ratio based on fully diluted value paints a different picture. This is because only 37% of PYTH tokens are unlocked, the next significant PYTH token unlock takes place in May of 2025 and happens yearly thereafter on the same date until the full amount of tokens has been unlocked by 2027.
Source: Defillama, Coingecko, data as of 05/11/2024. Historic performance is not a guarantee for future results. This should not be understood as investment advice for any of the digital assets mentioned in the table above.
Pyth’s Unique Advantages
Source: Pyth, Data as of 19/08/2024. This should not be understood as investment advice for any of the digital assets mentioned in the table above.
Use-cases Enabled by Pyth
Products and Services
• Price Feeds: real-time market data for smart contracts, blockchains, and applications
• Benchmarks: historical market data for smart contracts, blockchains, and applications
• Express Relay: smart contracts or protocols that need protection against MEV (Express Relay)
• Express Relay is one of a kind product that offers developers to auction off valuable transactions directly to MEV searchers without validator interference
• Entropy: smart contracts that require secure on-chain random numbers. Secure and verifiable random numbers are incredibly important for creating a fair and unpredictable on-chain actions (e.g., for games)
• Pyth DAO Governance model
Examples:
• Decentralised Exchanges (DEXs) require reliable real-time price feeds to provide users accurate trades.
• Pyth’s data pull model provides data directly from the source, such as exchanges, market makers or DeFi protocols. Because data is pulled only on demand and not pushed at a given interval, it scales efficiently, and costs are offloaded to users where updates are demand-based.
Pyth Network Governance
The Pyth Network operates a decentralized governance system that empowers the community by allowing all PYTH token holders to have a direct say in the network’s development and decision-making processes. This decentralized governance model ensures that control of the network is distributed among its users, promoting transparency and inclusion.
To participate in governance, token holders must stake their PYTH tokens through the Pyth staking program. By staking their tokens, users gain the ability to vote on community governance proposals, ensuring that they have a voice in the key decisions shaping the future of the Pyth Network.
In addition to voting, any PYTH token holder has the right to submit proposals to the Pyth DAO, provided they meet the requirement of holding and staking at least 0.25% of the total PYTH tokens staked. The proposals that can be brought to the DAO are diverse and impact many critical aspects of the network’s functionality, including:
• Determining the size of update fees: Proposals can influence the fees charged for updates to the network, ensuring that they remain fair and competitive.
• Reward distribution mechanisms for publishers: The community can vote on how rewards are allocated to data publishers, ensuring that those contributing accurate and reliable data are fairly compensated.
• Approving software updates across blockchains: The Pyth Network operates across multiple blockchains, and governance participants have the power to approve essential updates to on-chain programs, ensuring the network remains up to date and secure.
• Listing price feeds and determining their reference data: Token holders can vote on which price feeds are listed on Pyth, as well as set the technical parameters for these feeds, such as the number of decimal places in the prices and the reference exchanges used to determine the data.
• Selecting data publishers: The governance system allows the community to permission publishers, or select which entities are allowed to provide data for each price feed. This ensures that only trusted and verified data sources are contributing to the network.
This is not financial research but the opinion of the author of the article. We publish this information to inform and educate about recent market developments and technological updates, not to give any recommendation for certain products or projects. The selection of articles should therefore not be understood as financial advice or recommendation for any specific product and/or digital asset. We may occasionally include analysis of past market, network performance expectations and/or on-chain performance. Historical performance is not indicative for future returns.
Important information
For informational and advertising purposes only.
This information originates from VanEck (Europe) GmbH, Kreuznacher Strasse 30, 60486 Frankfurt am Main, Germany and VanEck Switzerland AG, Genferstrasse 21, 8002 Zurich, Switzerland. This information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck assumes no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. Views and opinions expressed are current as of the date of this information and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.
VanEck makes no representation or warranty, express or implied regarding the advisability of investing in securities or digital assets generally.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
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