Is Ethereum in Trouble After Uniswap, Its Cash Cow, Exits?

Key takeaways:

Ethereum could be facing a major setback after one of its most popular apps and key revenue contributors, Uniswap, moved to its own blockchain — something that could drain value and activity from Ethereum.

On Oct. 10, the decentralized exchange’s (DEX) parent company, Uniswap Labs, announced it would launch its own blockchain called “Unichain”.

The new blockchain, also known as a rollup, is built as a layer on top of the Ethereum network. Unichain will share its revenue with users who lock up, or “stake,” their UNI tokens, the native cryptocurrency of Uniswap.

Uniswap Wants to Capture Revenue for Itself

It marks a departure from a time when most of Uniswap’s revenue from fees went to holders of Ethereum’s eponymous token Ether (ETH).

For example, Uniswap generated $1.3 billion from trading and settlement fees across five primary blockchains over the last 12 months, according to DeFi Report founder Michael Nadeau.

However, “the protocol and [UNI] token holders captured $0 of that value,” Nadeau wrote on X. Instead, Uniswap paid over $368 million to Ethereum validators – the people who post ETH as collateral to secure the network.

Nadeau said that with the launch of Unichain, Uniswap would “capture all that value,” which would be shared with UNI token holders. The company would also be able to pocket all Maximum Extractable Value (MEV) on Unichain.

That’s because it owns all of the validators on its new Layer 2 blockchain, as opposed to allowing ETH stakers to milk MEV – the maximum amount of value that can be extracted from a DeFi protocol by a group of users. Nadeau said:

“MEV is estimated to be about 10% of total fees paid on Uniswap ($100m over the last year). They will have the option to share some of this with token holders as well.”

While Uniswap may not be breaking away from Ethereum completely, the decision to move to Unichain will likely divert a big part of its more than 1.2 million daily active users and liquidity away from Ethereum, experts say.

According to data from DefiLlama, Uniswap was one of the biggest decentralized finance (DeFi) protocols as of Oct. 28, with $4.7 billion in user deposits.

Since its launch nearly six years ago, the protocol has processed around $2.4 trillion in transaction volume, much of it on the Ethereum network.

Dune Analytics says Uniswap accounts for around 44% of DEX trading volume on Ethereum. It has also collected $3.8 billion in fees in its lifetime, with UNI token holders calling for a share of the revenue.

‘A Bad and Good Thing’ for Ethereum

Nadeau’s comments were echoed by Irfan Shaik, founder of Interstate.so, a so-called “pre-confirmation” protocol, built to “bring back volume” to the Ethereum Layer 1 (L1) network.

Speaking to Cryptonews, Shaik, a software engineer, explained that Uniswap’s main motivation for moving to Unichain, a Layer 2 (L2) blockchain, is to “capture the sequencing and priority fees revenue.”

He cited Base and Arbitrum, both Ethereum-based L2 rollups, which generate over $100 million each from “priority and sequencing fees.”

Sequencing fees are paid to L2s for ordering and processing transactions recorded on Ethereum. Layer 2s help make transactions on Ethereum faster and cheaper.

“Uniswap wants to capture this value, which was previously leaking to the L1 proposer [Ethereum],” Shaik said, adding:

“This is both a good thing and a bad thing for Ethereum. It is good because apps are staying in the Ethereum ecosystem, only moving to L2s so they can self-sequence. This is potentially a bad thing for Ethereum because blob fees have not yet caught up to match sequencing fees.”

Blobs are like bundles of transactions stored in a compressed format on Ethereum. Since they occupy less space, it’s cheaper to send these blobs from an L2 to the Ethereum blockchain.

Shaik said one way to address this issue is to increase the fees charged for sending blobs, or “pressure the L2s to become more decentralized and sit closer to the Layer 1.”

He worries that rollups like Unichain might “eventually branch off and become Layer 1s, competing directly against Ethereum.”‘

‘Hard to Predict’

Sasha Ivanov, founder of Waves—a decentralized blockchain that allows users to create and launch custom crypto tokens—said that Unichain’s impact on Ethereum is “hard to predict.”

This is mainly because Uniswap’s transition to its new chain won’t likely be completed until at least year-end. Ivanov told Cryptonews that when it eventually happens, the impact will depend on whether Uniswap will “bridge” to Ethereum and other smart contract-enabled chains on ETH.

Ivanov said:

“The most likely scenario is Unichain being used as a service chain for the whole Uniswap ecosystem, without affecting too much all the chains where Uniswap has already been deployed. Since Uniswap has a lot of traction on them, [it] probably wouldn’t want to jeopardise that.”

The launch of Unichain comes at a time when the Ethereum blockchain is seeing a massive decline in revenue. According to Token Terminal’s data, Ethereum’s Layer 1 network revenue has plunged 92% since March 2024.

On Mar. 5, Ethereum network fees reached over $35.5 million, a record for 2024. However, the fees slumped to $2.6 million as of Oct. 24 following an upgrade to the blockchain, dubbed “Dencun“.

The upgrade, designed to reduce fees for ETH Layer 2 transactions, has led to a surge in rival scaling solutions, with Unichain as the latest addition. Layer 2 analytics website L2Beats currently lists 116 Ethereum rollups.

If more projects go the Layer 2 route, Ethereum’s position as the go-to platform for decentralized finance could be eroded, according to DeFi analysts.

Ethereum is already seeing considerable blowback as competing Layer 2 entities battle for the lowest transaction fees. Users are starting to shun the blockchain due to high gas fees, currently at $30. As a result, daily transactions on Ethereum have dropped 7% since January, per The Block.

“A lot of dApps are moving to Ethereum Layer 2s, but they are effectively disconnected from the Ethereum layer,” said Ivanov. “[They] simply do not interact with Ethereum enough to make up for the amount of transactions they are taking away from Ethereum.”‘

‘Ethereum Is Cooked’

Ethereum is faced with other, bigger problems. The precipitous decline in revenue, which Shaik said mainly came from sequencing rights (the right to order transactions and extract MEV) and priority fees, has rendered a 2021 Ethereum upgrade called “EIP-1559” ineffective.

The update introduced a “fee burning” mechanism meant to keep the ETH supply in check, preventing the cryptocurrency from becoming inflationary. Lower transaction volumes on Ethereum have led to weaker demand for ETH, which is needed to pay for gas fees.

As a result, the ETH supply has steadily risen since the Dencun upgrade. By year-end, the annual supply of Ether is expected to increase by $1.5 billion. According to Ultra Sound Money, the ETH supply rose by about 331,948 ETH since the beginning of April, reaching 120,396,433 ETH as of Oct. 25.

Ethereum’s price has taken a hit due to the fees, L2, and supply issues. The token has dropped nearly 40% since reaching $4,000 in early March, its highest level this year, but ETH has inched up 5% year-to-date.

As Ivanov, the Waves founder, explained:

“The future of Ethereum should lie in the tight integration of all Layer 2 chains with the underlying Ethereum layer, based on tokenomics centered around the ETH token and restaking. In this case, ETH will benefit from all layers connected to it.”

For Justin Bons, founder and chief investments officer at European crypto fund Cyber Capital, Uniswap moving to its own blockchain is a clear indication that Ethereum is “cooked [and] in deep trouble.”

“Ethereum is effectively bankrupt, not just intellectually and ethically but also economically,” Bons said in a recent post on X. “Still riding on the laurels of its past success, most cannot see the writing on the wall.”

Bons said Ethereum’s revenue is collapsing and losing Uniswap, its “biggest fee paying customer,” is the final nail in the coffin. He expects more projects to move to competing Layer 1s and Layer 2s.

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