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Layer 2 be or Layer not 2 be: Scaling on Uniswap v3

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  • Austin Adams

Abstract

This paper studies the market structure impact of cheaper and faster chains on the Uniswap v3 Protocol. The Uniswap Protocol is the largest decentralized application on Ethereum by both gas and blockspace used, and user behaviors of the protocol are very sensitive to fluctuations in gas prices and market structure due to the economic factors of the Protocol. We focus on the chains where Uniswap v3 has the most activity, giving us the best comparison to Ethereum mainnet. Because of cheaper gas and lower block times, we find evidence that the majority of swaps get better gas-adjusted execution on these chains, liquidity providers are more capital efficient, and liquidity providers have increased fee returns from more arbitrage. We also present evidence that two second block times may be too long for optimal liquidity provider returns, compared to first come, first served. We argue that many of the current drawbacks with AMMs may be due to chain dynamics and are vastly improved with cheaper and faster transactions

Suggested Citation

  • Austin Adams, 2024. "Layer 2 be or Layer not 2 be: Scaling on Uniswap v3," Papers 2403.09494, arXiv.org, revised Mar 2024.
    • Handle: RePEc:arx:papers:2403.09494
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    References listed on IDEAS

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    1. Robin Hanson, 2007. "Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation," Journal of Prediction Markets, University of Buckingham Press, vol. 1(1), pages 3-15, February.
    2. Basile Caparros & Amit Chaudhary & Olga Klein, 2023. "Blockchain scaling and liquidity concentration on decentralized exchanges," Papers 2306.17742, arXiv.org, revised Mar 2024.
    3. Agostino Capponi & Ruizhe Jia, 2021. "The Adoption of Blockchain-based Decentralized Exchanges," Papers 2103.08842, arXiv.org, revised Jul 2021.
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