Ethereum’s Swapping Fees Outpriced by Rival Tokens
A recent study conducted by Austin Adams from Uniswap Labs has found that conducting transactions and providing liquidity on layer-2 networks can offer significant cost advantages compared to Ethereum’s mainnet.
The study highlights the success of Arbitrum, a layer-2 network that has generated over triple the liquidity positions compared to Ethereum in the past year. Particularly for trades below $125,000, 97.5% of transactions performed on layer-2 networks were more cost-effective than those on the Ethereum mainnet. This can be attributed to lower gas costs and higher liquidity concentration, which are beneficial for retail traders.
The research also reveals that even though Ethereum accounts for 25% of total transactions, it represents over 60% of the volume. This indicates a clear preference for layer-2 networks despite Ethereum’s higher transaction volume.
Furthermore, layer-2 networks like Arbitrum offer significantly shorter block times, which reduces the window for market price fluctuations and makes arbitrage less profitable. This ultimately benefits liquidity providers, who can enjoy 20% higher returns from arbitrage on layer-2 networks compared to the mainnet.
However, the study also raises concerns about layer-2 networks, including the potential manipulation of transactions by centralized sequencers for their own advantage, as well as the absence of decentralized fraud proofs in optimistic rollups, which are necessary for correcting errors.
Another challenge posed by the proliferation of over 40 layer-2 ecosystems is liquidity fragmentation, which requires reliance on bridging infrastructure that can be costly and time-consuming.
To address these issues, developers are actively working on solutions. For example, Optimism has unveiled a permissionless fault-proof system, and initiatives like Espresso aim to diversify sequencer networks.
Austin Adams, the author of the study, emphasizes the importance of reducing aggregate trading costs and improving user experience for decentralized markets to reach their full potential. He believes that the existing layer-2 networks have many benefits that users can take advantage of today, and any future improvements will only enhance the trading experience further.
In conclusion, the study highlights the advantages of layer-2 networks for transactions and liquidity provisions, but also acknowledges the challenges that need to be addressed to ensure the full potential of decentralized markets is realized.
