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Uniswap Research: Layer 2 Networks Offer Cost Advantages Over Ethereum Mainnet

A recent study conducted by Austin Adams from Uniswap Labs has shed light on the cost advantages of transactions and liquidity provisions on layer-2 networks compared to Ethereum’s mainnet.

The research, spearheaded by Uniswap Labs, underscores Arbitrum’s remarkable success in generating triple the liquidity positions compared to Ethereum over the past year. Particularly for trades below $125,000, a staggering 97.5% of transactions conducted on layer-2 networks proved to be more cost-effective than those executed on the Ethereum mainnet. This cost efficiency is attributed to lower gas costs and the concentration of liquidity, particularly beneficial for retail traders.

Despite Ethereum accounting for only 25% of total transactions, it captures over 60% of the volume, indicating a prevailing preference for layer-2 networks despite Ethereum’s higher transaction volume.

Furthermore, layer-2 networks such as Arbitrum offer significantly shorter block times, thereby reducing the window for market price fluctuations and making arbitrage less profitable. This translates to 20% higher returns for liquidity providers engaging in arbitrage on layer-2 networks compared to the mainnet.

However, the study also addresses pertinent concerns surrounding layer-2 networks, including the potential for centralized sequencers to manipulate transactions for their advantage and the absence of decentralized fraud proofs in optimistic rollups, crucial for error correction.

The proliferation of over 40 layer-2 ecosystems has led to liquidity fragmentation, necessitating reliance on bridging infrastructure, which can be costly and time-consuming.

In response to these challenges, developers are actively working to mitigate these issues, with Optimism unveiling a permissionless fault-proof system and initiatives like Espresso aiming to diversify sequencer networks.

Adams emphasized, “For decentralized markets to realize their full potential, aggregate trading costs must continue to decline, and user experience must continue to improve. We believe that the generalized layer-2s studied still offer numerous benefits that users can leverage today, and any future enhancements will further enhance the trading experience.”

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