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

ArXiv ID: 2403.09494 “View on arXiv”

Authors: Unknown

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

Keywords: Automated Market Maker, Uniswap, Gas Optimization, Market Structure, Blockchain

Complexity vs Empirical Score

• Math Complexity: 2.5/10
• Empirical Rigor: 7.0/10
• Quadrant: Street Traders
• Why: The paper relies primarily on empirical analysis of blockchain data and introduces a new Python library (v3-polars) for replicability, but its mathematical modeling is limited to standard economic concepts and descriptive statistics rather than advanced derivations or complex formulas.

  flowchart TD
    A["Research Goal"] --> B{"Data Collection"}
    B --> C["Comparative Analysis"]
    C --> D{"Statistical Testing"}
    D --> E["Key Findings"]
    
    A["Research Goal<br>Impact of Faster Chains<br>on Uniswap v3 Market Structure"]
    
    B["Data Collection<br>Uniswap v3 Activity<br>Mainnet vs L2s<br>Gas Prices & Block Times"]
    
    C["Computational Processes<br>Execution Price Simulation<br>LP Capital Efficiency Calculation<br>Arbitrage Activity Analysis"]
    
    D["Statistical Testing<br>Gas-Adjusted Swap Quality<br>LP Fee Returns<br>Block Time Sensitivity"]
    
    E["Outcomes<br>1. Better Execution on L2s<br>2. Increased LP Capital Efficiency<br>3. Higher Arbitrage Returns<br>4. 2-Second Blocks Suboptimal"]