Uniswap Research finds Layer 2’s are cheaper to swap on than Ethereum

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A study by Austin Adams from Uniswap Labs revealed that transactions and liquidity provisions on layer-2 networks offer lower cost advantages over Ethereum’s mainnet.

The paper highlights Arbitrum’s success in generating more than triple the liquidity positions compared to Ethereum over the past year. Especially for trades below $125,000, 97.5% of transactions performed on layer-2 networks were more cost-effective than those on the Ethereum mainnet, likely due to lower gas costs and higher liquidity concentration beneficial for retail traders.

The research also notes that while Ethereum accounts for 25% of total transactions, it encompasses over 60% of the volume, indicating a preference for layer-2 networks despite Ethereum’s higher transaction volume.

Additionally, layer-2 networks such as Arbitrum offer significantly shorter block times, reducing the window for market price fluctuations and making arbitrage less profitable. This ultimately benefits liquidity providers, who receive 20% higher returns from arbitrage on layer-2 networks compared to the mainnet.

However, the paper also addresses concerns regarding layer-2 networks, including centralized sequencers that may manipulate transactions for their benefit and the absence of decentralized fraud proofs in optimistic rollups necessary for correcting errors.

The proliferation of over 40 layer-2 ecosystems also leads to liquidity fragmentation, requiring reliance on bridging infrastructure, which is costly and time-consuming.

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

“For decentralized markets to fulfill their full potential, aggregate trading costs must continue to decline, and user experience must continue to improve,” Adams said. “We believe that the studied generalized layer-2s still have many benefits that users can utilize today, and any future improvements will only continue to benefit the trading experience.”

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