Will Unichain become a key milestone on Uniswap's road to overtaking Binance?

Author: Liu Jiaolian

Uniswap Labs has launched its own second-layer chain - unichain.

Obviously, unichain = uni + chain. Uni comes from the prefix uni- of uniswap, and chain means "chain".

This chain is an Ethereum second-layer chain based on Optimism superchain technology. I have already mentioned it in the 10.10 Jiaolian internal reference yesterday, so I will not repeat it. Today I mainly want to talk about the relationship between UNI's investment logic and this matter.

Time flies. It has been 4 years since Jiaolian built a position in UNI (see Jiaolian's 2020.11.7 article "Uniswap (UNI) Valuation Analysis and Fixed Investment Plan"). The cost is $11, and according to the current $8, it still has a floating loss of 27%, which is the worst performance among all positions (worse than ETH and large A positions). However, Jiaolian believes that the main reason is that he made a mistake in his operation. After the first batch of position building plans were successfully completed, he was a little excited after the bull market in 2021, so he blindly carried out the second batch of replenishment without strict calculation and planning, resulting in the holding cost directly increased from $8 when the first batch of positions were completed to $11. In other words, if I hadn't lost my discipline, I should have just recovered my investment now.

Therefore, conversely, Jiaolian feels that some of the underlying logic and fundamentals of choosing to build a position in UNI have not changed. Therefore, Jiaolian continues to hold the position. This is in line with the basic principles of investment.

Simply put, there are five fundamentals that Jiaolian considers in choosing UNI among many altcoins: 1. The most in-demand and most profitable business in the entire crypto industry is trading, which is currently monopolized by CEX and will inevitably be challenged by DEX in the future. Uniswap is the leader of DEX (real data leadership, not propaganda leadership); 2. Hayden Adams, the founder of Uniswap, has a very positive intention (mainly decentralized thinking and the courage to face supervision), the Uniswap Labs team has strong technical innovation capabilities (as can be seen from technical iterations such as V3), and is down-to-earth and responsible (regardless of bull or bear markets, they are working hard to do real innovative work), such a team can go far; 3. The Uniswap protocol is truly decentralized (the source code on the chain can be verified as authentic), and the community is fully empowered (Governance is a relatively exemplary model); 4. Uniswap has great revenue potential, which can be seen from Uniswap's Labs' front-end revenue data can be verified; 5. UNI's token model is relatively reasonable, the token code has no backdoor, and the possibility of cutting leeks is not high.

Of course, the negative risks are mainly internal and external: 1. Internal risk, UNI's value capture (or empowerment) logic is not currently connected, and there are huge variables - including the risk of how Uniswap Labs, as a commercial entity, balances its interests with the interests of the community, such as Uniswap Labs will be keen to extract front-end revenue, but not too keen on UNI dividends (of course, this issue is more complicated, and there are also issues such as securities legal risks); 2. External risks, the SEC's investigation of Uniswap Labs and the Wells Notice, the nature of UNI, whether it is suspected of securitization, etc. There are also huge variables.

In the past 4 years, these fundamentals and internal and external risks have not changed much. Therefore, the reason for holding the position at the beginning is still valid now. Of course, I must remind you again and again that the risk of copycats going to zero is extremely high. These personal opinions may not be correct and do not constitute any investment advice.

As mentioned above, as a representative of DEX, Uniswap's long-term strategic goal is definitely to challenge CEX. Who is the current leader of CEX? Of course, it is Binance.

Coincidentally, when CZ was still in charge of Binance, he also said that the development direction of Binance was to become a decentralized trading platform. Perhaps he realized that only by fully decentralizing can the inevitable corruption and degeneration of many centralized organizations be solved.

Since CZ was invited to a tea party by the U.S. Department of Justice (see the article "The United States swallows up Binance, Changpeng pleads guilty" on November 22, 2023) and was forced to resign from all positions at Binance, the new CEO of Binance has publicly claimed that Binance has achieved "decentralization".

However, this "decentralization" at the board decision-making level is only the decentralization of governance and form. Binance's technical architecture and organizational structure are still centralized from the bottom up. This is not the same species as Uniswap, which was built on a decentralized platform and decentralized protocol from the beginning.

To give a simple example: the market makers on Binance are all qualified partners. There must be someone within Binance who is responsible (and has the power) to make the final decision and select who to be the market maker; while Uniswap’s market makers are called LPs (liquidity providers), which are permissionless and anyone can participate freely - some people will give benefits to the person in charge of making the final decision at Binance in order to become a market maker, but no one will give benefits to anyone at Uniswap Labs in order to become an LP.

Another example: Binance's listing is decided by someone who is responsible (and has the power) for what coins can be listed and what coins cannot be listed; while Uniswap's listing is open, any coin, as long as it adds a liquidity pool, can be traded using the Uniswap protocol, which is also permissionless (no permission required) - some people will spend money to operate in order to list coins on Binance, but no one will spend money to operate in order to list coins on Uniswap (there is a small loophole in the default list of the front end, perhaps this is controlled by Hayden Adams himself?).

Of course, building the entire technology stack and organizational structure from the bottom up in accordance with the decentralized thinking and methods at each layer is also a huge challenge at this stage. The biggest challenges are two: 1. End users are not accustomed to the use of private key wallets, but are more accustomed to the accounts and custody methods of the Internet experience; 2. Operational performance, the current blockchain is not as good as the centralized Internet technology system.

In early 2023, in order to try to solve Challenge 1, Uniswap Labs launched its own wallet App - Uniswap Wallet.

Now, in October 2024, in order to cope with Challenge 2, Uniswap Labs has finally embarked on the path of "application chain" and launched its own second-layer chain - unichain.

Jiaolian believes that on the road from DEX to CEX, Uniswap Labs' strategic layout ideas are clear.

Some people think, is it really meaningful to build a chain? It seems that there are too many chains in the industry at present, and too few good applications. It doesn't make much sense to build one more. However, Jiaolian thinks that maybe Uniswap will do it differently. Maybe, there is a chance to become a milestone in the strategic turning point?

Learning from history, let’s take a look at the development of BNB after Binance launched its own Ethereum-compatible chain, BSC (Binance Smart Chain, now renamed BNB Chain) on September 20, 2020:

When the BSC chain was launched, BNB was $27. Today, 4 years later, BNB is $562, an increase of nearly 20 times.

Coincidentally, today BNB’s market value is more than 80 billion dollars, and UNI’s market value is more than 4 billion dollars, which is also exactly 20 times.

That is to say, assuming that UNI can reach the height of BNB today in the next four years, it will have a 20-fold growth space, from today's 8 dollars to 160 dollars. Of course, the upper limit of this visual space is 2 times higher than the maximum value of 50 dollars in the valuation matrix calculated by business scale in the article "After the Uniswap team shipped 1 million dollars at high prices..." published by Jiaolian on February 25, 2024. In this way, Jiaolian has a calculation of the target range of UNI in his mind for the upcoming new round of bull market cycle, which is about 50-150 dollars.

Note that valuation is not science, but a feeling.

In May of this year, the community made a proposal for UNI dividends, which once raised UNI to $11 (see Jiaolian 2024.5.25 Why did Uniswap (UNI) suddenly rise to over $10?). However, it seems that the Uniswap Labs team is concerned about the dividend empowerment. Although they did not reject the proposal on the surface, they sold at high prices and smashed UNI down. Afterwards, the implementation of the proposal was also suspended.

Now, Unichain, developed and led by Uniswap Labs, has made its debut. They should have more confidence in empowering from the underlying infrastructure and less worries about legal risks, right?

Looking at the white paper of unichain, it is clearly written that the block nodes are required to use Intel TDX (Intel Trust Domain Extension) hardware to build TEE (Trusted Execution Environment), and the verification nodes are required to pledge UNI and build UVN (Unichain Verification Network) to achieve decentralized computing and incentive alignment.

Why is Uniswap different from others in chain building? Randomly looking up the ranking of protocols that contribute the most gas fee income on the Ethereum layer, the first and fourth places are both Uniswap, adding up to nearly 18%, close to one-fifth. This is just a random sampling.

A quick check shows that the annual gas fee income of Ethereum's first-layer chain is about 3 billion dollars. Of course, there is a huge difference between bull and bear markets. We will not go into details here, just to get a feel for it.

One-fifth of 3 billion dollars is 600 million dollars. Please note that this does not include the income generated by the Uniswap protocol on many other side chains and second-layer chains. Let's round it up and estimate it to 1 billion dollars.

So, if these values ​​are migrated to unichain, it means that the upper limit of income can reach 1 billion dollars. Of course, because unichain is a second-layer, the gas fee will be much lower than the first-layer chain, so the usage must be greatly increased to reach the full income potential.

Balancing various factors, even if there is an annual income of hundreds of millions of dollars, it is enough for the nodes participating in UNI staking and verification to share the profits happily.

Jiaolian thinks that this is the biggest confidence of Uniswap to become its own second-layer chain unichain.

Of course, according to the white paper, unichain's ambition is definitely not limited to becoming Uniswap's "application chain", but to become the best chain to carry the entire DeFi ecosystem. In the summary of the unichain white paper, it is written as follows: "Unichain solves some of the most pressing challenges facing Ethereum transactions around Rollup scaling strategies, especially fragmented liquidity and inefficient cross-chain interactions. By introducing innovative technologies such as Flashblocks, the Unichain verification network, and integrating with super chains, Unichain aims to become the center of DeFi liquidity and the best platform to access DeFi on Rollup. " Wish it success.