Understanding Unichain: DeFi-specific L2

Author: 100y; Compiler: Yangz, Techub News

A few years ago, I predicted the possibility of Uniswap developing its own network, but I thought it was unlikely at the time due to potential user experience issues. However, just last night, Uniswap officially announced the launch of its own L2 solution Unichain, and my prediction was immediately overturned.

Although Unichain's white paper is only three pages, a closer look will reveal that it is a masterpiece. It brings together Uniswap's long-standing focus on user experience, Flashbots' latest MEV research, and the huge ecosystem built by OP-Stack. Although the content is brief, the white paper touches on complex topics such as TEE, prioritization, and MEV tax, which may be challenging for readers who are not familiar with the basics of MEV. Therefore, this article aims to quickly and simply decompose the main functions of Unichain to facilitate readers' understanding.

Problems with Uniswap

Uniswap is the leading AMM DEX in the Ethereum ecosystem, currently deployed to 25 networks with a total TVL of approximately $4.5 billion. Although Uniswap is considered one of the most successful protocols, it still faces limitations in the networks on which it operates.

For example, although Ethereum provides huge liquidity, it has problems such as low scalability and susceptibility to malicious MEV (maximum extractable value). To address these issues, various Rollup solutions have emerged, but most Rollups are currently operated by a single sorter, which is prone to potential single points of failure such as validity failure and censorship.

In addition, the block construction process of Ethereum and Rollup involves a public mempool, which creates an environment for users (searchers) to extract MEV (for good or bad) from other users. In addition, due to the structure of the MEV value chain, there is an imbalance in which proposers can obtain different proportions of value, while users cannot benefit.

Enter Unichain

Overview

Unichain is an Ethereum Optimistic Rollup based on OP Stack, launched by Uniswap, Flashbots, OP Labs and Paradigm, to solve the above problems. Unichain offers several key advantages through verifiable block construction and the Unichain Verification Network (UVN):

• Fast state updates

• Enable applications to extract and internalize MEV

• Fast settlement through fast economic finality

In addition to being an upgraded version based on OP Stack, Unichain also plans to participate in Optimism's Superchain ecosystem. In addition to its native fast settlement capabilities, the integration is expected to provide users with a seamless liquidity experience through cross-chain solutions in the Superchain ecosystem.

Below, let's take a closer look at how Unichain brings the above advantages.

Verifiable Block Construction

Verifiable block construction is achieved through Rollup-Boost, a feature developed in collaboration with Flashbots. Rollup-Boost provides two key features, including Flashblocks and verifiable priority sorting. Similar to MEV-Boost, Rollup-Boost is also available as auxiliary software.

Flashblocks

Flashblocks is a pre-confirmation issued by the builder of the Trusted Execution Environment (TEE) (we will explore it in detail below). Unichain generates partial blocks, splitting a single block into four parts, each of which is generated every 250 milliseconds and sent to the sorter.

The sorter continuously downloads these partial blocks while executing transactions, providing users with early execution confirmation. The sorter guarantees that these partial blocks are included in the final proposed block. This process speeds up state updates, reduces latency, improves user experience, and reduces malicious MEV.

Verifiable Priority Ordering

Priority Ordering

Priority Ordering is a block construction mechanism proposed by Dan Robinson and Dave White of Paradigm. It assumes that block proposers only sort transactions based on priority fees, without participating in censorship or delaying actions. This model is only feasible when there is a single or trusted block proposer. In a competitive environment like Ethereum L1, where there are multiple proposers building blocks, priority ordering is not feasible.

The purpose of priority ordering is to allow DApps on the mainnet to levy a MEV tax on transactions that interact with them, thereby extracting some of the MEV value. This value can be used internally by the DApp or redistributed to users. The MEV tax is a fee imposed on transactions by the smart contract and can be set as a function of the transaction priority fee. Below is a simple example.

The DEX 100y on Unichain wants to extract MEV directly from MEV transactions on its exchange. Since it knows that blocks on Unichain are built using priority ordering, this means that the MEV value of any transaction is entirely determined by its priority fee. Assume that 100y sets a MEV tax equal to 99 times the transaction priority fee. So, if an arbitrage opportunity worth 100 ETH arises, what is the maximum priority fee that a MEV seeker needs to submit to extract that MEV? The answer is 1 ETH. Setting the priority fee to 1 ETH results in a MEV tax of 99 ETH, for a total of 100 ETH. If the seeker sets a priority fee higher than 1 ETH, the total cost will exceed 100 ETH, resulting in a loss. Therefore, 100y can only capture a maximum of 99 ETH of the 100 ETH MEV value.

For ordinary users who do not capture MEV value, the priority fee is set lower, which means that 100y will not capture value from these transactions. Instead, it will only capture the MEV value represented by the priority fee. This setup allows applications on Unichain to directly extract MEV, opening up a variety of potential use cases.

Leveraging TEE for Verifiability

The key here is to ensure that the entity responsible for block construction uses the prioritization mechanism. To this end, Unichain takes two measures. First, it separates the sequencer and the block builder, similar to the PBS model. Second, it forces block builders to use TEE (Trusted Execution Environment), allowing anyone to verify that the prioritization mechanism is being used.

TEE is a secure area in hardware such as the CPU that runs independently from the rest of the system and can safely process sensitive data. TEE ensures the secure operation of trusted code even if the external environment is compromised. Prominent examples include ARM's TrustZone and Intel's SGX. A common example is how biometric data on mobile devices, such as fingerprint or facial recognition, is processed within the TEE.

This design prevents even the operating system or programs with administrator privileges from accessing the secure area. To ensure that the code running in the TEE is trusted, a verification process is used. This verification ensures that the TEE is always in a secure and untampered state. For example, in Intel SGX, a hash value is generated to represent the code and data in SGX, and the hardware-managed private key proves the integrity of the code.

The block building process of Unichain is carried out in the trusted execution environment of the TEE builders. Due to the characteristics of the TEE, these builders can initially submit a proof to prove to users that they are using the prioritized block building mechanism. This combination of features ensures that applications on Unichain can reliably extract a portion of the MEV revenue.

Unichain Verification Network (UVN)

The Unichain Verification Network is a decentralized network of node operators responsible for verifying the latest state of Unichain and providing fast finality, enabling seamless cross-chain transactions through economic security. This concept is similar to AltLayer's MACH (using EigenLayer for fast finality), Nuffle's fast finality layer, and Symbiotic's recent fast finality concept.

To become a decentralized node of Unichain, participants must stake UNI on the Ethereum mainnet. Each epoch, the node with the highest staked UNI balance will be selected into the active node set and participate in validation by running the Reth Unichain client. Additionally, similar to other networks, UNI holders can choose to delegate their stake.

Summary

As a DApp, Uniswap has achieved strong product-market fit, and I am positive about its transition to Ethereum-based application-specific L2, especially as it seeks to expand its ecosystem. However, liquidity fragmentation remains a challenge, and it will be key to see how the Uniswap team can provide a seamless cross-chain trading experience between Ethereum L1 and Unichain L2.

From an investment perspective, UNI tokens will now be used as collateral for UVN. Given the strong performance of re-staking protocols such as EigenLayer, Symbiotic, and Karak, we can expect a large amount of UNI to be deposited into UVN, which will greatly promote the value accumulation of UNI. Since the announcement of Unichain, UNI has risen by about 12% and entered the top 20 market capitalization. Given that UNI's market cap is already high compared to other tokens, it will be interesting to further understand the impact of UNI staking on its future price.