A recent paper by Austin Adams, a researcher at Uniswap Labs, states that swapping and liquidity provisioning on layer 2 networks is significantly cheaper than on Ethereum’s mainnet.
According to the newspaper, chains such as Arbitrum have created more than three times more liquidity positions than Ethereum in the past year.
The report further shows that when looking at USDC/ETH pools, 97.5% of swappers with transactions under $125,000 did better on Layer-2s than on Ethereum Mainnet.
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This is likely because retail swappers, with trades under $125,000, are much more likely to benefit from the lower gas costs and higher liquidity concentration on layer-2s than on the mainnet.
It is worth noting that Ethereum is only responsible for about 25% of the total number of transactions, but more than 60% of the volume. This shows that despite higher transaction volumes, network activity is still mainly at layer 2 levels.
Additionally, Layer-2s often offer shorter block times, or the time it takes for the network to produce a new block. On Ethereum today, the average block time is about 12 seconds. On Arbitrum, on the other hand, the average block time is around 0.26 seconds.
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The shorter the block time, the less chance there is for an asset’s market price to move, meaning arbitrage attempts are unlikely to be as profitable.
Less successful arbitrage attempts are a good thing for liquidity providers, who get 20% more returns from arbitrage on layer-2s than on mainnet, the paper shows.
While there are significant advantages to trading at layer 2 levels, the article also mentions disadvantages. One of the main concerns is the centralized sequencer.
Read more: ‘Shared Sequencing’ could help unify blockchain rollups
The article notes that many existing rollups today still operate under one centralized sequencer. This sequencer could take advantage of the situation by reordering trades to maximize MEV profits for itself.
Furthermore, optimistic rollups today do not have decentralized fraud proofs, which are necessary to correct sequencer errors.
Read more: So your layer 2 is ‘secured by Ethereum’ – what does that mean?
Finally, there are more than 40 layer 2 ecosystems present today. The proliferation of these networks means further fragmentation of liquidity, as they cannot reliably talk to each other in real time. This means they will have to rely on bridging infrastructure, which is both costly and time-consuming.
Layer 2 networking developers are working to address these issues. Optimism recently unveiled a permissionless error-proof system, while shared sequencer networks like Espresso have explored ways to diversify sequencers for rollups.
“For decentralized markets to reach their full potential, overall trading costs must continue to decline and the user experience must continue to improve,” Adams wrote. “We believe that the generalized Layer-2s studied still have many benefits that users can leverage today, and that any future improvements will only continue to benefit the trading experience.”