IOSG Ventures: Why is Unichain Necessary?

Original Title: "IOSG Weekly Brief | What is the Necessity of Unichain? An Initial Exploration of Unichain #250"

Original Source: IOSG Ventures

Foreword

Over the years, Uniswap has been continuously pushing for functional and innovative reforms, making exchanges more user-friendly and equitable. For example, we have seen Uniswap Mobile, the Fillers Network in UniswapX, the ERC-7682 standard for unified cross-chain intent, and hooks for custom AMM pools to be opened in Uniswap V4.

On October 10th, Uniswap announced their overall optimistic Rollup, Unichain. The chain aims to be a one-stop liquidity hub in the superchain ecosystem, providing traders with a near-instant exchange experience and lower slippage while maximizing the privacy and integrity of MEV participants using TEE.

While this vision is impressive, users have questioned the need for another L2, including some comments from Vitalik stating that Unichain is "just another Uniswap clone on each Rollup." In other words, he believes that launching a Uniswap clone on a new chain is essentially the same as launching Unichain itself.

So, is Unichain a positive or negative development? Today's article is here to explore the architecture of Unichain and understand the "necessity" of Unichain.

1. What is Unichain?

Unichain is an optimistic rollup designed to execute near-instant transactions while incorporating the privacy technology TEE to minimize the potential impact on on-chain LPs and traders.

As Unichain is built with similar attributes and standards as other optimistic rollup chains, it can now leverage interoperability in the superchain ecosystem and access shared liquidity across the entire network.

To achieve this, Unichain brings forth 4 significant innovations:

· Rollup-Boost and Sequencer Builder Separation

· Block Building in TEE

· Flashblock

· Unichain Validation Network (UVN)

1.1 Rollup Boost: Sequencer Proposer Separation (SBS)

Block Building is key to solving the MEV problem.

Prior to MEV Boost, Ethereum suffered from front-running and poor user experience due to the risk of censorship. The intense competition among miners for profit-driven transaction inclusion led to high transaction fees and front-running issues for users. To address these problems, flashbot built MEV-boost.

MEV Boost introduced a sequencer to aggregate the roles of block builders and proposers, submitting the most profitable block to the proposer for signature, thus separating the roles of block builder and proposer. This design effectively disperses the MEV extraction process, democratizing MEV profits between validators and professional builders.

The concept of Rollup Boost is similar to MEV Boost, where L2 enabled with SBS (Sequencer Builder Separation) can separate the block building process from the sequencer's execution engine through a system called the "Block Builder Sidecar."

In summary, the system has 4 main components:

· OP-node

· OP-geth

· Sidecar / Blockbuilder Sidecar

· External Block Builder

Below is the optimism architecture diagram, where we can see the sequencer node (also known as op-chain) composed of Op-geth and Op-node.

To differentiate the roles of block building and proposing within the sequencer, a component called Sidecar has been added. Sidecar enables the OP node to receive blocks from external builders, thus creating a market between block builders and proposers.

The workflow is as follows:

1. The OP node sends an update to the sidecar.

2. The sidecar acts as an intermediary to forward the update to op-geth.

3. When the OP node requests a block from OP-geth, the sidecar intercepts the request.

4. The sidecar then forwards the request to an external block builder, which is the "interstice" where external builders can bid and compete.

5. Upon receiving the external/winning block, the sidecar sends it to the OP node.

6. If no block is received, the sidecar forwards a locally generated block.

The key advantage of the block builder sidecar is that upgrades do not require modifying the OP chain client, while allowing for more flexible, simplified, and censorship-resistant transaction ordering rules. However, the addition of the intermediary (sidecar) may introduce some latency.

1.2 Rollup Boost: Sequencer Proposer Separation (SBS)

Rollup Boost enhances the block building process by introducing a Trusted Execution Environment (TEE) to ensure transaction integrity, taking this process further. Thanks to recent hardware advancements such as Intel TDX, real-time performance becomes achievable.

For those unfamiliar with TEE, it is a secure area within a processor or hardware that provides enhanced privacy by blocking unauthorized entities from reading internal data. At the same time, TEE maintains a high level of integrity as the code inside TEE cannot be modified or replaced.

In the context of Rollup Boost, Unichain will use a TEE builder to reduce the risk of MEV (Miner Extractable Value) extraction. This means that when bundling packets or transactions are sent to the TEE block builder, the integrity aspect of TEE ensures that the order of transactions reaching the builder is not influenced by external parties attempting to extract more MEV.

Additionally, TEE provides trustless rollback protection, which can shield users from the impact of failed transactions as the TEE can run simulations and detect and discard any rollback transactions before processing. This not only improves the efficiency of Automated Market Makers (AMM) (as no failed transactions go through) but also enhances the overall user experience, especially during times of high transaction volume.

In order to increase the transparency of the sorting and block building process, after block generation, proof of execution will be publicly shared with users. This proof is crucial for validating priority sorting, a concept that will be explained in the following paragraphs.

1.3 Flashblock and Verifiable Block Construction

Ethereum has an average block time of 12 seconds, which is very slow and cannot meet today's demands for acceptable transaction experiences. Furthermore, the slow block time exposes the network to more MEV opportunities and makes it susceptible to network congestion under spam transaction attacks.

L2 aims to improve Ethereum's scalability by bundling Layer 2 transactions and submitting proofs for computation correctness. To provide a smoother transaction experience, Unichain aims to achieve a 250ms block time. However, to accomplish this, Unichain needs a system that can continuously transmit blocks with low latency and provide near-instant confirmation times. Solana can process 440M transactions in parallel, but to achieve such speed, it sacrifices a certain degree of decentralization.

Previously, in most L2 block proposal processes, data serialization and state root generation caused delays, making fast block times impractical.

To address this issue, flashbot created the flashblock, which conceptually "breaks down" blocks into smaller shards to reduce the time between blocks, maximizing UX/LP advantages.

Flashblock is a pre-confirmation issued by the TEE block builder for partial but rapid confirmation.

First, transactions are streamed to the TEE block builder. If L2 has enabled SBS, the block builder will be decoupled from the sorter. Post sorting and bundling, transactions will gradually form partial confirmations called Flashblocks. Flashblocks are broadcast from the sorter to other nodes for validation every 250 milliseconds.

Since delays are caused by state root generation and serialization in L2, Unichain mitigates the cost of the block building process by only calculating the state root and consensus for multiple partial blocks once, significantly reducing delays.

In summary, the strength of Flashblock lies in:

· Shorter block time reduces LP's time value of reverse.

· Flashblock provides early execution state of the existing state, making wallet and frontend integration easier.

· Fast transactions provide outstanding User Experience (UX).

Moreover, since TEE can enforce priority ordering in each Flashblock, applications and smart contracts can now impose MEV tax, hijack priority ordering for their benefit, and reallocate MEV to LPs and users.

As Dan Robinson emphasized in his tweet, allowing applications and users to control their MEV is a key feature/purpose of Unichain.

Even better, priority ordering can be verified through a public execution proof in TEE. This allows users to accurately verify how their transactions were executed. This is crucial as it's the only way for users to ensure fair priority ordering.

1.4 Unichain Validation Network (UVN)

Today, most L2 sequencers are centralized, and the behavior of a single sequencer can impact the fairness of MEV, block liveness, or finality, etc. For example, if a sequencer broadcasts an invalid block and submits a fraud proof to challenge it, the resulting chain reversion would actually impact the chain's speed.

To address potential single points of failure in sequencers, Unichain introduces the Unichain Validation Network (UVN).

UVN adds an additional finality layer by focusing on validators of the proof-of-stake chain (Ethereum) when proposing a block. This process is akin to parallelization, where different stages of block construction can occur simultaneously within a period.

However, it's premature to make assumptions about pros and cons without further details in the documentation.

1.5 $UNI Token

The $UNI token is now not just a governance token; it is also a utility token.

To become a validator, operators must first stake $UNI on the mainnet as collateral. The smart contract will track the balance and update the status through Unichain's native bridge.

At the start of each epoch, the current staked balance is snapshot, and fees are distributed proportionally based on the staking weight. Validators with the highest $UNI stake weight are selected as the active set, where they can submit proofs to earn a portion of the validation reward. Validators who miss or fail to submit proofs will not receive rewards, and the rewards will carry over to the next epoch.

Based on limited public information, we can infer that the validation reward will be:

(L2 fee paid by Unichain users - MEV tax collected by the application - cost of submitting the bundle to Layer 1)

2. Unichain vs Appchain vs General Rollup

· The key distinguishing factors between Unichain/General Rollup and Appchain are MEV, pre-commitment, and block space competition.

· Since Appchains can customize their architecture flexibly, they can implement different MEV mechanisms to address issues such as eliminating frontrunning risk or reducing MEV extraction leakage.

· At the same time, through the integrity properties provided by TEE, Unichain mitigates and restructures MEV by ensuring transaction order is not influenced by any third party. Verifiable priority ordering also ensures MEV fairness and the potential for redistributing MEV revenue to users and liquidity providers.

· Most sorters in the market are centralized, allowing them to extract the maximum value from the order flow. In contrast, Unichain takes a more "public interest" approach as its MEV redistribution mechanism limits to some extent the amount of MEV original sorters can capture.

· Unichain is built on OpStack, which is the common standard of an optimistic chain, enabling Unichain to read messages and transfer assets on the superchain via secure message passing, achieving low latency (around 2 seconds) through its native optimistic interoperability design. On the other hand, Appchains can leverage different interoperability solutions such as joining the IBC ecosystem or building L3 on Arbitrum Orbit (although this is less common for OpStack's L2).

3. Conclusion

Unichain is an intriguing concept that not only provides users with a pre-commitment smooth transaction experience but also, due to the shorter block time enabled by flashblocks, minimizes the window for MEV exploitation. This innovation also reduces LP's adverse selection risk and benefits users/LPs with lower slippage, among other advantages.

On the other hand, the integrity and privacy properties of the Trusted Execution Environment (TEE) ensure that on-chain users can enjoy the assurance of fair, verifiable, or application-managed MEV redistribution transactions, thanks to the priority ordering on Unichain.

The Unichain verification process can also protect the sequencer from single point of failure, with validators playing a crucial role in fast finalizing verification blocks, while turning the $Uni token into a yield-bearing productive asset.

However, through enabling MEV reallocation, the sequencer effectively loses the potential to capture the maximum amount of MEV, but more revenue is flowing back to on-chain LP/users.

While some may argue that Unichain may not have enough appeal to migrate assets to a new chain, I believe that as the L2 ecosystem continues to evolve, interoperability between operational chains will enable Unichain to tap into larger liquidity pools, such as those from Base.

In addition, apart from Grants (which Unichain can also provide in USDC form post Uniswap DAO), new DeFi  Apps have ample incentive to build on Unichain as they can benefit from a bespoke MEV reallocation strategy. Simultaneously, assets within the ecosystem can benefit from TEE to mitigate MEV extraction.

Therefore, with its speed, fairness of MEV reallocation, and interoperability that the chain may offer, Unichain has the potential to become the next hub of DeFi.

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