Analyzing the Economic Impact of Account Abstraction on Uniswap's Liquidity Providers and MEV Dynamics

Overview

Recent Ethereum Improvement Proposals (EIPs) aim to introduce account abstraction features to the Ethereum network. One potential application of these features is for DEXes like Uniswap to sponsor gas fees for user transactions. This could potentially increase user engagement by lowering the cost barriers for swappers, but its economic implications on the protocol's revenue and its effects on liquidity providers and MEV dynamics remain underexplored.

Challenge Objectives

Focusing on specific Account Abstraction-related EIPs like 3074, 4337, 7562, and more, here the goal is to uncover actionable insights and recommendations on optimizing fee sponsorship strategies to enhance user engagement while maintaining or improving economic incentives for liquidity providers by looking into:

• Feasibility and Cost-Benefit Analysis: Investigate the economic feasibility of Uniswap covering gas fees for transactions. Analyze various transaction types and sizes to determine the threshold at which the cost of sponsoring gas fees is offset by the benefits gained through increased transaction volume and/or protocol engagement
• Impact on Liquidity Providers: Assess how covering transaction fees influences the incentives for liquidity providers. Examine changes in liquidity provision behavior, fee generation, and the overall impact on the profitability of liquidity pools
• Influence on MEV Opportunities: How account abstraction and sponsored gas fees might alter the landscape of MEV. Focus on identifying shifts in MEV strategies, the emergence of new forms of MEV, and the overall impact on the efficiency and fairness of the trading environment

Expected Outcomes & Deliverables

While thoughtful submissions of all mediums will be accepted, they may include (but are not limited to):

• A detailed analysis of the following primary question: How does Uniswap covering gas fees influence the incentives and behavior of liquidity providers (LPs)?
  • Potential Sub-questions:
    • Will LPs be incentivized to provide more liquidity due to increased trading volume?
    • How will changes in fee generation (from swaps) and potential rewards for sponsored transactions affect LP profitability?
    • Will there be a shift in the types of assets LPs choose to provide liquidity for?
    • Analyze the impact on impermanent loss (IL) for LPs with sponsored gas fees.
    • Conduct a simulation to model the behavior of LPs under different gas fee sponsorship scenarios.
• An economic breakdown of how account abstraction and sponsored gas fees will alter the landscape of MEV on Uniswap
  • Potential Sub-questions:
    • How will MEV extraction strategies change with the removal of user gas fees?
    • Will new forms of MEV emerge due to sponsored transactions and account abstraction features?
    • How will sponsored gas fees impact the efficiency and fairness of the trading environment for regular users?
    • Investigate the potential for front-running and back-running attacks under the new system.
    • Analyze how Uniswap can mitigate the negative impacts of MEV while maintaining the benefits of sponsored gas fees.
• An economic analysis on potential savings, revenues, costs, etc., for different stakeholder groups like LPs, swappers, sequencers, or others

Specific deliverables might include a written report with Allium visualizations, a simulation analysis leveraging v3-polars in a python notebook or a Github repo, a written report on Mirror/Medium/Notion/etc with visuals of key metrics from Allium/Dune/Flipside. Feel free to get creative with your submission; the focus should be on actionable insights.

A submission must include details related to:

• Methodology
• Assumptions
• Background Data used
• Conclusions
• Next Steps (optional)

Suggested Tools

• Optional: Leverage v3-polars for simulation analysis
• We encourage use of Allium for any data that bolsters your analysis, as Allium has recently been awarded a Uniswap Foundation grant as well to build the DEX Analytics Portal
  • Detailed models, simulations, dashboards, or data analysis that provide insights into the costs and benefits of implementing account abstraction for gas fee sponsorship on Uniswap.
  • Use of Allium is optional
• Additional Database Tools + Schemas:
  • Flipside
    • ethereum.uniswapv3.ez_lp_actions
    • ethereum.uniswapv3.ez_pools
    • ethereum.uniswapv3.ez_pool_stats
    • ethereum.uniswapv3.ez_positions
    • ethereum.uniswapv3.ez_position_collected_fees
    • ethereum.uniswapv3.ez_swaps
    • https://flipsidecrypto.xyz/jackguy/uniswap-0.15-frontend-fees-pjPWjV
  • Dune
    • account_abstraction_erc4337.userops
    • account_abstraction_erc4337.account_deployed
    • https://dune.com/0xproject/uniswap-fees
    • https://dune.com/sixdegree/account-abstraction-overview

Submissions