Hey Edge readers,
In the third installment of our Layer 2 (L2) mini series, we dive into how you can benefit from L2s and earn yield from users bridging in and out of various L2 blockchains.
Here's what we're covering this week:
- Earning yield on Layer 2 blockchains 📘
Earn yield from L2 user activity by providing liquidity to bridge protocols.
- Blast airdrop debuts at $3B valuation 🗞️
Hong Kong enters DeFi, Scroll airdrop next, and more.
Stay sharp. 🫡
-The Exponential team
Scaling Up: The Essential Guide to Layer 2s
In the third issue of our mini series, “Scaling Up: The essential guide to Layer 2s,” we break down how you can earn a yield from Layer 2 user activity by providing liquidity to bridge protocols.
Issue 3: Earning yield on Layer 2 blockchains
In the first two issues, we covered the basics of Layer 2 (L2) blockchains, including how they scale the Layer 1 (L1) mainnet (e.g. Ethereum) and the various types of L2 rollups that exist today.
L2s have proliferated since their introduction in the Ethereum roadmap. Today, they are the primary method to onboard retail users to the Ethereum ecosystem due to lower transaction costs and enhanced security (inheriting the security of the Ethereum L1). For instance, Coinbase is looking to onboard millions of its existing users to DeFi through its own L2 rollup, Base chain.
So far in 2024, over $19 billion of crypto has been bridged from Ethereum to major Layer 2 rollups. These users are generally chasing potential airdrops (e.g. zkSync), cheaper fees, and novel dApps that exist only on L2. For example, Arbitrum led all ecosystem inflows with nearly 40% of all assets flowing from Ethereum due to its thriving DeFi ecosystem.
That’s a lot of money flowing through the Ethereum ecosystem. Now you may be wondering how you can profit from this activity.
The answer is third-party bridges. Third-party bridges differ from the native bridges deployed by each blockchain network (e.g. Arbitrum bridge).
Native bridges are integrated into the relevant blockchain and are maintained by that blockchain’s foundation or DAO, providing secure transfers between Ethereum and the L2 rollup. Native bridges lock the original asset on the Ethereum L1 and mint an equivalent token on the L2 (‘canonical’ token).
Third-party bridges, developed by external entities, are protocols that help facilitate the movement of crypto assets between various blockchains. They offer a faster and cheaper alternative when bridging between networks. However, they carry their own risk, as you need to rely on their service and security, trusting the bridge provider with your assets.
What are the benefits of third-party bridges?
Third-party bridges are useful for several reasons.
First, recall that Optimistic blockchains have a 7-day challenge period to dispute any transactions. This means using the native bridge to transfer assets back to the Ethereum L1 also requires waiting 7 days before assets are released. The top four L2 networks by TVL are all Optimistic Rollups so this is a major bottleneck for users.
Second, third-party bridges enable bridging between L2 rollups. Imagine you initially bridged assets from Ethereum to Arbitrum. If you now want to bridge those same assets to Optimism, using only native bridges, you’d have to wait 7 days to first bridge back to Ethereum. After that completes, you’d have to initiate another bridge transfer from Ethereum to Optimism.
Lastly, third-party bridges offer a way for users to earn yield and benefit from increasing L2 activity. These bridges typically require users to provide liquidity on each blockchain to enable bridge transfers. Every bridge transfer through the provider includes a bridge fee that accrues to liquidity providers. For example, if you provide liquidity for ETH on Arbitrum network, you would earn fees every time ETH is bridged into and out of Arbitrum.
Top third-party bridges to earn yield
Below are a few popular third-party bridges where you can earn yield and benefit from L2 bridge flows.
Bridge provider: Stargate
Our take: Stargate is a composable asset bridge built on top of the LayerZero cross-chain messaging system. It leverages an oracle and relayer for cross-chain security for the protocol. With the introduction of Stargate V2, providing liquidity will likely become more attractive due to reduced costs and enhanced scalability through Hydra’s Bridging-as-a-Service. Hydra will also expand the number of chains to all LayerZero-supported networks, offering more yield opportunities for users.
Bridge provider: Synapse
Our take: Synapse offers a liquidity bridge for stablecoins and ETH. Its yield offerings are not as competitive due to higher gas costs and less efficient liquidity management (liquidity pool on each chain). Further, Synapse is exploring alternative bridging methods like SynapseRFQ, an intents-based bridge where user 'intents' (e.g. send 500 USDC from Ethereum to Arbitrum) are passed onto relayers who compete by giving their best quote to complete the bridging transaction. SynapseRFQ does not rely on liquidity pools so users may find better yield opportunities elsewhere.
Bridge provider: Hop
Our take: Hop was built with security at its forefront with no single points of failure or trusted off-chain actors. However, Hop faces challenges with scalability and cost efficiency. Hop relies on liquidity pools on each chain and the native bridges for verifying bridge transfers. The slower integration of new chains and assets can limit the yield offerings for liquidity providers.
Bridge provider: Across
Our take: Across is an intents-based bridging protocol. Like Hop, Across’ architecture provides enhanced security by only relying on canonical assets. Across relies on a system of ‘relayers’ to fulfill fast bridge transfers and are refunded by liquidity providers from a unified liquidity pool, ensuring quick transaction times and efficient capital use. As bridge aggregators become more popular, more user flow is expected to route through Across, making it a solid choice for liquidity providers seeking to maximize their yield.
Start earning today: Take advantage of our zero gas fees (we only charge a 0.2% transaction fee on the entry/exit) through the following Across bridging pools on Exponential. We also reinvest all protocol incentives every month to maximize your returns.
Conclusion
Providing liquidity to third-party bridges can be a lucrative way to earn yield from the increasing activity on L2 blockchains. By selecting the right bridge provider, you can maximize your returns and take advantage of the growing interest in L2 networks.
In the next and final issue, we will explore the economic designs behind various L2 networks and how they potentially lead to value accrual for their native tokens.
In the news
- Consensys says SEC is ending investigation into ETH as a security - Read
- Stablecoin transfer volume increased 16x over past 4 years - Read
- Bitcoin Runes rake in over 2,500 BTC in fees in less than 2 months - Read
- ZRO trades at >$1B market cap after launching airdrop claims - Read