2024 Theses

Yield Bearing and Alt DA L2s [Ren]

On November 20, 2023, Blast launched as the first Ethereum L2 with native yield for ETH and stablecoins. ETH deposited into the bridge contract would be deposited into Lido for stETH, while any stablecoins deposited into the bridge contract would be swapped for DAI and deposited into the DSR. Ignoring the questionable marketing tactics, including the use of points, a lottery, and assets that are non-redeemable until at least February 2024, the network has still managed to amass almost $1.01B in TVL in the bridge contract. 

Following Blast’s announcement, other L2s followed suit, including Aevo with the launch of aeUSD, and Manta, another L2 with native yield that claims to offer “2x more substantial incentives.” As 2023 has shown, the space has strongly trended to capital-efficient protocols and yield-bearing tokens. First kicked off by Lido and stETH, liquid staking solutions have become the norm, and this has slowly started to bleed over into restaking with the launch of multiple liquid restaking tokens (LRTs). Following that, lending protocols such as Aave have enabled high-efficiency mode, which allows users to borrow closely correlated assets such as stablecoins or ETH/related LSTs at up to 97% LTVs. Similarly, MakerDAO hiking the DSR from 3.3% to 8% through the launch of the Enhanced DSR in August 2023 led to a large increase in deposits. 

Arbitrum has a total of $1.97B in stablecoin deposits in the bridge contract and $3.02B in ETH deposits in the bridge contract. If one were to apply a 5% stablecoin yield and a 3% ETH yield, that would result in $98.5M in stablecoin yield and $90.6M in ETH yield, annually. Similarly, Optimism has a total of $527M in stablecoin deposits in the bridge contract and $718M in ETH deposits in the bridge contract. With a similar yield, that would result in $26.35M in stablecoin yield and $21.54M in ETH yield, annually. 

That is a significant amount of incentives that an L2 would not need to pay out to users to bridge over. For example, yield generated from Arbitrum’s bridge contract stablecoin and ETH deposits would equate to a non-trivial 12.8% inflation for the ARB token given the current market cap. Granted, it’s not like the Arbitrum DAO or the Arbitrum Foundation would have the ability to direct the yield as it would have to be passed on to users who bridged onto the L2. Nonetheless, it can still be seen as additional “incentives” for a user to bridge to an L2, as a user no longer has the opportunity cost of their assets not generating the same yield as on Ethereum mainnet. As the L2 competition heats up, with ZK rollups slowly gaining adoption, and especially with other L2s that will use alt-DA layers such as Celestia or EigenDA with minimal fees, existing incumbent L2s will have to utilize incentive solutions to sustain their competitive advantage. The thesis is that one major L2 (Arbitrum, Optimism, Base, zkSync Era) will adopt a yield-bearing solution in their bridge contract.

An extension of this thesis is that one major L2 (as defined above) will adopt an alt-DA layer in 2024. For example, Optimism already has plans for an alternative data availability layer named Plasma Protocol, which enables alt-DA providers to supplement limited L1 DA. As a result of increasing gas costs, the Dencun upgrade which will bring data blobs into production being delayed (slated to go live in March 2024), and the rise of alt-DA layers that provide data availability at a fraction of the cost, one major L2 will see it as a rational business decision to switch DA layers while still settling on Ethereum. The most logical candidate for a DA layer to switch to would be EigenDA, given its Ethereum “alignment” with restaked ETH, and what will likely be a large overlap in the operator set. However, given Celestia’s first-mover advantage and the fact that EigenDA is not live yet, it is more likely that an L2 would utilize Celestia. 

An L2 would theoretically get a similar amount of economic security with an alt-DA layer. One could also argue that an L2 needs less economic security for data availability than the amount of economic security the core Ethereum protocol needs. Arbitrum has spent $46.62M in ETH to post transaction call data and state roots to Ethereum, whereas if it had utilized EigenDA as its DA layer, it would have only spent ~$4,000. One simply cannot ignore the fact that doing so would instantly improve L2 gross margins from ~30% to >99.9%, assuming they hold transaction costs constant as a result of inelastic demand and thus pricing power. An L2 that pivots to an alt-DA layer would be able to charge 1/100th the fees of any other Ethereum L2 as a consequence of paying much less in data posting costs.