Before we get started, a reminder that this is not a recommendation or endorsement to buy any tokens mentioned in this tutorial.
Hop Protocol is one of the biggest names to hit the interoperability scene in DeFi. Hop is a scalable rollup-to-rollup general token bridge, allowing users to send tokens from one rollup or sidechain to another almost immediately without having to wait for the network’s challenge period, which is a common criticism where you have to wait 7 days to withdraw from Optimism or 4.5 hours from Arbitrum.
Thankfully, Hop uses market makers, called Bonders, who front the liquidity at the destination chain in exchange for a small fee. This credit is extended by the Bonder in the form of hTokens, which are then swapped for their corresponding native token in an AMM.
A good example is if I want to withdraw USDC from Arbitrum to Ethereum, Hop would allow me to transfer my liquidity from Arbitrum thanks to LPs holding USDC and hUSDC on Arbitrum.
Hop is also one of the only solutions for bridging between L2s, which is even better for a fugure where we can avoid congestion and high fees on Ethereum L1.
Since Arbitrum quickly grew to a high of $2B in TVL since its launch in early September, there’s been huge demand for dApps to deploy and for DeFi investors to get their liquidity onto Arbitrum. With about $660M TVL today and having witnessed a euphoria of yield farming on other sidechains and L2s, it seems possible and likely that there will be lots more liquidity bridging to Arbritrum using Hop. Bridging requires fees whether you move L2 <> L2 or L2 <> L1.
L2 <> L2 = 0.08% swap fee (two swaps)
L2 <> L1 = 0.04% (only one swap)
If you consider Ethereum has about $115B TVL, BSC has $16B, and Solana has nearly $9B. Arbitrum has lots of potential to catch up with these figures, meaning lots of bridging activity before yield farmers can start earning on Arbitrum.
How to Earn Yield from Arbitrum’s L2 Growth as a Hop LP
In today’s opportunity, I will show how I can benefit from the upside of DeFi growth on Arbitrum by being an hUSDC-USDC LP (Bonder), which I’m speculating will eventually rise to 10% APR or much higher over the coming weeks and months. This is a more conservative approach to LPing but also something I can consciously do to support the migration of liquidity to major L2s on Ethereum like Arbitrum.
Please also be aware of a few major risks.
- Smart contract risk in Ethereum and Arbitrum
- Oracle failure
- Liquidity crisis
- Systemic risk in DeFi
- Pegged assets like stablecoins can de-peg
- As always, this is not financial advice. You should not follow any of my writing as an investment strategy.
1 – First, I go to the Hop protocol app and connect my Ethereum wallet in the top right.
2 – Next, under the Pool tab, I choose Arbitrum and USDC from the dropdown menus to see whether I can get positive slippage (aka a bonus) to deposit Hop tokens (hUSDC) or instead more Arbitrum USDC.
- I can test entering any amount of USDC and see if the Bonus is positive or negative. Below you see I earn more share of the pool and hence more fees by depositing Arbitrum USDC (USD Coin Arb1).
- However, if I enter more hUSDC, I get negative slippage so there’s more hUSDC in the pool than what’s needed at the moment.
3 – Depending on whether I get a “Bonus” for depositing more USDC…
Hi! My name is Lark Davis!
I’m a cryptocurrency investor with years of experience and I’ve been making consistent profits in the crypto space.
I’m passionate about helping others do the same, so I run multiple educational channels on crypto investing.
