Welcome back friends!
After a brief hiatus, Decoding Defi is back for 2022! No better way to start off the new year than to take a look at a few yield farming opportunities on two of the most recently deployed L2 solutions: Arbitrum & Optimism. Lets dive in below. As always, this is not financial advice.
Thank you for reading and have a fantastic day!
- BJ
Layer 2 - What is it?
What is the importance of Layer 2 solutions and why do we need them?
In short, Layer 2 solutions offer a scalability solution while still keeping the structure and integrity of the Ethereum blockchain.
Due to traffic, transactions can be slow to process as well as expensive to settle causing gas to spike through the roof.
The goal of layer 2 solutions, aka “rollups”, are to improve transaction speed and cost across the Ethereum network.
First Step - Bridge
In order to use Layer 2 rollups, funds must first be bridged from Ethereum Mainnet to the L2 of choice. Be careful, bridging funds can become expensive if gas is high on Mainnet. Also, it’s important to check which funds the bridge protocol can tranfer across the network.
For example, with Hop Protocol it gives us the option only to bridge USDC, USDT, MATIC, DAI and ETH.
Layer 2 Solutions
Arbitrum
What: Optimistic Rollup L2 Solution
Network Bridges: Hop Protocol, Synapse Protocol, Arbitrum Bridge, Multichain, Across Protocol
Yield Farming Opportunity #1: Curve Finance
Curve Finance currently offers four incentivized liquidity pools on Arbitrum. The pool with the highest rewards, or highest tAPR (token APR), is the tricrypto pool. It consists of 1/3 USDT, 1/3 wBTC & 1/3 wETH.
*NOTE: In order to earn Rewards tAPR, the LP tokens must be staked.
Yield Farming Opportunity #2: SushiSwap
SushiSwap currently has nine pools with a TVL greater than $1 million with staking rewards.
The pool with the highest rewards is the MAGIC/wETH pool which earns 160% APR in MAGIC and about 65% in fee revenue in SUSHI at the time of writing.
Optimism
What: Optimistic Rollup L2 Solution
Network Bridges: Hop Protocol, Synapse Protocol, Optimistic Ethereum Gateway, Across Protocol
Yield Farming Opportunity #1: Rubicon Finance
Rubicon is a decentralized open order book exchange built on Ethereum Layer 2 networks. The protocol can be used to trade and swap between ERC20 tokens and provide liquidity in democratic liquidity pools.
Rubicon Finance currently offers four single-sided pools with a positive APR which include: USDC, DAI, USDT, wETH. The DAI stablecoin pool offers the highest (and safest) estimated APY at about 13%.
*NOTE: The TVL is still very low (under $500k) for all pools which brings risk as well as opportunity.
Yield Farming Opportunity #2: Lyra Finance
Lyra is an automated market maker (AMM) for options trading. Users can also provide funds to Lyra’s liquidity pools which provide liquidity to the options automated market maker.
Lyra currently offers three pools: ETH/USD, BTC/USD & LINK/USD. The LINK pool offers the highest estimated APY reward in LYRA which also has the lowest TVL.
*NOTE: Also offered is a USDC staking pool for additional LYRA rewards.
Yield Farming Opportunity #3: WePiggy
WePiggy is an open source, non-custodial crypto asset lending market protocol. In WePiggy's market, users can deposit their crypto assets to earn interest, or borrow others by paying interests.
WePiggy currently offers a small APY on ETH, USDC and USDT. The USDT pool offers the highest APY at 4.46%.
It’s still very early for Layer 2s. I imagine volume across the L2 ecosystem increases exponentially in the next few months. Nonetheless, it’s time to start migrating to the land of cheaper fees and opportunity. Below are a few additional reads about L2 rollups.
Additional Articles on Layer 2s
Bankless - Essential Guide to Arbitrum
Ethereum - Layer 2 Rollups (Advanced)
🌅 ON THE HORIZON: Next week we’ll take a look at any new yield farming opportunities in the Layer 2 ecosystem. Thank you for reading and please feel free to provide any feedback, comments or concerns! This is not financial advice.