原文标题：Swell Network; a Deep Dive into the Most Interesting L2
Original author: Kairos_Res
Source: Kairos Research
编译：深潮TechFlow
撰文：Kairos Research
introduction
We are fast entering an era of abundance of Layer 2 technology (L2). As service providers offer Rollup Services (RaaS), the barrier to entry for an L2 continues to be lowered, unlocking a significant amount of supply and blurring the differentiation between these new chains. For smart contract protocols that were originally independent blockchains or only existed on the mainnet, the transition to L2 makes special sense. The implementation of L2 allows existing protocols or blockchains to circumvent the high cost of self-initiating validator sets and provide a more efficient vertical path to value accumulation through transaction serialization. However, in the long run, if we really live in a world of thousands of Rollups, that means we'll see hundreds of losers, as well as dozens of big winners. We believe that most of the activity will be focused on a few generic and domain-specific L2s (e.g., core vertical focus, DeFi). It will ultimately be the network effect that will distinguish the winners from the losers. As far as we know by now, Swell has the potential to be a leader in the latter category for a number of reasons. But what exactly is Swell? In this article, we'll take a deep dive into the Swell network, examine its growth, and analyze its architecture to see how it stands out from its competitors and how it achieves a dominant Layer 2 position.
What is Swell?
Swell describes itself as a "non-custodial staking protocol with a mission to provide the world's best liquid staking and re-staking experience, simplifying access to DeFi while securing the future of Ethereum and re-staking services." So, what's actually going on? As of this writing, Swell has accumulated a total value locked (TVL) of $2.1 billion (713,000 ETH). 29.57% of this is in its liquid staking token swETH, 17.78% is in its liquid restaking token rswETH, and the remaining 52.65% is in its L2 deposit contract.
As you can see, the growth trajectory of Swell's L2 pre-issuance deposits is the fastest growing of all Swell products. Let's see what exactly has contributed to this growth:
As you can see, the majority of Swell L2 deposits are made up of tokens of the Swell ecosystem, such as rswETH, swETH, and the associated Pendle main token. These are the players that are most aligned with the Swell ecosystem. In addition to this, Swell L2 also houses millions of dollars worth of other LRTs and their associated PT tokens through Pendle. If you count their total deposits of $1.1 billion, this would make them the sixth largest company in TVL, ahead of well-known L2s such as StarkNet, ZkSync Era, Manta, Linea, and the recently launched Mode Network.
The most striking part of it all: the first deposit was made about 4 weeks ago on April 9. In just 28 days, Swell's L2 pre-issuance deposits increased from zero to over $1 billion, making it one of the fastest-growing Rollups to reach the $1 billion TVL milestone, behind Arbitrum. It's important to note here that Swell L2 isn't fully live yet, but even when you compare it to behemoths like Blast that allow pre-issued deposits, Swell is still growing faster, reaching the $1 billion mark 7 days earlier than Blast.
An important note is that most of Swell's L2 deposits were allegedly made by one person, Justin Sun, allegedly his own wallet, who deposited 120,000 EtherFi eETH into Swell L2, worth $376 million at the time. Today, his deposits account for about 30% of the entire Swell L2 TVL. However, after his deposit, we saw a few other whales start depositing in the seven-figure and eight-figure ranges, notably Wintermute depositing around $9 million in Renzo's ezETH. Overall, Swell L2's TVL has grown by another $360 million since Sun's deposit.
They've seen phenomenal growth on pre-issuance deposits, but what exactly is Swell L2?
深入了解 Swell L2
Swell L2 确实是独一无二的。
From an architectural point of view, they leveraged AltLayer's technology stack to be released as a "re-staking rollup", built using the Polygon (Composable Development Kit) CDK. In addition, they will leverage EigenDA as their data availability layer, and importantly, they will also have "native yield" built into the chain, driven by staking and re-staking rewards. Finally, as an interesting caveat, they will have their own liquidity restaking token, rswETH, as their canonical Gas token.
There's a lot to explain in detail here, so let's go through it step by step.
什么是再质押Rollup？
In simple terms, a re-staking rollup is an AVS stack rollup that leverages the three-part vertical integration of the Alt Layer, including:
- VITAL(AVS用于去中心化验证Rollup的状态)
- MACH (AVS for Quick Finishing)
- SQUAD（AVS用于去中心化排序）
On top of that, restaking Rollups allow for the re-staking of LST and SWELL tokens such as swETH themselves. When SWELL tokens are staked, it can accumulate sequencer fees. Note that this solves a huge problem with other L2s today. Optimism, Arbitrum, StarkWare, and many other smaller L2s have an incentive disconnect between sequencers and actual token holders, essentially creating an asymmetry between users and the legal or laboratory entities behind these L2s. While most, if not all, L2s are looking to address this issue in order to improve the alignment of their protocols with users, they will all eventually catch up. From day one, Swell has provided incentive adjustments for both its token holders and actual users on the chain.
通过前面提到的AltLayer的一系列工具，Swell选择利用Polygon Chain Development Kit (CDK)为他们的零知识（ZK）Validium Rollups。 Validium Rollups，主要由Immutable X推广，它在链下私密处理交易，稍后在主链（在这种情况下是Polygon）上提供其有效性的证明，与optimistic Rollups相比，改善了交易速度和隐私。
In addition to being able to choose their Rollup technology stack, Swell also chose to leverage EigenDA as their data availability (DA) service provider. EigenDA is thrown into the flywheel of positive feedback that we will discuss in detail in the next section. At the time of writing, EigenDA is the most popular AVS, with over $9 billion in repledged capital across 118 operators.
So, all the technical architecture aside, how exactly does the Swell Chain stand out?
The key is that its ingenious architecture provides a unique feedback flywheel that leverages all of the key areas of value accumulation in Swell and the Ethereum ecosystem.
Given that the native fuel token is rswETH, users who want to use Dapps on Swell L2 must either bridge their LRT or re-stake their ETH to earn rswETH. The more rswETH bridged or staked, the more secure the crypto-economy of EigenLayer becomes, deepening the collective security of the entire platform, thereby increasing the moat around EigenLayer and attracting more developers to build AVS. More AVS expands the overall market and has the potential to boost restaking yields. For Dapps on Swell L2, higher restaking yields make better use of rswETH, and the better the Dapp performs, the more users it attracts, and the more sequencer fees are returned to SWELL stakers, creating a continuous cycle.
Objectively speaking, no other protocol or L2 has the exact same vertically integrated reflection value capture mechanism as Swell. The rise and fall of most crypto networks depends on their liquidity network effects, and Swell L2 is well-positioned to capitalize on the key areas of long-term value appreciation that Ethereum provides.
Swell Expense Capture
For swETH and rswETH tokens, Swell has a standard 10% fee rate, which is evenly distributed between node operators and the finance department. Despite launching both products in less than a year, the agreement has accumulated more than $1 million in fees as of the time of writing. Looking ahead, these fees are likely to increase and could reach more than $5 million a year later, based on the background that the bull market will grow.
Who builds on Swell?
As we've already discussed, Swell L2 is ready to be operational, but which projects will be deployed on its chain? In a blog post from the Swell team, they publicly stated that they plan to airdrop SWELL tokens to pre-release depositors of Swell L2, in addition, some well-known DeFi projects also plan to distribute a portion of their airdrops to pre-release depositors of Swell L2. These projects include:
- Ion Protocol: A lending platform focused on staking and re-staking assets. Ion closed a $2 million pre-seed funding round in July 2023 and has a TVL of $6.27 million according to DeFi Llama.
- Ambient Finance: A "0-to-1" decentralized trading platform (DEX) where the entire DEX runs in a single smart contract. Ambient is currently deployed on Ethereum Mainnet, Canto, Scroll, and Blast. They raised $6.5 million in a seed round in July 2023 and currently have a TVL of around $87 million on DeFi Llama.
- Brahma Finance: An on-chain execution and custody environment that has raised $6.7 million in seed and seed extension rounds in February 2022 and December 2023. Brahma is currently deployed on Blast.
- Sturdy Finance: A siloed lending platform with shared liquidity that allows users to create liquid money markets for any asset without permission. Sturdy raised $3.9 million in seed and strategic rounds in March 2022.
AVS Partnership
In addition, in recent days, Swell has announced partnerships with three AVSs on EigenLayer: Drosera, Brevis and LaGrange. While it's still too early to tell, given that Swell is most aligned with AVS's economic incentives, it could become the de facto liquidity hub for all AVS tokens outside of the Ethereum mainnet. Swell is unlikely to win all the liquidity as established market participants will want to arbitrage these AVS tokens by trading between CEXs and DEXs, but Swell is likely to capture a lot of on-chain liquidity and transactions for AVS tokens.
Swell's growth story
To better understand Swell's prospects, we first need to understand how it got to where it is now. When looking at Swell's growth history, we can look at a date that facilitated the success of the protocol: December 18, 2023, which is the day EigenLayer opened deposits for LST's "long tail". On that day alone, 35,000swETHSwell was deposited into EigenLayer until the deposit pause on January 3, 2024, an increase of 225% in this amount.
In the second phase of EigenLayer deposits, which began on February 5, 2024, deposits soared again to 39,000 on the first day, an increase of 148%, and were suspended again on February 9 (just 4 days later).
Today, swETH remains the second most popular re-staking LST, with Lido's stETH currently in first place. With only 27% of the total Ethereum supply staked, there is still a huge addressable market (TAM) for liquid staking tokens like swETH. In addition, as more ETH is staked, the staking reward rate will naturally be compressed. The compression of earnings in any economic environment will lead individuals to look for other high-yield venues. For DeFi, this could manifest itself as swETH holders depositing funds into a fixed-yield trading protocol, such as Pendle, where users can earn a 4.46% staking reward rate, compared to around 3.2% for canonical staking rewards. Users also use a loop leverage strategy on LSTs through a lending protocol to enhance their returns. We expect swETH to continue to grow because of the inherent demand drivers around ETH and better staking yield opportunities in DeFi protocols.
Another way to increase the staking reward rate comes from EigenLayer, where re-staking users can earn additional yield by delegating to an operator on the network that supports Active Verification Service (AVS). However, re-staking LST has the same opportunity cost as staking ETH, which is one of the larger pillars of value for rswETH, which allows users to take advantage of re-staking rewards. In addition, they can also hold liquid assets, assuming there is sufficient liquidity in the pool, which allows them to bypass the 7-day withdrawal period on EigenLayer. We expect rswETH adoption to continue to increase due to the demand drivers surrounding rswETH.
Going forward, we believe Swell is best positioned across all L2s to capture the majority of restaking-related DeFi activity, including but not limited to LRT tokens, AVS tokens, and protocol tokens for projects around or adjacent to EigenLayer.
rswETH risk
While using rswETH as a canonical Gas token has advantages in creating a positive feedback loop, there are also risks. However, if the community is aware of the potential associated risks, it is more likely to succeed in the long run. For rswETH, we can divide it into three main risk categories:
- Operational Risks:
- While liquid staking tokens simply stake a user's ETH onto the underlying Ethereum blockchain, liquid restaking tokens (LRTs), such as rswETH, are first staked onto the Ethereum blockchain and then optionally added to EigenLayer's restaking infrastructure. With rswETH, users choose to delegate their re-staking ETH to a set of whitelisted "operators" who will re-stake the underlying ETH across multiple active validation services (AVS) that are projects built on top of EigenLayer.
- There will be no cuts to AVS at launch, but it is expected to be implemented soon. Each AVS will have its own cuts that operators must ensure compliance with to avoid cuts. In addition, Swell has worked with industry leaders in protocol risk management, such as Gauntlet, to help create the AVS Selection Framework.
- Liquidity Risk:
- This applies to all LRTs, not just rswETH, but liquidity is absolutely important. Liquidity risk refers to ensuring that there is sufficient liquidity in a pool with sufficient liquidity to pair rswETH to maintain a 1:1 ratio of price to fair value. In this case, fair value is the price of the underlying asset that makes up rswETH, i.e., the staked ETH and its associated staking rewards. Since rswETH is a non-decorated token, it follows a redemption curve that aligns with the staking reward rate. Essentially, this means that rswETH should always trade at a "premium" higher than ETH traded alone. At the time of writing, rswETH is trading at a discount of 0.55% to its fair value. If you'd like to take a deeper dive into the LRT liquidity landscape, read the LRT Mobility report.
When ezETH announced the launch of the REZ token, rswETH's liquidity situation was briefly affected by the "depeg" of ezETH. Opportunistic farmers used every possible method to exchange ezETH, while both rswETH and rsETH were thrown into chaos. rswETH is currently trading at a slight discount, but this could be closed in a few weeks after the implementation of local rswETH withdrawals.
- Smart Contract Risks:
- This is not a type of risk specific to Swell, but it is important to mention and understand how they are trying to mitigate this pervasive risk. Swell has been audited by numerous audit firms for all past upgrades as well as Swell L2 pre-issuance deposit contracts, such as Sigma Prime + Cyfrin for swETH and rswETH and Mixbytes + Hexens for pre-issuance contracts. In addition, Swell has opened bug bounties ranging from $1,000 to $250,000 through ImmuneFi.
Conclusions and Reflections
In conclusion, no one has been quite like Swell – they have successfully identified key areas of value accumulation in the Ethereum ecosystem, and they have executed well so far. We believe that the key to their success in L2 is to encourage DeFi Dapps, especially those built with a focus on EigenLayer, LRTs, LSTs, etc., to build on top of Swell L2. Their unique feedback structure, mentioned earlier in the report, highlights their understanding of network effects and their potential for sustainable growth. In addition, with LRTs likely to become the most popular form of staking in DeFi, the vertical ownership stack will become a very attractive move through L2s like Swell. If you don't have a full stack through sequencing, etc., then unfortunately you will miss out or even lose part of your profits. Finally, in other areas of L2, we have yet to see an understanding of similar long-term market segments. We expect others to follow suit and try to replicate execution in the same way that Swell has done so far, but Swell has an undeniable first-mover advantage in this "game" that leverages Ethereum. Winner takes all, it's as simple as that.