Swell L2: Liquid Restaking Redefined

L2s on Ethereum scale the mainnet, but it comes with its own set of challenges. This is in the form of network outages, the biggest Ethereum L2, faced thrice – one in 2022 and two in 2023.

There are typically three reasons for this:

1. Hardware problems

2. Software bugs

3. High network demand

The common theme among these three reasons is – the failure of the sequencer. This is a common argument against rollups i.e. the failure of a single centralized sequencer node can result in transactions not being processed.

Failure of a sequencer is not the only challenge facing L2s.

The other challenge is – decentralized network service providers must establish their own nodes and consensus mechanisms. For instance, Espresso Systems uses the HotShot consensus, their own consensus mechanism. However, establishing a custom consensus mechanism incurs a huge overhead.

For many chains, the solution is – building a custom trust pool. Where a network forms a collection of entities that provide trust and security guarantees for a specific decentralized application or service. These trust pools are responsible for maintaining consensus, validating transactions, and ensuring the integrity and reliability of the system. However, custom trust pools come at a cost. The user pays this fee to the protocol, which in turn is paid as L1 fees to Ethereum. Hence, Ethereum sees value leakage in the form of transaction fees, albeit minimized through batching, paid to L2s.

Summarizing this problem – on one hand, Ethereum’s biggest value proposition for developers is security. But accessing this security is a challenge for distributed systems (like bridges, sequencers, and layers for data availability). On the other hand, it’s a difficult task for developers to establish a custom trust pool to achieve security.

One way to solve both of these challenges is – Pooled Security.

Imagine a system in which multiple decentralized services or modules can be secured by a pool of tokens rather than having individual-specific tokens for each service. This concept is called ‘Pooled Security’. A novel concept of creating a marketplace for decentralized services to secure their respective networks through the delegation of staked assets.

EigenLayer is one such marketplace which allows decentralized protocols to use pooled security through staking and restaking tokens. Restaking is a mechanism that allows Ethereum validators to secure new modules built on EigenLayer by redirecting their Beacon Chain withdrawal credentials to EigenLayer smart contracts.

Validators opt into these modules by – downloading and running any additional node software required. Once opted in, these modules can impose additional slashing conditions on the validators' staked ETH. These modules are called Actively Validated Services or AVSs. Rather than relying on their own tokens, this process of using restaked ETH to secure AVSs enhances pooled security within the Ethereum ecosystem.

Here is how pooled security works. Ethereum and the restaked tokens are delegated to the EigenLayer marketplace, and these tokens are inturn delegated to secure AVS.

Any distributed system can be an AVS – data availability layers, bridges, or sequencers. A new category of AVS introduced by AltLayer and supported by EigenLayer is – Restaked Rollups. Restaked Rollups represent a novel class of services within the EigenLayer AVS ecosystem, combining multiple services into a unified package. This integration allows users of rollups to enjoy a streamlined integration process while gaining access to a variety of new functionalities.

Swell is a leading liquid staking and restaking protocol on Ethereum using this novel idea of Restaked Rollups to build its L2. The Swell L2 will use rswETH (Swell LRT) as a native gas token, giving it a native restaking yield.

The Swell L2 is interesting in terms of its architecture and economic mechanism. The Swell L2 is built using multiple AVSs and Polygon CDK. As a Restaked Rollup, the core parts of Swell L2 infrastructure – sequencing and verification to finality and data availability — will be decentralized and scaled using AVSs on EigenLayer. Multiple AVSs related to the DApp infrastructure of EigenLayer will also be deployed on Swell L2.

Let’s dive deep into each aspect of the above mockup, with a focus on:

1. Swell’s Chain

2. Swell’s Application

3. Swell’s Economic Layer

4. Swell’s Current Performance

Swell collaborates with industry experts for its L2, for each step of the transaction lifecycle. Here is the overview of the transaction lifecycle of Swell L2.

Let’s look at all of them and their roles.

As discussed previously in this report, AltLayer introduced the novel idea of restaked rollups using Eigenlayer. Restaked rollups are essentially a set of three vertically integrated Actively Validated Services (AVSes) created on-demand for a given rollup that works with any underlying rollup stack.

These 3 AVSs essentially provide 3 key services to build a rollup.
- Verification of rollups' state correctness
- Faster finality
- Decentralised sequencing

These 3 AVSs are:

A. VITAL (AVS for decentralized verification of rollup’s state)

VITAL operates as AltLayer's decentralized verification layer for rollups, comprising a network of AVS-registered operators. These operators verify new states proposed across the network and detect invalid state roots. They can even challenge discrepancies through a bisection protocol or demand ZK proofs for disputed state roots, thereby ensuring the integrity of rollup states.

B. MACH (AVS for fast finality)

Ethereum finalizes the block after 2 epochs or approx ~13 minutes. Although, it can even take more than that.

MACH is built as an overlay network on top of Ethereum that provides rapid transaction confirmations, crypto-economic security against malicious actors, and decentralized validation of rollup states, ensuring a robust and efficient network

C. SQUAD (AVS for decentralized sequencing)

SQUAD facilitates decentralized sequencing for AltLayer, acting as a network where EigenLayer AVS operators can join to become sequencers. It ensures fair and transparent ordering of transactions within rollups by leveraging a collateral-based system for sequencer registration, thereby enhancing the decentralization and security of the rollup ecosystem.

Data availability networks offer a reliable, decentralized, and scalable solution for the storage and access of transaction data.

Chains utilizing zkEVM technology, developed using Polygon CDK, typically default to Ethereum for their data availability needs. However, Swell L2 optimizes for lower transaction expenses by finalizing transactions on the Ethereum mainnet and utilizing EigenDA for storing chain-state information.

A. zkEVM Validium
Polygon CDK allows for the creation of zero-knowledge proof (zkEVM plus optional validium) L2 chains on Ethereum, enabling the execution of transactions in a way that is compatible with Ethereum's existing smart contracts and developer tools.

B. Agglayer
For Swell L2, AggLayer facilitates seamless cross-chain operations by enabling the verification of transactions across different networks, thus enhancing the scalability of the Swell L2 ecosystem. Via Agglayer Swell L2 will share a seamless flow of liquidity with X Layer, Astar zkEVM Polygon zkEVM, and Polygon PoS.

Multiple teams are already building on Swell L2 – ION protocol, Brahma protocol, Ambient protocol, and Sturdy finance among others But what advantage does Swell have for Dapps to build on it?

1. Pooled Economic Security

   Imagine a scenario where a large sum of money, say $10 billion, is distributed across 1,000 different blockchain services or platforms. This distribution forms a collective pool of economic security. To compromise or attack any single service within this ecosystem, an attacker would need to obtain more than half of the entire pool's value, which in this case would be more than $5 billion. This requirement makes attacks prohibitively expensive and unlikely. This especially works well for smaller blockchains and protocols which have low value locked into a system and hence are more vulnerable to attacks. If chains/protocols like these use pooled economic security, they will be more secure at a low cost.

   Since all the AVSs on Swell are secured by Swell’s restaking tokens i.e. either – $rswETH, $SWELL or $ALT token, to attack any Dapp or service, the attacker needs to acquire more than 50% of staked tokens which can be costly and unlikely.

   

2. AVSs

   Swell L2 is set to become the central hub for DeFi powered by AVSs.

   By leveraging AVSs from EigenLayer, the chain is enhanced in terms of scalability and security, opening up fresh avenues for dApps to advance and offer improved DeFi functionalities.

   List of Eigenlayer AVSs to be deployed on Swell

   1. Brevis

   2. Lagrange

   3. Polyhedra

   4. Drosera

   5. Ditto

   Together these AVSs bring multiple ready-to-built utilities on Swell like sophisticated trading tools such as time-weighted averages and limit orders on DEXes, Dynamic fees based on volatility or other inputs, Cross-chain Decentralized Identities (DIDs), Cross-chain credit scores for undercollateralized lending protocols, Cross-chain zkBridge, DApp security etc.

   Doug Colkitt from Ambient said “We think restaking not only opens up a lot of primitives for us as a DEX, but it also opens up a lot of possibilities for DeFi across the space. Once you can safely move computation off-chain, a lot of limitations of DeFi are no longer there.”

The economic layer of Swell L2 has 3 tokens: 

• A gas token: rswETH

• A governance token: SWELL

• ALT 

rswETH is designated as the primary gas token for Swell L2, enhancing the token's functionality and streamlining gas costs, while its value is expected to grow over time through staking and restaking incentives.

Swell along with AltLayer has introduced a novel staking mechanism called Tri-staking, in which users can secure Swell L2 AVS’s via AltVault, to receive baseline rewards for securing chain-specific services.

For example, SWELL holders will be able to stake to AltLayer’s MACH AVS, and provide economic collateral that is used to attest to the validity of Swell L2’s state. In return, they will receive restaking rewards for securing the L2.

$SWELL will act as a governance token for all three: Swell LST, Swell LRT, and Swell L2.

The restaked yield flywheel is a sophisticated mechanism that propels Swell L2 towards overcoming the liquidity and infrastructure challenges that have historically plagued L2 solutions. This mechanism operates on a series of interlinked processes:

1. Deepening Cryptoeconomic Security: The minting and bridging of rswETH to Swell L2 amplify the platform's cryptoeconomic security. This security is not just a protective measure but a magnet for developers seeking a robust environment for building AVS.

2. Attracting DeFi Ecosystem Growth: The fortified security and enhanced liquidity create an attractive proposition for DeFi applications. As these applications thrive on Swell L2, they contribute to an increase in transaction fee intake, thereby generating more revenue for chain-specific AVS infrastructure.

3. Boosting rswETH Yield: The revenue generated from increased transaction fees is funneled back into enhancing the yield of rswETH. This elevated yield makes Swell L2 an even more appealing platform for DeFi activities, attracting more users and developers.

4. Creating a Vertically Integrated Value Capture: Swell L2 distinguishes itself through its unique ability to capture value across its ecosystem. The platform's design ensures that the success of DeFi applications directly benefits SWELL stakers through accrued sequencer fees, thereby closing the loop of the flywheel.

In simple terms, users stake their ETH to get swETH or restake their ETH to get rswETH and use these tokens in tokens in various Defi strategies to earn yields. Here are Defi strategies for swETH and rswETH.

Now, when users perform transactions on Swell L2, they pay rswETH as gas and these gas are collected by network sequencers. These fees collected by sequencers are then distributed to SWELL stakers.

More users / DeFi activity -> more Gas collected by sequencers -> More rewards are given to SWELL stakers -> Attracts more stakers -> increased security and value -> attracts more users and Defi activity.

Swell L2 Pre-launch deposits started on April 10, 2024. In 45 days, more than $1.78 billion worth of assets have been deposited on Swell L2.

If the chain were live, this would make Swell L2 the 5th biggest rollup on Ethereum TVL-wise. Not to mention it’s already the biggest validium rollup far ahead of its competitor, Immutable X ($212.68 million TVL). However, it's also important to mention that Swell L2 is not live yet.

Swell is also the second fastest roll-up to hit $1B TVL only after Arbitrum.

One interesting thing about these deposits is that out of 43,880 unique depositors 5 depositors have deposited assets worth more than 50% of the total TVL.

On 4 May 2024, an address – “0x7a95f1554eA2E36ED297b70E70C8B45a33b53095” alleged to be of Justin Sun deposited 115.647K weETH token on Swell L2 and multiple big whales as well as small individuals followed in next 3-4 days. As a result, we saw the first major increase in daily depositors, daily deposited value and increase in TVL since Pre-launch deposits started.

• TVL growth before Justin Sun: $416.95M in 24 days

• TVL growth after Justin Sun: $1.36B in 22 days

Swell currently has 44.45k active depositors. After the start of pre-launch deposits Swell has shown continuous growth on the new depositors front, specifically in the first week of May after Justin Sun’s deposit. For Swell, Justin Sun’s deposit is a pivotal event as it brought trust into the L2 and motivated more individual deposits to participate in the chain.

Swell L2’s unique value proposition is native staking rewards and LRTfi rewards. Going forward Swell L2 can become the biggest chain for activities-related LST, LRT, and protocol adjacent to EigenLayer.

The current share of deposited assets also tells a similar story.

Restaking is a hot topic within crypto. But it’s not without reason. Creating custom trust pools for decentralized services allows a more efficient use of capital for security. Restaked rollups take this concept further and allow transaction processing at a much faster and more secure manner. The Swell ecosystem is leading the way in this novel ecosystem with the Swell L2 and rswETH. Swell has identified key arrears of value accural on Ethereum using – liquid staking tokens (LSTs), liquid re-staking tokens (LRTs) and now a Restaked Rollup, the Swell L2.

The numbers say the same story. In its pre-launch, Swell L2’s deposits reached nearly $2 billion, among the top-5 L2s. In the coming months, the LRTs ecosystem will get a lot more attention. This means use cases adjacent to EigenLayer, like Swell, will see huge momentum.