Mantle Network, Modular Layer 2 Revolutionizing DeFi

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Seungho Choi
Research Analyst/
Xangle
May 24, 2024

Table of Contents

1. The Marriage of Infrastructure and DeFi

2. Mantle’s Modular Structure Optimized for Scaling DeFi Ecosystem
2-1. First modular rollup using EigenDA AVS
2-2. Liquid staking DeFi supports Mantle’s modular structure
2-3. Expanding mETH use cases and DeFi liquidity through partnerships
2-4. DeFi ecosystem on Mantle Network

3. The Impact of Mantle’s Ecosystem Expansion Strategies

4. Bottom Line - The Future of Mantle Network’s DeFi Ecosystem

 

 

1. The Marriage of Infrastructure and DeFi

Decentralized Finance (DeFi) has become a key driver of growth in the blockchain ecosystem, providing capital liquidity and attracting users. The advent of Ethereum enabled rapid fundraising and growth for new projects through ICOs, and DEXs like Uniswap enabled immediate token trading. Furthermore, efforts to maximize blockchain network scalability have evolved DeFi to offer a user experience akin to centralized exchanges (CEX).
Now, DeFi is poised for another evolution beyond simple financial trading. Recent blockchain technology trends highlight the adoption of Layer 2 solutions based on Ethereum and the implementation of modular blockchain structures to enhance stability and scalability. With Ethereum's transition from Proof of Work (PoW) to Proof of Stake (PoS), there is a growing trend to leverage PoS mechanisms in various structures of infrastructure, combining DeFi with infrastructure to secure the capital needed for validation. This technological evolution, paired with DeFi, enhances security through economic incentives while building more efficient and scalable blockchain networks. Understanding these trends and ensuring technological compatibility is crucial for projects aiming to lead in this evolving landscape, and it seems that only few possess these capabilities among currently existing projects.
This report focuses on Mantle Network, a leading Layer 2 chain that is responding swiftly to such evolution. Mantle Network successfully launched its mainnet last July, quickly adapting to Layer 2-based DeFi, liquid staking, and restaking narratives. It employs structures and strategies favorable for securing TVL and users, leveraging both monetary and human resources that can instantly respond to major trends within the blockchain ecosystem to maintain a long-term competitive edge.

 

2. Mantle’s Modular Structure Optimized for DeFi Ecosystem Expansion

Modular blockchains divide into execution, settlement, consensus, and data availability (DA) modules, each specializing in distinct functions. Mantle Network uses Ethereum Layer 1 for settlement and consensus, ensuring security for transactions executed on Mantle. Thus, Mantle inherits Ethereum's strong security while offering higher throughput and lower transaction costs. Such technical characteristics enable scalable financial service of DeFi protocols where security, processing speed, and cost-efficiency are paramount. Moreover, Mantle Network distinguishes itself from other Layer 2 chains in two ways.

  • Its native token $MNT is used for gas fees, unlike other Layer 2 chains.
  • MantleDA, powered by EigenDA, will soon switch to using EigenDA as its DA module.

These distinctions enable Mantle Network to pursue an expansion strategy of the DeFi ecosystem that is unique from competing Layer 2 chains.

*For more information on Mantle Network, please read Xangle’s previous report Mantle Network: A Potential Disruptor in the Rollup Ecosystem?

2-1. First modular rollup using EigenDA AVS

Source: EigenLayer

Mantle is the first Layer 2 to integrate EigenDA AVS (Actively Validated Service) for data availability, a technical feature that sets it apart from existing Layer 2. Rather than writing transaction data from the Mantle Network to Ethereum in its entirety, EigenDA only processes DA metadata and accountability processes on-chain, reducing data recorded and maximizing cost efficiency.

EigenDA works through the validation of decentralized stake-qualified node operators, and EIGEN tokens and Ethereum are used as the capital that constitutes the stake. The Ethereum used here is divided into two types: native Ethereum staked on the Beacon Chain and Ethereum deposited and received (LST) through the Liquid Staking Protocol (LSP). In other words, staked Ethereum can be re-staked on AVS like EigenDA to leverage the network security of Ethereum.

The key factor for EigenDA and AVS is securing sufficient capital—whether Ethereum or EIGEN tokens—to be used for validation. Mantle Network aims to establish a strong position in the restaking ecosystem by expanding its DeFi ecosystem based on Ethereum liquid staking.

*To read more about EigenLayer, please read Xangle’s previous report, EigenLayer: An Open Marketplace for Decentralized Trust

2-2. Liquid staking DeFi supports Mantle’s modular structure

Mantle Network has developed and operates its own liquid staking protocol, Mantle LSP. When users stake Ethereum in Mantle LSP, they receive mETH, a Liquid Staking Token (LST). This setup allows users to earn staking rewards while using mETH to generate additional income.  

Mantle Liquid Staking Protocol (Mantle LSP)

Mantle's LSP works by allowing users to deposit Ethereum and receive mETH (LST) as a certificate, and it has several key features:

  • Non-custodial System: Ethereum deposited by users is stored at a smart contract address defined by the protocol, with no centralized manager.
  • High Yield:  Mantle LSP enables users to earn Ethereum staking rewards through mETH, providing opportunities for additional income.
  • Securing Liquidity: Users can secure liquidity of staked asset through mETH, which allows them to utilize it across various DeFi applications.

Source: Mantle LSP Dashboard

Currently, if you hold mETH by depositing Ethereum through Mantle's LSP, you can earn additional EigenLayer points along with a return on your deposit, depending on the amount you hold. This is an event where Mantle, using EigenDA, re-stakes mETH from Mantle Treasury to EigenLayer and allocates most of the EigenLayer points earned to users who hold mETH on Mantle L2, and it is expected that mETH holders will be able to target airdrops from related projects once the AVS service is fully mainstream in the future.

Proposal of Mantle restaking token cMETH

Source: Mantle Discussion

Mantle Network is considering a proposal to allow general users to engage in liquid restaking by further staking mETH to issue cMETH, which will be used in AVS of EigenLayer. The expected benefits of cMETH include the following:

  • Integration with EigenLayer: cMETH will be used in AVS validation on EigenLayer, contributing to high security and efficiency. EigenLayer will use Ethereum staked in Mantle Network to enhance the security of services like EigenDA.
  • Additional Income Generation: Users can earn additional income through cMETH, the economic incentives to attract new influx and extend holding periods of mETH.

By employing EigenDA as DA, Mantle's modular Layer 2 strategy highlights the value of mETH’s existence, and restaking mETH into cMETH is expected to further strengthen EigenDA’s security. Market participants contribute to network security and generate DeFi income through mETH and cMETH, enabling Mantle to lock Ethereum assets long-term and build a more stable and efficient DeFi ecosystem. Additionally, EigenLayer imposes limits on the amount of restaking deposit pools to prevent the centralization of security and to ensure that Ethereum capital is not overly concentrated in specific protocols. This allows users who are unable to restake due to these limitations to participate in restating through Mantle's mETH.

2-3. Expanding mETH use cases and DeFi liquidity through partnerships 

Utilizing mETH with Ethena USDe

Source: Mantle Network

Ethena's USDe is onboarding to the Mantle Network, offering a range of features and benefits using mETH as a collateral asset. USDe is a delta-neutral synthetic dollar that is issued using a variety of assets as collateral. Specifically, the use of mETH as a collateral asset allows mETH-holding users to issue USDe. This is an effective way to increase the utilization of mETH and increase its liquidity. Users deposit mETH as collateral into a smart contract on the Mantle Network, and USDe is issued based on the value of the deposited mETH. If needed, users can convert USDe back to mETH.

mETH boosting with Bybit

Source: Bybit

Bybit, a key player in the Mantle Network, has adopted various strategies to maximize the liquidity and profitability of mETH:

  • Bybit offers a seamless staking experience, allowing users to convert ETH to mETH with a single click, subsidizing staking gas fees to enhance accessibility.
  • Through ETH2.0 liquid staking events, Bybit provides additional bonus to stakers, offering higher returns compared to competing LSPs.
  • Bybit has listed mETH/ETH and mETH/USDT pairs, providing rich liquidity for trading.

Bybit's comprehensive support strategy aims to expand the use cases of mETH across both decentralized and centralized exchanges. This partnership not only helps in expanding Mantle's DeFi ecosystem but also creates a synergy where the substantial capital from DeFi activities flows into Bybit, boosting liquidity and revenue.

Ondo Finance Secures Liquidity with USDY on Mantle Network

Source: Mantle

Ondo Finance's USDY is a real-world asset (RWA)-based yield token introduced through a partnership with Mantle Network. Collateralized by short-term US Treasuries and bank deposits, USDY offers a stable yield and is tradable on Mantle's decentralized exchange (DEX). Users can mint USDY directly through Ondo Finance's platform and transfer it to the Mantle network, enhancing the stablecoin's liquidity on DEXs like Merchant Moe and AGNI Finance, and allowing users to earn stable yields.

In the Mantle ecosystem, Ondo Finance's USDY and mUSD can be used as collateral assets or liquidity providers (LPs) in derivatives and lending protocols. This partnership with Ondo Finance expands financial opportunities for Mantle Network's users, enriching the ecosystem and supporting its sustainable growth.

FBTC comes to Mantle Network to offer deep liquidity by providing a composable BTC asset

Source: FBTC

FBTC is a digital asset pegged 1:1 to Bitcoin (BTC), designed to enhance the liquidity and composability of Bitcoin. Utilizing a decentralized Threshold Signature Scheme (TSS) network for minting and redemptions, FBTC ensures added security. It can be minted on a variety of L1 and L2 blockchains, enabling cross-chain interoperability. Backed by its partnership with FBTC, Mantle Network aims to boost Bitcoin liquidity and expand its use cases by integrating it with various DeFi protocols. This integration aligns Mantle with the Bitcoin DeFi narrative and provides additional monetization opportunities for the DeFi ecosystem.

2-4. DeFi Ecosystem on Mantle Network

As of May 17, 2024, according to DeFiLlama, the DeFi Total Value Locked (TVL) on the Mantle network, excluding overlapping protocols, is $302.96M. Key dApps in the Mantle ecosystem include the decentralized exchange (DEX) Merchant MOE and the lending protocol INIT Capital. Mantle's native DEX, Agni Finance, also contributes significant liquidity to the ecosystem, while the MethLab lending protocol holds over 5% of the TVL. These DEXs and lending protocols facilitate the swapping and collateralized lending of mETH to maximize liquidity, as well as the trading of tokens from promising projects onboarded through partnerships.

Compared to other competing L2 chains, the number and size of dApps in the Mantle DeFi ecosystem are still relatively small. For instance, Arbitrum boasts a DeFi protocol TVL of $2.64B with over 430 protocols, while Base and Blast have TVLs of $1.5B with over 220 protocols and $1.5B with over 90 protocols, respectively. On the Mantle Network, DeFiLlama separately counts the TVL of mETH, which is $1.4B. This indicates that Mantle has a relatively low DeFi TVL, and the actual utilization of mETH in DeFi protocols appears underwhelming compared to its TVL. Therefore, increasing DeFi activities using liquid staking tokens (LSTs) should be a key focus for growth.

 

3. The Impact of Mantle’s Ecosystem Expansion Strategies

The historical trend of new account inflows, as observed through on-chain data, indicates three major periods of significant growth.

On August 29, 2018, the "Mantle Journey" event rewarded participants with 500,000 Mantle tokens and whitelisted 20,000 Citizens of Mantle NFTs. This event alone led to the creation of 100,000 new accounts. On October 23, another Mantle Journey program was launched, offering a total pool of 25 million Mantle tokens to reward users and protocols for inviting new users. Although the influx of new accounts during this period was not as high as in late August, it was still above the average for new account creation between September and November.

A significant increase in new account creation around December 23 can be attributed to Mantle’s Double-Dose Drive event—doubling the yields by allocating  its own $ETH staking rewards to mETH stakers. During this time, Mantle Network intensified its promotion of both the mETH yield doubling event and LSDfi, resulting in a notable surge in new accounts and inflows.

The significant increase in new account creation at the end of April 2024 is likely due to the $MYSO token airdrop during the Mantle Rewards Station event and the introduction of the EigenLayer Points dashboard for mETH holdings. These incentives have clearly attracted more users, driven by the prospect of economic rewards.

Even accounting for the rise in Ethereum prices, the TVL of mETH has seen an upward trend since the end of December, coinciding with the mETH rate doubling event. Once this boosting event concludes, Mantle Network's interest rates will align more closely with those of competing LSPs. To sustain the onboarding of depositors into the ecosystem, it will be crucial to leverage mETH for various DeFi financial activities, thereby maintaining user engagement and TVL growth.

Since December 23, DEX trading activity within the Mantle ecosystem has remained high, driven by increased mETH inflows and the rising price of Ethereum. This uptick is likely due to Mantle Network's strategic partnerships aimed at providing liquidity to the DeFi ecosystem and expanding the range of tradable products.

Looking ahead, Mantle Network is preparing to enable users to directly earn additional EigenLayer points and rewards by restaking mETH into cMETH. This initiative will allow DeFi users holding mETH to earn extra income alongside their existing EigenLayer point rewards, potentially attracting new users to the ecosystem. However, despite the high trading volume, the utilization of mETH in DeFi activities remains relatively low compared to its TVL. To ensure sustainable growth, it will be essential to achieve meaningful outcomes in the utilization of mETH, beyond simply increasing DEX trading volume and token swaps.

 

4. Bottom Line - The Future of Mantle Network’s DeFi Ecosystem

Mantle Network is building a differentiated DeFi ecosystem through its modular Layer 2 technology, powered by EigenDA. The strategy focuses on maximizing capital liquidity and returns via liquid staking and restaking protocols while enhancing network security, aligning well with current market trends. Mantle's approach emphasizes not only technical excellence but also the integration of various DeFi applications through strategic partnerships.

Mantle's strategy of technical excellence and ecosystem expansion has yielded significant benefits: 1) The modular Layer 2 architecture of the Mantle network ensures that the network achieves both scalability and robust security. 2) Capital is effectively mobilized through liquid staking, which can be re-staked for additional security and returns, showcasing a highly innovative approach. 3) Collaborations with Bybit, Ethena, Ondo Finance, and others are enriching the DeFi ecosystem by diversifying the uses of mETH and increasing liquidity.

However, a long-term user acquisition strategy will be crucial for the sustainable growth of Mantle's DeFi ecosystem. While events aimed at attracting new users have been successful, there must be incentives for utilizing mETH in DeFi activities beyond just holding it. This includes providing opportunities to borrow against mETH, trade derivatives based on mETH, and participate in various liquidity pools with mETH. Encouraging these activities will lead to more active use of mETH, thereby fostering further expansion and growth of the DeFi ecosystem.

Mantle Network is a nascent project, having launched its mainnet less than a year ago. Despite its relatively modest on-chain achievements compared to other competing chains, it holds significant potential for future growth. Currently, Mantle's treasury stands at $3.2B, ranking third behind Optimism's $4.9B and Arbitrum's $3.9B. With strong backing from key stakeholder Bybit, Mantle is well-capitalized for substantial growth. The technical and economic advantages of its modular L2 architecture with EigenDA, coupled with the recent restaking narrative, highlight its innovative potential. Mantle's accelerated development and innovation, fueled by abundant resources, are positioned to redefine the DeFi ecosystem, making its future trajectory particularly exciting to watch.

 

주의사항
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