Liquidity inflows move into new L1 and L2 protocols

Asset flows into L1 and L2 networks help to show the hotspots of activity and differentiate between highly active and ‘dead’ blockchains. Recent flows data show a shift in the balance of several leading chains. 

Optimism (OP) turned into the most significant recipient of net inflows, mostly coming from Ethereum. Arbitrum (ARB) showed higher overall activity, but a lower retention of assets. Both of those L2 chains attracted more than $1B in liquidity. 

Flows to L2 blockchains showed a shift in Ethereum usage, where the leading L1 was turned into a relay layer. One of the main reasons for the Optimism inflows is the expansion of the Superchain, which hosts a long list of projects in addition to the Optimism main net. The Superchain hosts Base, Worldcoin, Celo, as well as an OP BNB version.

Some of the distributed apps, games, DeFi and other actions already switched to scalable chains, retaining significant shares of available liquidity. Bridging is still the key tool for inflows, despite attempts to create other cross-chain tools. Since bridges have limited capacity, this also means L2 chains retain most of the bridged assets and guarantee a good level of liquidity.

Inflows to L2 are sometimes the work of whale wallets, which create wealth inequality. Arbitrum is among the biggest targets of liquidity coming from Ethereum (ETH), mostly in the form of USDT tokens. 

The inflows are limited to the top 200 wallets, which hold more than 93% of USDT wealth. The transfers may be targeting liquidity pools, DEX or other on-chain entities, but are not a sign of users taking their funds and wallets to a new chain. 

More active flows to L1 and L2 chains also coincide with periods of peak market activity. One of the reasons is the ability to find arbitrage opportunities between different protocols. In Q2, flows increased and affected more L2 chains.

GM.

Top Net Flows.
🥇 @Optimism : +$1.2B
🥈 @Arbitrum : +$1.0B
🥉 @Base : +$450M
4️⃣ @Injective : +$185m
5️⃣ @Solana : +$175m

Track this metric. Flows matter for blockchain networks.

Follow the liquidity, follow where activity is going. pic.twitter.com/jM0nE9Kjqe

— Artemis (@artemis__xyz) July 31, 2024

Liquidity does not translate to users

The metrics of liquidity and users do not always overlap. The reason for liquidity inflows may be specific apps, vaults or lending protocols, which draw in big sums from a small user count. 

For some chains, high traffic coincides with low transaction value. Networks like Ronin only drew in $153M in value, but carry the traffic of the Axie Infinity game, with more than 2.2M daily active users. Ronin almost lines up to TRON with 2.2M daily active users.

Older networks like BNB Chain still get close to Solana’s activity, due to carrying a significant part of stablecoins, as well as NFTs and tokens. However, BSC has slowed down in terms of building up its DeFi space. 

Previous hot projects see outflows

Former over-hyped L2 solutions saw the biggest outflows. Both Linea and ZKSync had net outflows close to $500M. These L2 chains promised to produce ZK-rollup solutions and become the next building hubs. 

ZKSync earned its high profile through airdrop promises and the launch of the ZK token. After the incentives ran out, ZKSync was abandoned. Linea is still lagging in announcing a native token. The native token airdrop may be delayed for months, and in the meantime, liquidity is abandoning the chain. 

Outflows are also affecting the older generation of chains, which boomed during the 2021 gaming bull market. Networks like Polygon and Avalanche are not enjoying the same revival in activity and liquidity. The slowdown of NFT trading and general token bridging also led to slim inflows for those chains. BNB Chain also saw minimal net inflows, and some of the BNB assets were bridged into Solana.

Part of the funds flowed into Base, which became the most important chain for Uniswap trading. Solana was a significant recipient of net flows and also became a source of liquidity for Base and Arbitrum. 

The recent activity between chains was also reflected in overall bridge usage. Bridge volumes turned more consistent in Q2, moving between $170M and $300M in 24 hours. In a week, more than $1.76B in assets have been bridged between chains. 

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Cryptopolitan reporting by Hristina Vasileva