What is Hop Protocol?

Hop Protocol represents an Ethereum-centric token bridge that is specialized in value transfer between layer-2 solutions. Simple and efficient, Hop Protocol is the perfect tool for Ethereum aficionados. 

Over the course of the last 5 years, Ethereum has solidified its position as the leading layer-1 blockchain. Hundreds of DeFi apps, Games, and NFTs are choosing to build on Ethereum thanks to its strong security guarantees and smart contract capabilities. Inevitably, Ethereum reached its scalability bottleneck, leading to gas wars between various users. The only way to outcompete others was by paying higher gas fees. This was the decisive element that motivated the creation of alternative Layer-1 networks.

Fast forward to 2021, the emergence of layer-2 solutions such as Arbitrum, Optimism and StarkNet solved the scalability problems for Ethereum. The idea was to move the heavy computing activities on these L2s and post the proof on the main chain. For the end user, this meant cheap and fast transactions on Ethereum. 

Scalability solutions have been in the works as early as Ethereum's inception, each using its proprietary method. Although each of these L2s dramatically improve the user experience, their uniqueness created a series of unforeseen challenges. Namely, these L2 solutions are not interoperable with each other. For example, funds deposited with Arbitrum can't interact directly with the crypto funds deposited on Optimism. Migrating funds between L2 solutions require using Ethereum as the bridge layer. As a result, liquidity on Ethereum faces a major risk of fragmentation.

Hop Protocol has come up with an elegant solution to bridge the gap between L2s and get rid of the ETH gas fees once and for all! Much like every other infrastructure project on Ethereum, Hop Protocol is trustless. Users have on-chain guarantees that they will receive their funds 

Every bridge relies on a mechanism to transfer data across chains. In some way or another, it needs to be proven that a transfer on the source chain is valid and that the bridge protocol can release tokens on the destination chain. This is how assets can be transferred between L2's even though they are not directly connected.

Bridges differ in how they transfer data between chains and this is what defines their security model for the most part.

How does Hop Protocol work?

First and foremost, Hop Protocol is a rollup-to-rollup bridge. It allows users to send tokens from one rollups or sidechain to another without having to wait for the challenger period. In order to make the transfer seamless, Hop uses market makers (called Bonders) to offer liquidity upfront in exchange for a fee. 

Hop Protocol hTokens

Hop Protocol works by using an intermediary asset – the hToken (e.g., hETH, hUSDT, etc) that can be quickly moved from one network to the next. The end user doesn't interact with the hToken directly, only the respective rollup's native token that's bridge to the layer 2.

It then uses AMMs to swap between the hTokens and their corresponding assets on each layer-2 network. This AMM automatically prices liquidity and incentivizes rebalancing liquidity on each rollup. Because users don't deal directly with hTokens, let's illustrate an example of its underlying mechanics.

If you choose to send 2 ETH from Arbitrum to Optimism, the funds go through the Hop Bridge contract. From there, the 2 ETH is locked and converted to hETH in order to migrate to the destination layer. At the other end, the 2 hETH is converted to the ETH version on Optimism. This is often called a "canonical token."

In simple terms, canonical tokens are layer 2 representations of the native layer 1 token. The idea is to create a unified representation of the same asset across multiple blockchain networks, allowing for seamless transfer and exchange of assets between networks. By using canonical tokens, it becomes possible to reduce the complexity of cross-chain transactions and improve interoperability between different blockchain networks. 

Hop Protocol Bonders

Making transfers across L2s can take time. For rollups like Optimism, the challenge time can take up to 7 days. Hop Protocol allows users to send tokens from one rollup or sidechain to another almost immediately using Bonders.

Market makers, or Bonders, offer the liquidity upfront in exchange for a small fee. In exchange, they receive the hToken as guarantee, which is then swapped for the native token counterpart in an AMM after the challenge period is over. The end result allows users to seamlessly transfer tokens from one network to the next.

How to make money on Hop Protocol?

Interestingly, Hop Protocol offers a couple ways to make money even though it's intended to operate as a cross-chain bridge.

Hop Protocol Bridge

While bridging in itself isn't a direct way to make money, it can be useful to move your funds across rollups as you see fit. As a result, you have wider options to execute your DeFi strategies without having to worry about the bridging duration. 

In order to bridge on Hop Protocol, follow these steps:

1. Open the Hop Protocol app

2. Select the network where your crypto tokens are deposited

3. Choose the amount your would like to bridge

4. Select the destination rollup

5. Click "Send"

The waiting time will be displayed immediately after hitting the send button. How long it takes to complete the transfer depends on the network you are sending to and from. Generally, L1 to L2 transfers take the same amount of time. This is because Hop itself uses the native bridges for L1 to L2 deposits.

The advantages with Hop come about when you transfer the other way around from L2 to L1 or from one L2 to another L2. This is where the true value of Hop Protocol comes out. 

Hop Protocol Arbitrage

The ability to move funds between rollups creates wonderful arbitrage opportunities. Any price discrepancies between the same asset on different L2s can be a chance to increase your profits with minimal risk. 

Consider the following scenario with a layer-1 network and a single rollup supported by a Hop Bridge. A user has ETH on the rollup, and they want to move it to the layer-1 immediately. They use the Hop Bridge because using the Native Token Bridge would subject them to the rollup’s exit time.

First, their ETH will be swapped for Hop ETH (hETH) using the ETH:hETH AMM on the rollup. Then, the Hop ETH can be burned on the rollup and redeemed for layer-1 ETH. Because exiting over the Hop Bridge involved selling ETH into the ETH:hETH market, it caused ETH to be priced at a small discount to Hop ETH.

If this discount becomes large enough (e.g., 1.005 ETH/hETH), the Arbitrageur moves layer-1 ETH across the Hop Bridge to receive Hop ETH. The Hop ETH is then used to purchase the discounted layer-2 Canonical ETH. The Arbitrageur may now choose to move that layer-2 Canonical ETH back to layer-1. Because they do not want to trade back into the market they just arbitraged and lose their profits, they will exit via the Native Token Bridge and take on the liquidity lock up.

Hop Protocol Liquidity Provider

Each AMM requires Liquidity Providers to contribute passive liquidity to the AMM’s liquidity pool. In return, Liquidity Providers are rewarded with a small fee from each swap (e.g., 0.3%). Typically, Liquidity Providers also risk incurring what is known as ”impermanent loss”.

Impermanent loss occurs when the assets in an AMM diverge in price. Because AMM pairs in the Hop protocol are always assets of similar value, Hop Liquidity Providers have a very low risk of impermanent loss under normal network conditions. 

To become a liquidity provider on Hop Protocol, follow these steps:

1. Go to the Hop Protocol app

2. Click on the "Pool" tab

3. Choose your pool and click on "Add Liquidity"

4. Choose the amount

5. Click on "Deposit"

6. Approve the transaction

7. Profit

In addition to the fee rewards, you also receive HOP tokens that you can stake. The Hop interface gives you the option to deposit and automatically stake your HOP tokens. If you choose only to deposit, your LP tokens will not be staked. 

Hop Protocol Bonder

As a Bonder on Hop Protocol, you can be the one to supply liquidity and receive a fee for your service. Compared to other ways of making money in DeFi, being a Bonder takes a bit more effort and technical knowledge. Bonders have to run a local node to verify the state of the transactions. in addition, a 110% of the transfer sum must be "bonded" as collateral. This allows you to mint hTokens at the destination chain which are sent to the user to provide instant liquidity.

The Bonder unlocks the capital after a 24hr challenge period during which anyone can challenge the Bonder. If a challenge is successful the Bonder capital is slashed. As you can tell, the only risk is to get penalized for malicious behavior. 

Price Prediction for Hop Protocol — Can it hit $1000?

Buying and hodling HOP — the native token of the Hop Protocol — is one way of potentially making money on Hop Protocol.

By looking at its current price, it’s natural to think about the chance of HOP hitting $1000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.

Let’s examine the potential growth of the HOP token by analyzing its tokenomics. HOP’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} HOP tokens being in circulation today, that means a price of {PRICE} per HOP.

How did we come to that calculation? It’s quite easy, the price of a HOP token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each HOP coin. 

By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of HOP at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for HOP to hit that price.

At a price of $1000 per token, that means the current market cap of HOP would equal ${{CIRCULATING_SUPPLY} * 1000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1000.

Now let’s shift our attention to the fully diluted market cap.

Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.

The fully diluted market cap represents the total value of a coin if all tokens were in circulation. HOP’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} HOP which means that no more coins above that number will ever be created.

These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.

How does this impact the price of HOP? Taking into account the current price of a HOP token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. HOP coins that have been burned are not taken into consideration because they have been permanently removed from circulation.

Whether it seems gigantic or not, the number we came to above only takes into account the current price of a HOP token. Doing the same calculation but with a price of $1000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1000} for the HOP protocol fully diluted market cap.

These are all crucial details to know when calculating if HOP can reach the price of $1000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.

The future of HOP depends solely on its growth as a network used by tens and hundreds of millions of users.

If you’re looking to add some HOP to your portfolio, the most trusted places to get some are Binance and Coinbase.