Manta becomes the third largest Ethereum L2 – by a certain metric

The Manta Pacific rollup has quickly worked its way up to a top spot in the ranking of Ethereum Layer 2 networks. Behind this rapid rise lies a clear recipe for success – but also some weaknesses. A centrally used protocol is at least as interesting.

January brought great success for the developers of Manta Pacific. Just five months after launch, Manta became the third largest Ethereum L2 network by the Total Value Locked (TVL) metric.

TVL means the total value of all tokens and coins that are “locked” on a blockchain in some way, for example in staking or as liquidity in DeFi apps. This value is generally considered one of the most important metrics to evaluate Web3-enabled blockchains. According to the overview site L2Beat, the Arbitrum One rollup has the highest TVL value with more than $12 billion, followed by Optimism with $6.64 billion and now Manta Pacific in third place with $1.77 billion. In fourth place comes Base from Coinbase with $850 million.

How did Manta manage to climb to third place in such a short time? The answer probably lies in a special feature of this rollup: tokens and coins earn interest natively as soon as they are transferred to the rollup. Behind the scenes, Manta’s publishers are either staking ETH or using the Mountain Protocol to earn interest on stablecoins using US Treasury bonds.

This alone had made Manta a fairly popular Layer 2 in a fairly short period of time. The platform achieved its breakthrough in January when it published its own token, MANTA. This token caused liquidity on Manta to explode. No wonder: the MANTA token alone has a market capitalization of a good $750 million – more than a third of the total TVL in Manta.

However, TVL is just one of several metrics. For example, if you look at activity instead of TVL, usually measured in transactions per second (TPS), the overall picture looks completely different. At just 0.5 TPS, Manta’s activity is in a pretty low place among Layer 2 networks, 18th to be precise, behind Sorare and ahead of Rhino.fi, while Arbitrum is at 21.7 TPS and Base from Coinbase comes to 4.19 TPS.

L2Beat’s risk analysis is also not particularly favorable for Manta Pacific. There is hardly any other Layer 2 where the risks for users are so high. Fraud proofs that protect against losses due to invalid state roots are missing, and data storage by Celestia saves fees, but introduces further uncertainties.

It is therefore questionable whether Manta can actually establish itself permanently as Layer2 with this setup. It could be more likely that the platform has sparked a short-term flash in the pan due to the native interest rates and the token launch, which will quickly burn out again due to a lack of real activity.

The second party mentioned in the report could therefore be more interesting: The Mountain Protocol. This actually means the stablecoin USDM, which earns interest natively through US government bonds: You buy USDM and they currently earn interest at five percent per year.

With a market capitalization of $153 million, USDM is still a pretty small fish in the stablecoin pond. For comparison: Tether (USDT) has $97 billion, Circle (USDC) has $28 billion and even the rather small, decentralized stablecoin DAI has a good five billion dollars. However, among the new class of “Real World Assets” (RWA), USDM is nevertheless establishing itself as one of the largest on-chain products for government bonds.

As a “no-brainer product for interest,” says founder Martin Carrica, USDM fills a gap in the crypto ecosystem. So far, this has only been possible for stablecoins with more complex and sometimes riskier operations. With Mountain Dollars, all you have to do is hold the tokens in your wallet to earn reasonable interest.

A fundamental problem with such stablecoins is that they are considered “security” and regulated in the USA. Therefore, exchanges there are currently only allowed to trade stablecoins such as USDT or USDC, whose issuers also gold the dollars deposited as security with government bonds, but do not pass on the interest, but pocket it themselves. This is an extremely lucrative business for the major stablecoin issuers such as Tether and Circle, as it allows them to generate interest profits in the nine to ten-figure range with relative ease.

In the medium term, Carrica expects interest rates on US government bonds to fall again and settle between two and four percent. But even at this level, the USDM concept will remain attractive.

So far, the USDM stablecoins have been used primarily in DeFi or for savings. But Carrica’s vision goes beyond that: he wants USDM to be used in payments like USDT or USDC. “I think every dollar that doesn’t pay interest should start paying interest.”

And why not? Stablecoins like USDM make interest from government bonds the norm. They combine savings and government financing in the means of payment.