Hop Protocol: A Faster Way to Move Tokens

What is HOP protocol


Key Takeaways:

  • Hop allows seamless traversing of crypto assets through sidechains, Layer 2 solutions, and Layer 1 blockchains through the flexible hToken algorithm.

  •  Bonders on the Hop protocol network serve as liquidity providers that make assets available on the sending and receiving chains and they complete the bridge request.

  • Hop protocol’s bridge currently supports Ethereum blockchain, Optimism, Arbitrum, Polygon, and Gnosis. Assets that can be bridged using the protocol include Ethereum, Polygon (Matic), USDT, DAI, USDC and HOP.

  • The HOP token is the native token of the Hop protocol and its ecosystem. It is the governance token of the HopDAO and is used to vote on improvement proposals.


The Hop protocol hopes to get rid of the issues encountered by cryptocurrency enthusiasts while bridging between Ethereum scaling solutions. 

In a tweet on July 2, 2022, Hop shared its weekly usage statistics that claim that over 60,000ETH has been bridged across Ethereum Layer 2 network – Arbitrum – through the protocol.

This stems from Ethereum transactions made by over 400,000 individual accounts. Published reports suggest that Hop’s bridging protocol records an average of about 50,000 daily users. These figures are expected to grow exponentially as it gains more exposure. 

So, what is Hop, and why are cryptocurrency communities so interested in it?

What is Hop? 

Hop is a protocol for sending tokens across rollups. The protocol is a collection of algorithms and novel tools that simplify cross-chain interaction by allowing cryptocurrency enthusiasts to move their crypto assets between blockchain layers and sidechains. 

Hop complements native and external bridging infrastructures by introducing unique techniques that make the bridging process easier, more secure, and less time-consuming. These include utilizing highly-modified liquidity technologies, decentralized pools, and token minting strategies to create faster and more efficient communication between Ethereum Layer 2 networks, sidechains, and the Ethereum mainnet. 

Hop’s bridge currently supports the Ethereum blockchain, Optimism, Arbitrum, Polygon, and Gnosis. Assets that can be bridged using the protocol include Ethereum, Polygon (Matic), USDT, DAI, and USDC, as well as the HOP token. Upcoming tokens to look out for will be SNX and sUSD.

What are Layer 2 solutions?

To understand the challenges Hop is trying to overcome, we need to start with looking at Layer 2 solutions and how they work. While Ethereum developers are attempting to scale the Ethereum mainnet, they have also developed some work-throughs to create faster and more efficient networks that only rely on the Ethereum blockchain for finality and security. These ‘work-throughs’ are known as Layer 2 solutions.

Rollups

Layer 2 solutions adopt the rollup technology to execute these transactions even faster and for a cheaper fee. Rollups literally roll up (package) a series of transactions and confirm them all at once. By doing this, a single fee is paid for these transactions and the same amount of time is spent to execute them.

Sidechains

Sidechains are another brilliant approach to Ethereum scaling. The main difference between sidechains and Layer 2 networks is that sidechains are standalone networks. They execute and verify transactions without relying on Ethereum mainnet. They also run their separate consensus algorithms and can develop their own native coin. The native tokens serve the same purpose as Ether on Ethereum blockchain.

Bridges

Layer 2 solutions have an in-built communication system for maintaining an effective relationship with the mainnet. A native bridge enables the switching of assets between the mainnet and the Layer 2 networks. Assets bridged from Layer 1 (mainnet) to Layer 2 networks are known as canonical tokens. The communication pathway also ensures that transactions are also relayed to the mainnet and proof of validation is sent back to the Layer 2 network.

To create a connection with the Ethereum blockchain, other sidechains, and Layer 2 networks, asset-bridging platforms have emerged as the best solution.

Bridging platforms migrate crypto assets from their native blockchains to other blockchain networks. They utilize smart contracts, which freezes the user’s current cryptos and provides them with a copy of equivalent tokens on the new network through swaps between liquidity pools provided at the destination chain and the source chain.

Finally, bridging a non-smart contract token (like bitcoin) to a smart contract blockchain would require a different procedure. Cases like this might require locking the non-smart asset with a third-party and issuing smart contract tokens pegged to the value of the asset on the smart contract blockchain.

Challenges and Risks of Crypto Bridges

Unfortunately, the native bridges that connect Layer 2 networks to their mainnets and the independent bridges that facilitate asset transfer between sidechains and Ethereum blockchain haven’t really been very effective.

Published data estimates that it takes about 20 minutes to 3 hours to bridge tokens between the Ethereum blockchain and Layer 2 networks. Bridging in any of these directions can cost up to $20.

Bridging between sidechains and the Ethereum blockchain, or between sidechains and Layer 2 networks may cost more and assets could take a longer time of up to seven days to arrive at the destination chain. Independent bridges are also hotspots for hacks and other technical exploitations. Over $1.3 billion has been lost to bridge hacks and other security issues related to asset bridging in 2022 alone.

These issues call for better alternatives to contemporary bridging technologies. These alternatives are expected to bring speed, cost-effectiveness, and security to cross-chain asset bridging.

Hop is one of the projects developing an alternative and claims to offer a comparatively more efficient strategy for asset bridging. Current statistics suggest that Hop’s solution is cheaper and faster. At the time of this writing, there haven’t been any reported security issues concerning its bridge and other applications that power the protocol.

How Hop Protocol Works

The major utility of the Hop protocol is its multi-network bridging facility – the Hop protocol bridge. It allows crypto assets to be moved between Ethereum mainnet, sidechains, and Layer 2 networks. The bridging direction is universal, allowing assets to be moved bi-directionally and between any selection of networks.

Hop adopts a modified token issuance, redemption, and swap algorithm to achieve fast and cheap bridging of assets between Layer 2 and standalone networks. It delivers this first by introducing unique smart contract tokens known as Hop Bridge Tokens (hTokens).

hTokens are flexible tokens that can be transferred and redeemed across chains, Hop bridge users use hToken variants of the tokens when they perform a conversion transaction. They are a reflection of true assets locked on supported chains. Htokens are issued at a ratio of 1:1 with the locked asset. That is, when a user locks a certain number of crypto assets (say 100ETH), they will be able to mint the same number of Htokens for that asset (in this case, 100hETH). 

The issued hTokens can be transferred to other chains supported by the Hop protocol and redeemed swiftly. A transfer command for hTokens triggers a burning and minting function that burns the hTokens on the source network and mints the same variant and number of hTokens on the destination chain and account. 

The burning and minting transactions are executed relatively faster than the normal bridging functions used on other asset bridging platforms. Users then receive the hTokens and proceed to redeem them instead of waiting for the bridging process.

There is an exception to the need for hTokens to transfer assets across chains: The HOP token. HOP doesn’t require an AMM to move across different Layer 2 chains, as the Hop Dao can decide which token to consider as the “canonical” HOP, and opting for hHOP as the canonical HOP token means that no AMM is needed for final swaps at the destination chain, which saves users fees.

Bonders

Rapid redemption of hTokens on the destination chain is actualized through a separate party known as Bonders. Bonders create up-front liquidity for hToken so that recipients can rapidly redeem the hTokens for the underlying asset. On redemption, the hTokens are burnt while bonders receive their assets once the proper bridging process is completed. For this vital service, bonders are rewarded through the bonder’s fee paid by the users.

AMMs and Liquidity Pools

To add more flexibility to hTokens, Hop protocol also developed a decentralized exchange powered by Automated Market Makers (AMMs) and decentralized liquidity pools. Hop protocol’s AMM works just like the one used by normal decentralized exchanges. However, available trades are only crypto assets and their associated htokens. The AMM complements the services of Bonders and makes htokens seamless.

The liquidity pool that powers the AMM relies on contributions by independent users of the Hop protocol. As seen in other exchanges, liquidity providers on Hop lock up hTokens and paired crypto assets in the pool and receive Liquidity Pool (LP) tokens that represent their contribution to the pool.

Liquidity providers on Hop may be exposed to impermanent losses, but the severity of this is expected to be similar to that seen in stablecoin liquidity pairs. This is because the values of hTokens and the assets they are paired with are designed to be the same.

In the case of tangible variation in values of hTokens and their underlying assets, the variation is a good incentive to arbitrageurs who wish to balance this shift and earn profits in the process. If a hToken trades at a discount to its underlying asset, an arbitrageur can purchase hTokens through the AMM and exchange them for the proper crypto asset via the bridge. Likewise, a reverse transaction is profitable when the crypto asset trades at a discount to the hToken.

Passive Reward Programs

Hop offers incentives to users and other community members who contribute to the performance of the bridge protocol and other services offered on the platform.

Through staking programs and rebate rewards, Hop encourages the crypto community to use its services and contribute positively. The staking program rewards liquidity providers for locking their assets on the AMM that powers the token bridge. Liquidity providers will receive staking rewards when they lock their Liquidity pool tokens on the staking platform.

Staking rewards will vary depending on the user’s network and the APR offered for the asset locked. Staking APR could be as high as 7% as seen in Gnosis network Eth LP token staking. Staking rewards are unavailable for some assets and chains at the time of this writing.

Hop also offers rebate rewards. According to reports, users bridging to the Optimism network from the Ethereum blockchain and other supported sidechains and Layer 2 networks will receive rebate rewards amounting to about 80% of the total bridging fees.

Is the Hop Protocol Safe?

With the safety risks accompanying bridging facilities, the Hop protocol claims to adopt precautionary measures that keep its smart contracts safe from technical exploitations. Its smart contracts are audited according to proofs presented by the Hop protocol team.

For instance, it is yet to develop support for arbitrary contracts and other features that will expose users to more risks. 

How to Use Hop

On Hop Exchange, users can perform diverse activities like asset bridging, providing liquidity for the bridging protocol, and converting assets across supported chains.

Token Bridging

To bridge your crypto assets using Hop Exchange, visit the bridging facility and connect your wallet.

The dropdown selection lets you select preferred assets and chains to bridge your tokens to.

If you’re using Metamask, ensure that you are using the right network before proceeding with subsequent bridging steps.

Click on the indicated carets to 

  1. Select the asset you wish to bridge

  2. Select the source chain (the blockchain you’re bridging from) 

  3. Select the destination chain

If you wish to receive the bridged assets in another wallet; click ‘Options’ and input the receiving wallet address.

Specify the number of tokens you wish to bridge and proceed to confirm and complete the process.

Converting Assets and Providing Liquidity on Hop

Liquidity providers on Hop are required to lock up their assets and a number of hTokens (for that asset) as well.

To obtain hTokens, Click “Convert” to use the asset conversion protocol. 

On the conversion interface, select the sidechain or Layer 2 network on which you wish to create the hToken.

Also, input other required parameters including the number of tokens you wish to convert. Once the process is complete, the protocol mints hTokens pegged to the value of the asset you are converting and sends the hTokens to your wallet.

To provide liquidity, select ‘Pool’ and proceed to choose the asset you wish to lock on the protocol and the chain you are providing liquidity on.

Input the number of assets and hTokens you wish to add to the liquidity pool and click “Add liquidity” to confirm your liquidity position and receive LP tokens.

Staking and Earning Rewards

Liquidity providers can also stake their LP tokens to earn passive rewards. 

Click ‘Stake’  to visit the staking page and lock your LP tokens to receive rewards according to the specified APR.

Rewards can be tracked and claimed from the “Rewards” page. Visit the reward page to see claimable rewards and pending rewards.

What is the Hop Token (HOP)

Hop token is the token of the Hop protocol. HOP serves one major purpose – governance. It was introduced as a means to develop an inclusive administration strategy for the Hop protocol through a Decentralized Autonomous Organization (DAO). 

Through the HopDAO and with the aid of HOP, the affairs of  the Hop protocol are managed by a community made up of its users and investors.

HopDAO operates through a decentralized proposal and voting platform where HOP token holders can submit improvement proposals and vote on proposals submitted by other members of the DAO. Members’ votes are weighted according to the number of HOP tokens they hold.

HopDAO members vote on decisions such as the next sidechain, Layer 2 network, or Layer 1 blockchain on which the Hop protocol will launch. DAO votes will also decide which assets will be added to the Hop protocol bridge. Certain other financial issues such as treasury allocation and management plans will also be subject to the DAO’s deliberation and approval.

What’s a DAO?

A DAO is a systemic administrational design that ensures inclusive and undiluted participation of the members of the organization. In cryptocurrency communities, rights to this participation are tokenized and every token holder is considered a member of the DAO. Through voting portals, members of the DAO can vote on proposals and submit their improvement suggestions to be voted on by the rest of the holders.

HOP Tokenomics

One billion Hop tokens were issued on the Ethereum blockchain. This is the maximum supply of the Hop token. A majority of the total supply has been vested and will be gradually released in the future. 8% of the total supply has been distributed to early platform users as part of the Hop token airdrop program. Over 60% of the total supply has been reserved for the project’s treasury while 25% has been set aside for the current and future team.

HOP token allocation

More information around HOP’s tokenomics and supply schedule.

Information from CoinGecko shows that only about 42 million Hop tokens are currently in circulation.

Where to Buy HOP

The HOP token is currently trading on several centralized exchanges including MEXC Global, BitMart, BingX, and CoinEx. HOP can also be traded on Uniswap and SushiSwap decentralized exchanges.

See the full list of available markets for HOP.

HOP Token Airdrop

8% of the total HOPop token supply was distributed to platform users and socially active members of the Hop protocol community as a reward for pioneer community members and to also give a share of the HopDAO to its early users.

To reward socially active community members, 500 active members on the project’s official discord channel and 79 Twitter users who actively discussed the project were rewarded with part of the airdrop amount.

Users who have used the Hop protocol’s bridge at least two times and have bridged over $1000 worth of assets through the cross-chain bridge also received a share of the airdrop.

External contributors to the protocol and Authereum users were also eligible for the airdrop. A snapshot for the airdrop was done on April 1, 2022, with allocations scheduled as follows;

  • 3.35% of the airdrop amount was allocated to users of the Hop bridge (at least two bridge transactions and $1,000 of volume)

  • 2% was distributed to Liquidity Providers

  • Bonders received 2% (this will be locked up for 1 year)

  • 0.1% of the airdropped tokens were distributed to the top 500 Hop Discord participants and 79 Twitter users who were early evangelists for Hop

  • 0.05% allocated to external Hop contributors

  • 0.5% distributed to past Authereum users with deployed accounts

 Eligible users are required to visit the claim website to redeem the allocated tokens, with a claiming window of 6 months from the time of the drop. Within this time, airdrop beneficiaries are expected to claim their rewards. When the window elapses, the HopDAO will claim every allocation that is left unclaimed.

The claiming portal for the Hop token airdrop went live on 9th June 2022.

Final Thoughts

The effectiveness of the different Ethereum scaling solutions will be greatly improved if users can easily use each of them for their best features. To be able to do this, users must have an efficient means to move crypto assets across these platforms.

This necessitates bridging solutions. Optimized bridging solutions can make this process simple, secure, and fast. With a flurry of ‘brilliant’ approaches, Hop protocol is offering users a way to transfer their assets across different Layer 2s, sidechains, and the Ethereum mainnet. Current statistics suggest that its approach to token bridging is practical and flexible enough to maintain its efficiency at higher levels.

Attempts by the development team to extend Hop Protocol’s facilities to other chains and Layer 2 networks will see this solution being put to use and also gain wider adoption. Under the governance of a democratic community, the Hop protocol’s future policies will be inclusive and discussed in detail to ensure that only the best financial and technological ideas from the community are brought to life.

At an even larger scope, Hop Protocol’s approach to cross-chain bridging and platform governance could also serve as a base layer for novel bridging solutions. Positive modifications to its algorithms will birth even more alternatives, create competing solutions, and make cross-chain bridging a more reliable technology.