State of Scaling Issue 6: Rollups Post-Merge and Arbitrum Exploits

In an earlier issue of State of Scaling (SoS), we covered the likely impacts of the Ethereum Merge on rollups. In it, we discussed the possibility of borrowing rates on rollups and alt L1s spiking, along with increased bridging activity as a result of traders piling on the “long spot, short futures” trade. Needless to say, borrowing rates on Ethereum skyrocketed, with the APR on Aave surging past 100% at some point leading up to The Merge. This is pertinent as Aave had already implemented a governance proposal to pause further borrowing activity as of September 6, more than a week before the actual Merge. As such, the spike in borrow rates was a result of users withdrawing Ether from Aave, causing the utilization rate to spike correspondingly and resulting in significantly higher borrowing rates.

There was a similar trend playing out on rollups, though to a much lesser extent. This is expected since it was raised in the earlier SoS that borrowing Ether on L2s or alt L1s still exposes the borrower to bridging risks. Given that a handful of bridges (Multichain, Synapse, Across) suspended bridging activities in the period leading up to The Merge, it would reduce the available liquidity for opportunistic traders who intended to capitalize on the ETHW airdrop by borrowing Ether at cheaper rates on L2s or alt L1s. The reduction in liquidity was definitely a significant hurdle, seeing as how borrowing rates on L2s and alt L1s remained much lower than that on Ethereum itself.