By Joel John
Compiled by: Luffy, Foresight News
The killer app for cryptocurrencies has already emerged: stablecoins. In 2023, Visa’s transaction volume was close to $15 trillion, while the total transaction volume of stablecoins reached $20.8 trillion. Since 2019, the total amount of stablecoin transfers between wallets has reached $221 trillion.
Over the past few years, a sum of money equivalent to the global GDP has been flowing across blockchains. Over time, this capital accumulates across different networks. Users switch between protocols to get better financial opportunities or lower transfer costs; in the era of chain abstraction, users may not even know they are using a cross-chain bridge.
Cross-chain bridges can be thought of as routers for capital. When you visit any website on the Internet, there is a complex network in the background. The physical router in your home is crucial to the network, and it determines how to direct data packets to help you get the data you need in the shortest time.
Today, cross-chain bridges play the same role for on-chain capital. When a user wants to move from one chain to another, the cross-chain bridge decides how to route the funds to get the most value or transaction speed for the user's capital.
Since 2022, over $100 billion has been processed through cross-chain bridges. That’s a far cry from the amount of money that stablecoins move on-chain. But cross-chain bridges make more money per user and per dollar locked than many other protocols.
Today’s article will explore the business models behind cross-chain bridges and the funds generated through transactions on them.
Business Model of Cross-Chain Bridge
Since mid-2020, cross-chain bridges have generated nearly $104 million in cumulative fees. This data is somewhat seasonal as users flock to cross-chain bridges to use new applications or seek economic opportunities. Without attractive yield opportunities, memecoins, or financial primitives, cross-chain bridge usage will drop significantly as users stick to the chains and protocols they use most.
A sad (but amusing) way to measure cross-chain revenue is to compare it to Memecoin platforms like Pump.fun. While Memecoin platforms are making $70 million in fee revenue, cross-chain bridges are making $13.8 million in fee revenue.
Despite the rise in transaction volume, we have seen fees remain largely unchanged due to the ongoing price war between blockchains. To understand how they achieve this efficiency, you need to understand how most cross-chain bridges work. One mental model for understanding cross-chain bridges is through the Hawala network from a century ago (Note: The Hawala network is an ancient non-cash cross-border payment system, which consists of people who know each other and are distributed in different countries and regions to form a money transmission network).
Although hawala is mostly known today for its association with money laundering, a century ago it was an effective way to move money. For example, if you wanted to transfer $1,000 from Dubai to Bangalore in the 1940s, there were many options.
You can go to a bank, but it can take days and require a lot of documentation. Or you can go to a seller in the Gold Souk, who will take your $1,000 and instruct the merchant in India to pay the same amount to someone you designate in Bangalore. Money changes hands in both India and Dubai, but it doesn’t cross the border.
How does this work? Hawala is a trust-based system that works because sellers in the gold market and merchants in India usually have an ongoing trading relationship. Instead of transferring capital directly, they settle the balance later with a commodity (such as gold). Since these transactions rely on mutual trust between the individuals involved, there needs to be a high level of confidence in the honesty and cooperation of both parties.
How does this relate to cross-chain? Many cross-chains use the same model. In pursuit of yield, you may want to move capital from Ethereum to Solana. The job of a cross-chain bridge like LayerZero is to help pass messages about users, enabling users to deposit tokens on one chain and borrow tokens on another chain.
Suppose that instead of locking up assets or providing gold bars, these two traders give you a code that can be used anywhere to redeem assets. This code is a form of sending messages, which are called endpoints on LayerZero. They are smart contracts that exist on different blockchains. Smart contracts on Solana may not understand transactions on Ethereum and need to rely on oracles. LayerZero uses Google Cloud as a validator for cross-chain transactions. Even at the forefront of Web3, we rely on Web2 giants to help us build a better economic system.
Imagine that the traders involved do not trust their ability to decipher the code. After all, not everyone can get Google Cloud to verify the transaction. So what can they do? Another way is to lock and mint assets.
In this model, if you use Wormhole, you lock your assets in a smart contract on Ethereum and then get wrapped assets on Solana. This is the equivalent of you depositing dollars in the UAE and then a hawala vendor providing you with gold bars in India. You can take the gold, speculate with it, and then return it to get your original capital back in Dubai.
The following chart shows the wrapped assets of Bitcoin today. Most of them were minted during the DeFi summer to generate yield on Ethereum using Bitcoin.
There are several key points in the commercialization of cross-chain bridges:
TVL: When users come to deposit funds, these funds can be used to generate returns. Today, most cross-chain bridges do not absorb idle capital and lend it out, but instead charge a small transaction fee when users transfer capital from one chain to another.
Relay Fees: These are fees charged by third parties (like Google Cloud in LayerZero) who charge a small fee for validating transactions on multiple chains on a single transfer.
Liquidity provider fees: paid to people who deposit funds into the cross-chain bridge smart contract. Let's say you are running a hawala network and someone is moving $100 million from one chain to another. You personally may not have that much money. Liquidity providers are individuals who pool these funds to help facilitate transactions. In return, each liquidity provider gets a small share of the fees generated.
Minting costs: Cross-chain bridges can charge a small fee when minting assets. For example, WBTC charges a fee of 10 basis points per Bitcoin.
The expenses of the cross-chain bridge are used to maintain the relayer and pay liquidity providers; while the income is transaction fees and creating value for itself through the assets minted by both parties to the transaction.
The economic value of cross-chain bridges
The data below is a bit confusing because not all fees go to the protocol. Sometimes the fees depend on the protocol and the assets involved. If the cross-chain bridge is mainly used for long-tail assets with low liquidity, it may also cause users to suffer transaction slippage. Therefore, when we look at unit economics, the following does not reflect which cross-chain bridges are better than others. We are interested in seeing how much value is generated throughout the supply chain during the cross-chain event.
First, we look at 90 days of transaction volume and fees generated across protocols. The data looks at metrics through August 2024, so these numbers are for the 90 days thereafter. We assume that Across has higher volume because it has lower fees.
This gives a rough idea of how much money flowed through the cross-chain bridges in a given quarter, and the types of fees they generated during the same period. We can use this data to calculate the fees generated for one dollar flowing through the cross-chain bridges. For ease of reading, I calculated the data as the fees generated by transferring $10,000 through these cross-chains.
Before I start, I want to clarify that this does not mean that Hop charges ten times more than Axelar. Rather, it means that every $10,000 transfer on a cross-chain bridge like Hop can create $29.2 in value across the entire value chain (for LPs, relayers, etc.). These metrics are different because they are different in the nature and type of transfers.
The most interesting part for us is comparing it to the value captured on the protocol and the amount of money moving across chains.
For benchmarking, we looked at the cost of a transaction on Ethereum. As of the time of writing, with lower gas fees, a transaction costs about $0.0009179 on Ethereum and about $0.0000193 on Solana. Comparing a cross-chain bridge to L1 is a bit like comparing a router to a computer. The cost of storing a file on a computer will be exponentially lower. But the question we are trying to address here is whether a cross-chain bridge captures more value than L1 from an investment objective perspective.
From this perspective, and referring to the above metrics, one way to compare the two is to look at the USD fees charged per transaction by the various cross-chain bridges and compare them to Ethereum and Solana.
The reason several cross-chain bridges capture lower fees than Ethereum is due to the gas costs incurred when making cross-chain transactions from Ethereum.
One could argue that Hop Protocol captures 120x more value than Solana. But that misses the point because the fee models of the two networks are completely different. What we are interested in is the difference between value capture and valuation.
5 of the top 7 cross-chain protocols have cheaper fees than Ethereum L1. Axelar is the cheapest, with an average fee of just 32% of Ethereum over the past 90 days. Hop Protocol and Synapse are more expensive than Ethereum. Comparing to Solana, we can see that L1 settlement fees on high-throughput chains are orders of magnitude cheaper than today’s cross-chain protocols.
One way to further reinforce this data is to compare the cost of transacting on L2 in the EVM ecosystem. Typically, Solana’s fees are 2% of Ethereum’s fees. For this comparison, we’ll use Arbitrum and Base. Since L2 is designed for low fees, we’ll use a different metric to measure economic value — the average daily fee per active user.
Over the 90 days we collected data for this article, Arbitrum had an average of 581,000 users per day and generated an average of $82,000 in daily fees. Similarly, Base had 564,000 users and generated an average of $120,000 in daily fees.
In contrast, cross-chains have fewer users and lower fees. The highest of these is Across, with 4,400 users generating $12,000 in fees. Based on this, we estimate that Across generates an average of $2.4 in fees per user per day. This metric can then be compared to the fees generated per active user of Arbitrum or Base to measure the economic value of each user.
Today, the average user on a cross-chain bridge is more valuable than the average user on L2. The average user of Connext creates 90x more value than an Arbitrum user.
Currency routers like cross-chain bridges may be one of the few product categories in cryptocurrency that can generate meaningful economic value.
As long as transaction fees remain too high, we may not see users switching to L1s like Ethereum or Bitcoin. Users could join L2s directly (like Base), or there could be a situation where users simply switch between lower-cost networks.
Another way to measure the economic value of cross-chain protocols is to compare them to decentralized exchanges. If you think about it, both primitives have similar functions. They enable tokens to be transferred from one form to another. Exchanges allow tokens to be transferred between assets, while cross-chain bridges allow tokens to be transferred between blockchains.
The above data only applies to decentralized exchanges on Ethereum
I avoid comparing fees or revenues here. Instead, I am interested in capital turnover. It can be defined as the number of times capital flows between smart contracts owned by a cross-chain bridge or a decentralized exchange. To calculate it, I divide the amount of transfers on any given day by the cross-chain bridge and the decentralized exchange by their TVL.
As expected, velocity is much higher for decentralized exchanges, as users trade assets back and forth multiple times throughout the day.
Interestingly, however, when you exclude large L2 native bridges (like those from Arbitrum or Opimism), the velocity of money is not too far off from that of decentralized exchanges.
Perhaps, in the future, we will have cross-chain bridges that limit the amount of capital and instead focus on maximizing returns by increasing capital turnover. That is, if a cross-chain bridge can transfer capital multiple times a day, it will be able to generate higher returns.
Is a cross-chain bridge a router?
Source: The Wall Street Journal
If you think the VC rush into the "infrastructure" space is a new phenomenon, take a look back with me. Back in the 2000s, when I was a young boy, many people in Silicon Valley raved about Cisco. The logic was that if traffic through the Internet channels increased, routers would capture a large portion of the value. Just like NVIDIA today, Cisco was a high-priced stock at the time because they built the physical infrastructure that supported the Internet.
Cisco's stock peaked at $80 on March 24, 2000. As of this writing, it trades at $52 and has never recovered to its heyday. Writing this post in the midst of the Memecoin craze got me thinking about the extent to which cross-chain protocols can capture value. They have network effects, but are likely to be winner-take-all markets. This market is increasingly leaning toward intent and resolution, with centralized market makers fulfilling orders on the back end.
At the end of the day, most users don’t care about the level of decentralization of the cross-chain bridge they use; they care about cost and speed.
Cross-chain bridges have matured and we are seeing multiple approaches to solving the age-old problem of transferring assets across chains. The main driver of change is chain abstraction: a mechanism to transfer assets across chains without the user ever knowing that an asset has ever been transferred.
Another factor driving volume growth is innovation in product distribution or positioning. Last night, while exploring Memecoin, I noticed that IntentX is using intent to package Binance’s perpetual contract market onto a decentralized exchange product. We are also seeing cross-chain bridges for specific chains being developed to strengthen product competitiveness.
Regardless of the approach, it is clear that, like decentralized exchanges, cross-chain bridges are hubs through which a large amount of monetary value flows. As a primitive technology, they are here to stay and continue to evolve. We believe that niche-specific cross-chain bridges (like IntentX) or user-specific cross-chain bridges (like those enabled by chain abstractions) will be the main drivers of growth in this industry.
A nuance Shlok added in discussing the article is that routers in the past have never earned economic value based on the amount of data they transfer. You can download terabytes or gigabytes, and there is no difference in the money Cisco makes. In contrast, cross-chain bridges make money based on the number of transactions. Therefore, their fates may not be the same.
At this point, it’s safe to say that what we’re seeing with cross-chain bridges is consistent with what we’re seeing with the physical infrastructure that routes data on the internet.
