Bridges: (ir)rational valuations - an investment framework

Bridging is a homogeneous service that will eventually be abstracted away.

A user won't know what rails they are using. They will simply try to go A>B for the cheapest price.

This is max a few years away.

My thoughts on if these non-differentiated products are investable:

I think few users care about security. The recent hacks increase awareness, but I think almost everyone except whales care about price over security.

Only the big accounts know that centralized validator sets and venturing outside of roll-up / ZK pose big risks. Rest don't care.

Fundamentally bridges are creating messaging layers between chains, allowing for transfer of data.

Additionally most current solutions require liquidity on destination chain for bridged assets, since present norm is wrapped tokens (lock on source, mint on destination, then swap)

Presently, bridge market share is largely a function of business development.

For example:

- $FTM adopted @MultichainOrg and Andre's interpretation. Other routes exist, yet this is what they institutionally encourage from my understanding.

- $SYN is smart to quickly adopt new chains, resulting in early entrenchment of their position (e.g. on $METIS recently).

Moreover, with them powering the new @DefiKingdoms $AVAX subnet chain, they will have created a partnership that likely doesn't require any alternatives.

I think fragmentation continues based on how the different parties are now entrenched. However we will trend towards trust minimization and new protocols & chains will prefer integrating those as hacks increase risk sensitivity.

What that means is that trust-minimized solutions such as:

• @LayerZero_Labs's oracles/relayers (which ostensibly can be operated via the validators of the source/dest chain)
• @nomadxyz_ / @ConnextNetwork optimistic & roll-up reliant solutions

Will capture new market share.

While I think I have a decent understanding of bridging solutions as a non-technical person, I often notice my own price sensitivity when picking what bridge to use.

My quiver and rationale is typically as follows:

$SYN for hard to reach destinations. Rarely gets best rates.

$CELR for large swaps of $ETH & $USDC. Has low fees and decent security, is often my preferred route.

$ANY for long-tail tokens or small amounts. Low fees. Awful security, but often earliest to adopt new tokens.

But what you use is NOT a good proxy of what to invest in!

Current bridge mechanics make their biz model akin to AMMs.

They do some $ amount of volumes and take a commission over that. Standard is 6 basis points, but some subsidize fees and charge lower rates.

Effectively, the best comparables for valuing bridge tokens are AMMs.

People don't realize this and that's why I think $STG pricing is outrageous, for ex.

It's unclear if their innovations (oracle/relayer distro mechanism and omnichain fungible token stnrd) will accrue value to holders, and if so, it'll likely be to Layer 0 gov tkn, not $STG.

Let's run some numbas.

On $STG's ETH pools, week of March 21st:

$109.419.320 in transaction volume resulted in $68.454 total fees (0,063% or 3,25% annualized). This reflects their 0.06% bridging fee.

https://dune.xyz/misterglass/Stargate-Ethereum

Couldn't find their vol on other chains, so let's work around it:

In the past 7 days, $JOE did roughly $1.139B in volume. Like most Uniswap V2 forks, they charge a 0.30% fee (30 bips).

Annualizing that volumes gives us $59.228B and est. $178M in fees ("sales").

$JOE trades at $274M MCAP (1,5x MCAP/S) &  $656M FDV (3,7x).

But as a prudent holder, you shouldn't care about Sales as much as you should care about Tokenholder Earnings. Basically, what part of the revenue accrues to you via yield, buybacks etc.

Of the 0.30% that $JOE charges, only 0.05% goes to stakers.

Let's run the numbers again.

0.25% of $JOE's revenues goes to the LPs, remaining 0.05% goes to stakers (29.67M of estimated annualized fees).

So as a holder you're paying 9.2x MCAP/Tokenholder Earnings or 22.1x FDV/TE.

I explain this so that you can make the following logical jump with me:

What premium are we willing to pay for a bridge like $STG or $SYN based on it being in a different sector, being the hot potato narrative, their biz dev strengths and defensibility?

First let's look at implied volumes/fees based on the valuation and metrics today.

Note that $JOE earns 0.30% in revenue (through fees) whereas $STG only does 0.06%. That's 5 times less.

If $JOE were to trade at $STG's $3.916B FDV, at current multiples, it would have to do $1.058B in est. ann. fees and $352B in volume.

For $STG to earn the same amount of fees, they need to do 5x the volume (since they earn 5x less)... that's $1765B per year. AN INSANE AMOUNT!

If you're willing to pay higher multiples, it implies the following volumes:

• 2x higher: $880B
• 5x higher: $352B
• 10x higher: $176B

Let's comp with $SYN's #s to see if these are reasonable figures. Their avg. fee is 0.05% so it's a decent comparison.

Since 8/16/21 they have generated a cumulative $8.49B in volume! Annualized that's $13.47B.

Even if you're willing to pay 10x more for $STG's volumes than $JOE's (which you shouldn't, because all that matters as a holder is what you will earn from said volumes), the $176B in annualized volumes needed to justify that valuation are still 13x higher than what SYN's done.

Most of those volumes by $SYN have actually been generated already. There's no doubt about traction, it exists.

The $JEWEL integration just turbo-charged those volumes, as you can see on their dash: https://analytics.synapseprotocol.com/

One must then ask, how is $SYN priced?

It trades at $627M MCAP and $864M FDV.

Note that it's almost fully diluted already, meaning you have less risk of being dumped on.

At their avg. 0.05% fees their annualized $13,47B volumes imply $6.7M in revenues or 93.58x MCAP/S or 128.95x FDV/S.

Roughly half of the 0.05% goes to the treasury so that implies 187x MCAP/TE and 258x FDV/TE.

Market is willing to pay MUCH more for $SYN than $JOE's volumes (MCAP/TE: 187x vs 9.2x and FDV/TE: 258x vs. 22.1x). In other words, 20x and 11.7x more on a MCAP & FDV basis.

We all know $STG is expensive, so let's apply $SYN's premium on volumes to our estimations for $STG:

At 20x premium, it implies $88.25B annualized volumes (6.6x more than SYN's annualized vols)

At 11.7x, $150.85B ann vols (11.20x more than $SYN).

You're a wiz of you stuck along this far. I hope I got my math right. Many assumptions. But the precision doesn't matter so much as the logic.

The question we're trying to answer is whether bridges are a sensible investment at current prices and if/how you should invest in them.

I think the best approach is a basket.

We know these markets are irrational and that narrative drives price more than earnings.

However we've seen that cashflowing assets like $CVX & $CRV enrich those with a long-term horizon and ability to do basic math.

I currently only hold $SYN since I'm deeply familiar with their product, they are good at biz dev, constantly shipping and have respectable backers (@BlockTower, among others).

$STG has the same but the val is extreme and I think their most compelling features are going to be part of their @LayerZero_Labs token value accrual mechanic (if any). And it will likely be egregiously priced.

I love @connext's product but there's no token.

$CELR's product is great but their marketing and communications is awful. You need a private investigator to find their tokenomics and value accrual mechanisms.

$REN is a great product but barely gets volume. There's no story to drive it, which is essential for ze pump.

These are the instances where one must compartmentalize LIKING a product vs. INVESTING on that basis.

And none of the bridges have integrated swaps via AMM aggregators in a way that I've enjoyed yet.

Bridges are one of my favourite topics in DeFi and I'm carefully following the latest innovations.

On my study list are @nomadxyz_ and @BungeeExchange (bridge agg). Got any others for me?

I'd love to hear feedback on my thought process. Esp. if you disagree - tell me why.

I'll probably write more on bridges. There's much to explore.

Thanks for reading.

Yours,

Bruce