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Bridges: (ir)rational valuations - an investment framework

6 min read
Bridges: (ir)rational valuations - an investment framework
Credits to Sebastien Hue for the great concept art.

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:

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.

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