Bridges – Weekly fundamentals #78

A walkthrough of the most interesting charts and trends in crypto, with a focus on key business drivers and protocol fundamentals.

This week’s newsletter focuses on the bridges market sector, which has a designated dashboard on Token Terminal. Let’s dig in!

Bridges are smart contract-based exchanges that allow for the permissionless movement of assets across different blockchains.

Key highlights

• Monthly transfer volumes have grown by 360% YTD, mostly driven by Stargate.
• Base has seen $250m in native bridge deposits since launch.
• Usage of cross-chain messaging protocols such as Axelar Network and LayerZero is trending up.

Introduction

• Bridges establish connections between blockchains. Each blockchain has a unique set of ground rules and parameters, and most do not have an in-built system to communicate with other blockchains. As a result, bridges were developed to allow blockchains to communicate with each other, enabling key functionalities such as cross-chain asset transfers.
• Without bridges, each blockchain would be its own isolated ecosystem. Bridges connect blockchain networks with each other, enabling the transfer of assets and information. They remove the limitations inherent to blockchain technology by providing cross-chain functionality and expanding access to liquidity.
• Bridges grow in importance as the number of blockchains increases. The number of blockchains deployed has increased rapidly since 2020. In particular, the number of blockchains (L2) has grown from just a handful to 29 over the past two years alone. As a result, the demand for bridging between these chains has also increased accordingly.
• We anticipate bridge aggregators to gain popularity as they provide the most efficient liquidity routes for bridging. Bridge aggregators such as LI.FI, Socket, and RelayChain allow the most capitally efficient routes to be used when bridging across chains. This reduces slippage when bridging, allowing users to retain a larger portion of their assets than when using bridges with a single liquidity source.

Overview

The daily transfer volumes of the top 9 projects in the bridges market sector since the beginning of the year are visualized below.

Scope of analysis

• Monthly transfer volumes have grown by over 360% year-to-date (YTD). Aggregated monthly transfer volumes grew from $1.1b to $5.1b between January 2023 and July 2023.
• This uptrend is largely driven by Stargate. Stargate, the current bridge market leader, represented ~66% of the total transfer volume market share in July ($3.4b bridged). This is followed by canonical blockchain (L2) bridges Arbitrum Bridge and Optimism Gateway at $979m and $365m over the same period. The next general purpose bridge by transfer volume, Across, only represented ~4% of the market share with just over $184m bridged in July.
• Stargate now has the second-lowest P/S ratio (circulating) in the bridges market sector. Due to its outstanding financial performance, Stargate now has a P/S ratio (circulating) of 5.6x, despite a relatively high circulating market cap of $104m. This may make Stargate’s STG token undervalued compared to competitors such as Synapse’s SYN token, which has a P/S ratio (circulating) of 20.3x. However, it is crucial for investors to keep in mind that only 1bp of Stargate’s transfer volume will be shared with veSTG token holders (4bps and 1bp are allocated to the protocol treasury and liquidity providers, respectively).

• Investors must note that STG token allocations to the Stargate team and early-stage investors begin unlocking in mid-September 2023. Both the team and investors will receive 17.5% of the maximum STG supply each, unlocking linearly over the course of two years.

Bridge deposits on Base trending up

• Base has received over $250m in deposits over the last month through their native bridge. Base is a blockchain (L2) launched by centralized exchange Coinbase using the OP stack. The official Base-to-Ethereum bridge launched in July. Although bridging back from Base to Ethereum was released later on August 9th, Base showed a continuous upward trend in deposits.
• Base represents potential access to Coinbase’s +100m verified users. Base is currently the fastest blockchain (L2) to reach 1m unique addresses since the time of launch, achieving this in just 11 days. In contrast, it took zkSync Era and OP Mainnet 71 days and 191 days, respectively, to reach the same number of addresses. However, it is also important to note that addresses do not represent unique users, as a single user may control multiple wallet addresses.
• Deploying on Base is a lucrative opportunity for cross-chain bridging teams and investors alike. Many bridges have already been deployed on Base to take advantage of the large bridging demand. Bridges that have already deployed to Base include Stargate, Hop, and Synapse. Over the past 30 days, these bridges have facilitated 180k, 27k, and 8k transfers to Base from other chains, respectively. In particular, Hop's bridging contract on Base facilitated more transactions than their contracts on Arbitrum and OP Mainnet over the same period. Similarly, investors should keep an eye on which bridges are able to consistently capture market share in emerging chains.

Cross-chain messaging protocols are gaining traction

• The usage of cross-chain messaging protocols is trending up. Cross-chain messaging refers to the sending and receiving of messages, data, or transactions between different blockchain networks. Leading cross-chain messaging projects include LayerZero (34 chains), Axelar Network (41 chains), Wormhole (30 chains), and Chainlink CCIP (7 chains). LayerZero remains the current leader based on transaction count, with over 9.2m cross-chain messages in July. Although Axelar Network and Wormhole’s market share remain low, both have exhibited positive monthly growth trends.
• Cross-chain messaging protocols enable developers to build dapps that operate natively across multiple chains. Building bridges using cross-chain messaging protocols introduces benefits such as reduced gas costs. This is because these protocols move cross-chain function calls across chains instead of minting new wrapped assets on the destination chain (which is less computationally intensive). An example of how this benefits DeFi protocols includes cross-chain loans. This could involve securing an NFT on a chain as collateral, and then executing a cross-chain function call to take out a loan on another chain. Without cross-chain messaging, this would require multiple transactions to complete, and may also be limited by the low NFT liquidity.
• Most cross-chain messaging protocols have yet to release a token, except for Axelar Network’s AXL token which allows investors to gain exposure. Although Chainlink does have a token, the main value accrual to the LINK token comes from their oracle service, rather than cross-chain messaging. As Wormhole and LayerZero have yet to launch their token, this makes AXL the only viable window for retail investors to gain exposure to cross-chain messaging protocols. However, multiple LayerZero smart contracts contain functions and parameters referring to “ZRO fees”, indicating that a ZRO token launch will most likely happen in the future.

Other key highlights from the bridges market sector

Across

• Across deployed on zkSync on August 16th. The protocol has also passed $2b in total transfer volume.

Allbridge Core

• Allbridge Core deployed on Arbitrum on July 3rd.

Connext

• On August 18th, Connext announced the upcoming airdrop of its NEXT token. 10% of the total NEXT supply will be rewarded to users, with the airdrop snapshot taken on August 1st.

Hop

• Hop deployed on Base and Arbitrum Nova on August 3rd and July 13th, respectively.

Stargate

• Stargate has ramped up their cross-chain support, with recent deployments on Kava, Linea, and Base.

Synapse

• Synapse deployed on Base on August 4th.

Wormhole

• On July 21st, Wormhole announced their expansion to the Cosmos ecosystem.

Changelog

Recent updates and improvements to the bridges market sector on Token Terminal.

Video of the week

The Internet Computer is a general-purpose blockchain that hosts canister smart contracts. It is designed to provide a World Computer that can replace traditional IT and host a new generation of Web3 services and applications that run solely from the blockchain, without the need for traditional IT. It can also play the role of Web3 orchestrator, by interacting with traditional blockchains.

In this episode with Dominic, we talk about the big vision behind the Internet Computer, and what the journey has looked like from initial idea to launching mainnet. Dominic walks us through the main technical innovations that have needed to be introduced to enable the vision for a true world computer, and we speak about the compelling real-world use cases that the IC can facilitate, and how adoption has been progressing for some of them.

Listen to the episode:

We cover the evolution of smart contracts, identity authentication, open internet services, and building tamperproof, autonomous, and sovereign infrastructure.

Tune in for a great discussion about restoring the Internet to its open, innovative, and creative roots.

Timestamps:
00:00 Introduction
02:01 Replacing the legacy IT stack
04:38 Building web3 services 100% onchain, instead of on AWS
07:09 The inspiration for building a World Computer
13:12 The problems with legacy IT & rethinking our backend tech platform
14:22 Fulfilling the World Computer vision: Funding, R&D, and attracting talent
18:32 A blockchain that plays the role of cloud 3.0 will always be complex
19:28 Technical innovations: Proof of useful work consensus
22:08 Technical innovations: Chain-key cryptography
24:58 Technical innovations: Reverse gas model
25:19 Technical innovations: Canister smart contract framework
27:04 Technical innovations: How blockchain became a cloud
28:23 Technical innovations: Service Nervous System (SNS) DAO
30:14 Internet Identity
33:39 Building apps on the Internet Computer
34:33 OpenChat
39:35 Chain-key tokens: a cryptography-based replacement for wrapped tokens
41:00 True composability: linking together all blockchains without bridges

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