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 L1/L2 blockchains.

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 are essential for connecting different blockchain networks and enabling the seamless transfer of assets and information. They unlock the full potential of blockchain technology by enhancing collaboration, promoting cross-chain functionality, and expanding access to liquidity.
• Bridges have become increasingly popular as they elevate user experience. The demand for bridge projects has increased steadily, and this upward trajectory has kept going as new blockchains continue to emerge. The onchain user experience becomes greatly enhanced by bridges, as they enable users to operate across multiple blockchains. Nevertheless, it's important to acknowledge that bridges also come with certain inherent risks. Especially lock-and-mint bridges, which hold large amounts of assets in their smart contracts, are particularly vulnerable to exploits.

Overview

The daily transfer volume over the past year for projects in the bridges market sector is visualized below.

Scope of analysis

Chart analysis

• Transfer volume has increased substantially since the beginning of the year. The aggregate transfer volume has averaged a 56% month-over-month growth rate since January. Stargate and Allbridge Core experienced the largest growth in transfer volume, with 90d growth rates of 312% and 328%, respectively. However, Allbridge Core fell victim to a smart contract exploit on April 2nd, 2023, and has halted operations until new contracts are introduced.
• Stargate is the current market sector leader by daily transfer volume. Stargate is the largest project in the bridges market sector, with an average of over ~$52m in daily transfer volume over the last 90d. Ren previously led the sector from early-2020 to late-2021 with monthly transfer volume peaking at ~$887.5m in May 2021. However, they have since shut down their bridging network in late-2022 due to their exposure to the effects of Alameda Research's failure.
• The Arbitrum token (ARB) launched on March 23rd, 2023, which increased bridge activity to and from Arbitrum. The transfer volume to and from Arbitrum has increased substantially on all bridge projects listed on Token Terminal since the ARB token launch. There has also been significant growth in transfer volume on other chains. For example, between January and March 2023, Synapse's transfer volume increased by 136% and 108% on Avalanche and Optimism, respectively.
• Increased activity on blockchains (L2) is fuelling demand for bridges. The significant surge in daily active users on blockchains (L2), a remarkable ~240% growth over the past year, indicates a thriving ecosystem. This growth trend shows no signs of slowing down, pointing toward sustained demand for bridge projects that facilitate seamless interoperability between different blockchains (L2).
• Liquidity pool bridges are gaining market share against lock-and-mint bridges due to security concerns over the latter bridging model. Lock-and-mint bridges operate by locking assets in the source chain and minting equivalent synthetic representations on the destination chain. This locking model requires bridges to store large amounts of funds in their smart contracts, making them attractive targets for exploiters. Following numerous high-profile exploits on lock-and-mint bridges (such as Ronin Network, BNB Bridge, or Harmony Bridge), some users have grown cautious of transferring their assets through this bridging model. As a result, liquidity pool bridges such as Stargate and Hop Protocol have grown in popularity, as stored liquidity tends to be more spread out across different chains and contracts. Read more about bridge exploits from this research piece.
• App-specific chains are likely to increase in popularity, which will heighten the demand for bridge projects. As decentralized applications (dApps) mature, we expect there to be increased demand for purpose-built appchains to facilitate the unique requirements of these dApps. As a result, the demand to facilitate transfers between appchains will also increase.

• The majority of fees originate from Ethereum. Across and Synapse demonstrate a balanced distribution of transfer volume, with approximately 40% originating from Ethereum and the remaining volume evenly spread across other chains. Notably, Ethereum accounts for over 80% of the fees generated. The fees on both bridges are paid on the destination chain, primarily to cover the associated gas costs.
• Transferring assets to Ethereum incurs higher transaction costs due to its comparatively higher gas fees. The gas fees on Ethereum are often substantially higher than on any other blockchain, resulting in higher transfer fees for users. Additionally, native transfers from an “optimistic rollup” blockchain (L2), e.g., Arbitrum and Optimism, to Ethereum, experience a delay of roughly seven days. This is due to the inherent design of optimistic rollup technology, where anyone can “challenge” a transaction if they find it invalid. However, several bridge projects offer immediate transfers, enabling them to impose higher fees to compensate for this advantage.
• Bridges face high operational expenses, resulting in reduced net earnings. Gas costs often represent a significant portion of the fees incurred, resulting in reduced net earnings for both the relayers and the bridge projects themselves. For example, ~71% of the fees paid to Across during the past month on Ethereum were used to pay for gas. On days with volatile gas prices, Across even incurred losses on some transfers.

Momentum

Some of the most interesting trends for projects in the bridges market sector are visualized below.

• Stargate transfer volumes have increased significantly since March 2023. Monthly transfer volume increased from $302.7m in February 2023 to $2.3b in April 2023, an increase of over 650%. A substantial portion of these transfers originated from Arbitrum. Notably, transfer volume has exhibited the highest proportional increase on Fantom, Avalanche, and Polygon. In contrast, transfers on Ethereum have undergone a proportional decline over the same time period, falling from 30% to under 10% of the total transfer volume.
• The activity on Stargate has witnessed a significant boost due to the ARB airdrop and growing speculation surrounding a potential Layer Zero airdrop. The introduction of the ARB token in March sparked the growth in activity on Stargate. As Stargate operates on Layer Zero, users might be choosing to engage in farming activities, which involve utilizing the product in the hopes of securing potential airdrop rewards. The 55% decline in average transfer size across all chains from February to April 2023, the 30x growth in active users during the last 90 days, and the increase of transfer volume in low-fee environments, such as Fantom and Avalanche, all support this thesis.
• ~52% of Stargate's users in March 2023 used the bridge again in April 2023, indicating strong user retention. The combination of the Arbitrum airdrop and the speculation surrounding a possible Layer Zero airdrop has significantly boosted bridging activity on Stargate. The increase in transfer volumes has been growing steadily over the past two months, indicating positive user retention. When analyzing the transfer patterns of the same addresses across multiple chains, in March, approximately 52% of all users who engaged in transfers continued to do so in April. Notably, the median user in April executed three transfers, while the third quartile user sent six transfers.
• Using Layer Zero relayers enables Stargate to focus on the end-user experience. Stargate is built on top of Layer Zero's messaging relayer network, which relieves them of the burden of constructing and managing their own messaging relayers. While this poses a platform risk for Stargate, it also allows them to concentrate solely on liquidity pool security and delivering the optimal end-user experience.

• Ren’s quarterly transfer volume decreased from $2.09b in Q1 2021 to $4.82m in Q1 2023 – a drawdown of over 99%. With an early-mover advantage compared to other bridges, Ren initially represented over 90% of the total bridging volume from January 2020 to September 2021 (when compared to other bridges listed on Token Terminal).
• The decrease was due to Ren’s shutdown following the FTX bankruptcy, as Ren had been acquired by Alameda Research in February 2021. Alameda originally acquired Ren to spearhead bridging between EVM chains and Solana. Following the acquisition, Ren no longer had custody of its treasury assets, and as a result, had to shut down its bridging network.
• In August 2022, Ren began the transition from cross-chain bridging to a blockchain via the release of Ren 2.0. Ren 2.0 will be an EVM-compatible blockchain, with the native gas asset being the REN token. The Ren Foundation is initially proposing to burn 50% of gas fees to apply deflationary pressure to REN, although the exact burn amount is subject to changes through governance. To fund further development of Ren 2.0, the Ren Foundation has also proposed the minting of ~180m new REN tokens. The corresponding snapshot governance vote that passed in January 2023 may come to represent significant inflationary pressure to existing REN holders and node operators.

Other key highlights from the bridges market sector

• Across introduced spoke pool contract upgrades on April 26th. The spoke pool upgrade was the first piece of an overall upgrade called “Universal Bridge Adapter (UBA)”. This upgrade will enable Across to provide bridging solutions on a wider number of chains going forward. For more details, see this blog post.
• Allbridge Core open-sourced their new smart contracts as a result of the earlier exploit and relaunched their bridge on June 1st, 2023. The new smart contracts can be found here.
• Connext introduced Chain Abstraction on May 24th. Chain Abstraction is a new product update that aims to minimize the need for users to care about which chain they are on.
• Synapse launched the Synapse Explorer on February 23rd. The Explorer lets users see all transfers made through Synapse, to and from what chain.

Video of the week

In this episode of the Fundamentals podcast, we’re joined by John McNiff and Felipe Montealegre, the founders of Theia Blockchain – a fundamentals-driven investment fund that is applying the principles of prudent investing to blockchain.

Timestamps:
00:00 Introduction
02:31 Theia’s founding story & overview of the fund
05:30 The problem that Theia solves for investors
07:17 All-DeFi rule at Theia
08:43 Theia’s 3 strategies & how they work with and support portfolio co’s
12:02 The possibilities that come with real-time streaming of data
13:56 What do fundamentals mean in crypto?
15:34 Crypto projects do generate cash flows for tokenholders
17:37 The Theia Underwriting Engine
18:55 The Theia Underwriting Engine: Case GMX
21:33 Open source = composability for both projects and investors
22:57 What does Theia look for in potential investments?
28:04 Investment thesis: Trader Joe
29:15 Investment thesis: gTrade (Gains Network)
30:27 Focus on DeFi and cash flows
32:47 Bottom-up approach to the market
33:56 Challenges that funds face in crypto: Getting reliable data
35:36 Challenges that funds face in crypto: Regulatory overhang
36:34 Challenges that funds face in crypto: Risk management
38:34 What it requires to be a fundamental investor in crypto
39:25 What are John and Felipe most excited about in crypto right now?

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