Blockchain bridges allow the exchange of assets, messages, data, and, most importantly, users. In our base case, we value the bridging sector to be worth $174B by 2030.
The blockchain bridge space is the final frontier in applied blockchain technology. Bridges are gateways that allow the exchange of assets, messages, data and, most importantly, users. While they are the source of tremendous controversy amid billions in hacks, bridges have also been used to great strategic effect. Chains like Solana (SOL-USD) and Avalanche (AVAX-USD) have employed bridges to jumpstart their blockchains by onboarding hundreds of thousands new users and billions of dollars in assets in the span of just a few weeks.
Based on our discounted cash flow analysis, our base case is that the blockchain bridging sector will be worth $174.1B by 2030. Here we’ll share our insights on the growth, key developments and outlook in this space, as well as how we arrived at our base case.
Blockchain Bridging Goals
Bridges may present tremendous perils but also high potential rewards to users, investors, applications and entire ecosystems. Because bridges collect tolls on the information shared between blockchains, they stand to benefit enormously in an environment where economic activity is fragmented across many ecosystems. With $54.2B in assets spread across more than a dozen major smart contract platforms, we live in a multi-chain world. Blockchains are closed loop systems of value, which means assets are mostly restricted to their native blockchains. The result is that asset prices and asset liquidity vary across ecosystems. Even interest rates for the same asset, within the same application, differ depending upon where they reside. A successful set of blockchain bridges could immediately create higher capital efficiency in DeFi by harmonizing rates according to a more transparent set of variables.
|Borrowing Rates on Aave (AAVE-USD)|
|USDC Rates||USDT Rates||DAI Rates|
(Source: Aave, as of 11/01/2022)
One major goal of bridging infrastructure is to unify the various blockchain asset markets, much in the same way stock exchanges are connected through electronic trading, to make capital truly interchangeable and transferable. To achieve this goal, bridges (or centralized exchanges, or stablecoin issuers) must implement safe blockchain-to-blockchain asset transfer methods, while reducing the complexity and time spent utilizing bridging applications. The end state should offer a user experience defined by a few clicks, whose safety matches the level of the bridged blockchains. Ultimately, a user should not even have to understand the route that the assets take to perform a desired function nor even which blockchains are being used. If bridges are able to surmount their considerable safety issues and their technology is aptly applied, bridges may render blockspace a commodity.
Blockchain Bridge Security Key to Growth
Despite the massive market opportunity, bridges struggle with serious safety issues that have prevented them for reaching their full potential. Due to hacks, more than $2B in funds have been lost in the last year alone. Thus, notable figures such as Ethereum (ETH-USD) co-founder Vitalik Buterin continue to raise concerns about bridge safety. Because bridge designs and implementations are cutting-edge and because bridges hold large amount of funds, they are prime targets for hacking attacks.
However, the potential value of a successful bridge, combined with the greenfield design space, has spawned over a hundred bridge projects. The bridge space today resembles that of the early-era crypto exchanges, where many competitors battled for early market share amid uncertainty over safety, practicality and functionality. As a result, the bridging space is one of the most highly fragmented components of the blockchain infrastructure layer.
The presence of so many bridges is simply a transitionary period, in our view. If and when safer, more versatile bridges prove themselves, we believe economic activity is likely to consolidate around a few winners. One of the chief reasons is that each bridge creates its own synthetic assets similar to Liquid Staking synthetic assets. Synthetic asset integration in DeFi drives network effect feedback loops that favor one version of a synthetic asset over others. This is similar to traditional finance, where U.S. Treasury Futures are created by many venues, but the vast majority of usage revolves around CME derivatives. As a result, the top bridge projects will build competitive moats through superior safety, simple user experience, deep application integration and the wide proliferation of their synthetic assets.
Improving Blockchain Bridge Implementation and Design
Due to the infancy of bridge construction and their enormous complexity, bridge security is difficult to assess by even the most seasoned smart contract developers. Bridges must mathematically prove the recent transaction history of different blockchains, translate that proof data for each blockchain to understand, lock assets, and then safely route and communicate verification of the whole process between blockchains. Each of those steps introduces a new component to the tech stack – often a brand-new design – that represents a potential point of bridge failure or hacker attack. In the highly adversarial nature of blockchain, this is akin to airlines flying passengers on never-before-tested airframes using brand new engine types.
Bridge implementation will improve as lessons are applied, and bridge development will likely mirror the security improvements seen in DeFi smart contracts. Over time, the best bridge designs will progressively decentralize while also reducing trust assumptions. At the moment, most bridges employ third-party computer node networks to verify bridged blockchains, authenticate transactions and safeguard locked value. While some of these networks approach the level of sophistication of a layer-1 blockchain, nearly all suffer from trust design flaws that rely upon the integrity of these third-party networks.
For many bridges, an attack where a simple majority of a bridge’s nodes are compromised means that the attacker can seize all bridge funds or even mint fraudulent assets. In the bridging space, the securest designs mitigate this hazard by relying only upon the trust assumptions of the blockchains being bridged – the security of the two connecting blockchains rather than a third-party network.
The closest to a “trustless” roll-up bridge, such as the bridge between a Layer-2 on Ethereum and Ethereum, is Cosmos’ (ATOM-USD) IBC, which currently only serves to connect Cosmos blockchains. Though several projects claim to employ IBC technology, the only one that approximates the security of IBC is Composable Finance (PICA), which we discuss in further detail below.
How We Arrived at Our Bridging Base Case
In our base case, we value the bridging sector to be worth $174.1B by 2030, based upon a discounted cash flow analysis. Discounting that back to today’s dollars at 27%, we arrive at a valuation of $25.7B. This represents approximately 8.75% of our estimate of smart contract layer blockchains at $2T. Our estimate is based upon a discounted cash flow valuation with a 30.8x exit multiple, a terminal annual cash flow of $5.66B and a terminal growth rate of GDP+20%.
Bridge revenue is composed of two major components: toll fees and maximal extractable value (MEV). We derive these components by estimating their share of projected blockchain revenue and total value locked (TVL). However, as the space matures, there may be dramatic evolution in how fees are assessed and which party pays those fees as the bridges’ customer focus evolves from the consumer to the blockchains and application (from B2C to B2B). Controversially, we believe bridges will play a roll in MEV because they route assets and messages across chains to take advantage of arbitrage opportunities. Bridges may even integrate directly into the MEV technical stack to bid on blockspace.
|Bridge Valuation Framework||Axelar||Composable Finance||Stargate (LayerZero)||Multichain||Portal (Wormhole)||Synapse|
|Fully Diluted Valuation ($M)||$800||$400||$532||$456||$2500||$270|
|Est. Fees, Annualized ($M)||$1,160,931||N/A||$750,791||$5,748,000||$2,348,308||$15,500,000|
|Est. Transfer Value, Annualized ($M)||$1,872||N/A||$5,052||$14,704||$46,154||$11,123|
|Tokenomics (1 – Worst, 10 – Best)||4||8||6||2||N/A||3|
(Source: VanEck Research, Coingecko, DeFiLlama, L2Beat.com, Axelar, Composable Finance, Stargate, Multichain, Portal,…