Hello,Crypto’s killer application is already here in the form of stablecoins. In 2023, Visa did close to $15 trillion in transaction volume. Stablecoins did about $20.8 trillion in total transaction volume. Since 2019, $221 trillion in stablecoins have been exchanged between wallets.Over the past few years, the equivalent of global GDPs has been moving through our blockchains. Over time, this capital has accumulated in different networks. Users switch between protocols for better financial opportunities or lower transfer costs. With the arrival of chain abstraction, users may not even know they are using a bridge. 

One way to think of bridges is as routers for capital. When you visit any website on the internet, there is a complex network in the background, ensuring the bits and bytes that display them emerge accurately. Crucial to the network is the physical router at your home. It determines how data packets should be guided to help you get the data you need in the least amount of time. 

Bridges play that role for on-chain capital today.  They determine how money should be routed to get the user the most value or speed for their capital when a user wants to go from one chain to another.

Bridges have processed close to $22.27 billion through them since since 2022. It is a far cry from the amount of money that has moved on-chain in the form of stablecoins. But it appears as though bridges make more money per user and per dollar locked than many other protocols.

Today’s story is a collaborative exploration of the business models behind bridges and the money they generate through bridge transactions.

Show me the money

Blockchain bridges have generated close to $104 million in cumulative fees since mid-2020. That number has a certain amount of seasonality to it as users flock to bridges to use new applications or in pursuit of economic opportunities. If there is no yield, meme token or financial primitives to be used, bridges take a hit as users stick to the protocols they are most accustomed to.

A rather sad (but funny) way to benchmark bridge revenue is by comparing it to meme-coin platforms like PumpFun. They did $70 million in fees, compared to the $13.8 million generated by bridges in fees.

The reason why we see fees staying flat even though volumes have gone up is because of ongoing price warfare between chains. To understand how they get to this efficiency, it helps to know how most bridges work.  One mental model to understand bridges is to see them through the colour of hawala networks from a century back.Blockchain bridges are similar to hawala with portals where cryptographic signatures bridge physical separation.

Though much of what is known today about hawala revolves around its association with money laundering, a century ago, it was an efficient way to move capital. For example, if you wanted to transfer $1,000 from Dubai to Bengaluru in the 1940s—a time when the Indian Rupee was still used in the UAE—you had options.

You could either use a bank, which might take days and require extensive documentation, or you could visit a vendor in the Gold Souk. The vendor would take your $1,000 and instruct a merchant in India to pay the equivalent amount to someone you trust in Bengaluru. Money changes hands in both India and Dubai but does not cross the border.

But how does this work? Hawala is a trust-based system, operating because both the vendor in the Gold Souk and the merchant in India often have ongoing trade relationships. Instead of transferring capital directly, they may settle their balances later using goods (such as gold). Since these transactions depend on the mutual trust between the individuals involved, it requires a great deal of confidence in the honesty and cooperation of the merchants on both sides.

How does this relate to bridges? A lot about bridges operate in the same model. Instead of moving capital from Bengaluru to Dubai, you may want to move capital from Ethereum to Solana in pursuit of yield. Bridges like LayerZero enable users to lend tokens on one chain and borrow on another by helping relay messages about a user. 

Presume instead of locking up assets or giving gold bars, the two traders give you a code that can be used at either location to redeem capital. This code is a form of sending messages. Bridges like LayerZero use what are known as endpoints. These are smart contracts that exist on different chains. A smart contract on Solana may not be able to understand a transaction on Ethereum. This is where oracles come into the picture. LayerZero uses Google Cloud as a verifier for transactions across chains. Even at the frontiers of Web3, we rely on Web2 behemoths to help us build better economies.

Imagine the traders involved don’t trust their own ability to interpret codes. Not everybody can get Google Cloud to validate transactions after all. A different way to do this would be to lock and mint assets. 

In such a model, you would lock your assets in a smart contract on Ethereum to get a wrapped asset on Solana if you were using Wormhole. This is the equivalent of your hawala vendor giving you gold bars in India for Dollar deposits in the UAE. Assets are minted in India and given to you. You can take the gold, speculate with it and return it to get your original capital back in Dubai so long as you give the gold bars back. Wrapped instances of an asset on a different chain are similar to gold bars - except that their value usually remains the same on both chains.

The chart below looks at all the variations in which we have wrapped bitcoins today. Much of these were minted in the days of DeFi summer to facilitate creating yield on Ethereum using Bitcoin.

Bridges have a few key points they can make money on:

Of these, a bridge’s expense is on maintaining relayers and paying liquidity providers. It creates value for itself on the TVL from transaction fees and minted assets on either side of a transaction. Some bridges also have a staking model which is incentivised. Say you had a $100 million hawala transfer to do to a person on the other side of the ocean. You may want some form of economic guarantee that the person on the other side is good for the money.He may be willing to gather his friends in Dubai and pool together capital to show you that he’s good for the transfer. In exchange for doing so, he may even give back a portion of the fees. This is structurally what staking is. Except, instead of dollars, the users gather around to give native tokens of the network and in exchange get more tokens.

But how much money does all of this yield? And what is a dollar or user worth on these products?