Why Interoperability Demands You Give Up Control of Your Reward Currency

Protocols must surrender token sovereignty. Native tokens are the primary tool for bootstrapping security and governance, but they create insurmountable economic silos when used as the sole reward for external validators or relayers. This forces a choice between network isolation and economic dilution.

The interoperability trilemma is real. You cannot simultaneously have a native-token reward model, capital efficiency, and universal composability. Protocols like Axelar and LayerZero use a neutral gas token (AXL, ZRO) to pay relayers, decoupling security from any single chain's economics.

Evidence: Chainlink's CCIP uses LINK to pay for cross-chain services, but its adoption is bottlenecked by the need for each new chain to bootstrap sufficient LINK liquidity. In contrast, Wormhole's generic message-passing, agnostic to the payment token, demonstrates the scalability of a neutral fee market.

Native token utility fails when confined to a single chain. A token's value accrual depends on its ability to flow across ecosystems like Arbitrum, Base, and Solana. This requires integrating with third-party bridges and DEXs like Stargate and Uniswap, which you do not control.

Liquidity fragmentation destroys value. A token with 90% of its supply locked on its native chain has 10% of its potential utility. Protocols like Axelar and LayerZero solve this by wrapping assets, but the wrapped version becomes the dominant, liquid form, decoupled from your governance.

The reward mechanism becomes externalized. To incentivize cross-chain usage, you must pay rewards in the dominant, bridged asset (e.g., USDC, WETH, wstETH). Your native token becomes a governance coupon, while the real economic activity flows through assets you don't issue. This is the model of Connext and Across.

Evidence: Arbitrum's ARB has a TVL of $2.3B, but its cross-chain liquidity on major DEXs is less than 5% of that. The utility is on-chain; the value is trapped.

Native token rewards create silos. Every new L2 or appchain issues a token to bootstrap usage, locking users and liquidity into a single ecosystem. This fragments capital and forces users to manage dozens of reward streams, creating a poor experience.

The interoperability tax is real. Bridging these siloed rewards back to a base layer like Ethereum incurs fees and delays via services like Across or Stargate. Users pay this tax to regain liquidity, eroding the value of the initial incentive.

Protocols sacrifice composability for control. A chain like Avalanche C-Chain prioritizes its AVAX token for gas and staking, but this makes its DeFi apps harder to integrate with Ethereum-native assets without constant bridging friction.

Evidence: Over $20B in TVL is locked in L2-native reward programs. This capital is effectively stranded, unable to flow seamlessly to the highest-yielding opportunities across the broader DeFi landscape without significant cost.

Sovereignty creates liquidity silos. A protocol's native token, managed by its own governance, is trapped within its own ecosystem. This prevents atomic composability with external DeFi pools on Ethereum, Solana, or Arbitrum.

Neutral settlement demands neutral assets. Cross-chain intent solvers, like those in UniswapX or Across Protocol, require a final settlement currency that is universally accepted and not subject to unilateral rule changes by any single protocol's DAO.

The canonical solution is a third-party token. Protocols must adopt a neutral, high-liquidity asset like ETH, USDC, or a LayerZero-wrapped variant as the final reward currency. This cedes monetary policy control to achieve network effects.

Evidence: The Cosmos Hub's ATOM remains a governance token, not a cross-chain settlement asset, while Circle's USDC has become the de facto reserve currency for interchain liquidity routing.

You cannot have both. A protocol that issues its own reward token for staking or governance creates a captive economic system. This forces users to hold and manage a non-native asset, adding friction that breaks cross-chain composability.

Native gas is the universal solvent. Protocols like Ethereum, Arbitrum, and Solana succeed because their native token is the required fuel. Users and developers operate within a single, predictable economic layer, enabling seamless interactions with dApps like Uniswap and Aave.

Dual-token models fracture liquidity. Requiring a separate reward token splits user attention and capital. This creates economic silos that protocols like LayerZero and Axelar must bridge, adding complexity that pure gas-token ecosystems avoid.

Evidence: The dominance of Ethereum and its L2s in Total Value Locked (TVL) demonstrates that a unified gas-and-reward currency is the dominant design pattern for scalable, composable networks.