Why Bridge Incentives Must Move Beyond Mercenary Capital

Mercenary liquidity is ephemeral. Bridge protocols like Across and Stargate rely on liquidity provider (LP) incentives that compete with yield farms. This capital chases the highest APR, creating a $500M+ annual subsidy treadmill that offers no sustainable moat.

The churn destroys capital efficiency. LPs provide liquidity for the reward token, not the bridge's utility. This creates a zero-sum game against users, where LP fees must subsidize the mercenary yield, directly increasing transaction costs for every cross-chain swap.

Intent-based architectures invert the model. Protocols like UniswapX and CowSwap separate routing from liquidity provision. This shifts the incentive burden to solvers competing on execution quality, not to LPs demanding inflationary emissions.

Evidence: LayerZero’s OFTv2 standard demonstrates the shift. By enabling native yield-bearing assets to move cross-chain, it aligns LP incentives with the underlying asset's yield, not a separate bridge token, reducing the need for mercenary capital.

Inflationary rewards attract mercenary capital. Protocols like Stargate and Synapse initially used high token emissions to bootstrap liquidity, creating a cycle of sell pressure that devalues the very token used for payouts.

Fee-sharing creates sustainable alignment. Directing a portion of bridge transaction fees to stakers, as pioneered by Across Protocol, transforms validators and LPs into long-term stakeholders invested in the bridge's volume and security.

The economic flywheel is inverted. Inflation pays users to extract value; fee-sharing pays users to create value. This shifts the incentive from farming and dumping tokens to actively securing and promoting the network.

Evidence: Across Protocol's model. By rewarding relayers with fees from sourced volume, Across achieved capital efficiency 5-10x greater than locked-capital models, proving sustainable economics outcompete inflationary bribes.

Mercenary capital dominates bridge liquidity. Yield farmers chase the highest APY, creating volatile TVL that evaporates after incentives end, as seen with early LayerZero Stargate pools. This model is operationally expensive and fails to secure the network.

The solution is a fee-sharing flywheel. Protocols like Across and Synapse redirect transaction fees directly to liquidity providers, creating a self-sustaining reward loop. This aligns provider profit with network usage, not temporary subsidies.

Sticky liquidity requires protocol-native yield. A bridge must be the most profitable place for its own asset, like Wormhole's W or Circle's CCTP. This creates a capital lock-in effect where leaving forfeits a perpetual revenue stream.

Evidence: Bridges with mature fee-sharing models, such as Across, demonstrate lower TVL volatility and higher capital efficiency. Their liquidity is resilient during bear markets because rewards are tied to core utility, not speculation.

Mercenary capital is ephemeral. Bridge protocols like Across and Stargate rely on liquidity provider (LP) incentives that chase the highest yield. This creates a fragile liquidity layer that abandons the bridge during market stress or when subsidies end, directly harming user experience.

Incentives must align with security. The dominant validator/staker reward model for bridges like LayerZero and Wormhole creates a principal-agent problem. Stakers optimize for fee extraction, not the correctness of cross-chain state, which misaligns with the protocol's core security guarantee.

Sustainable models require protocol-owned liquidity. Projects must evolve towards fee-sharing with LPs and direct treasury incentives that treat liquidity as a public good. The shift from rented capital to embedded capital is the only path to eliminating this systemic fragility.