The funding model is broken. Public goods like Layer 2 sequencers, governance tooling, and shared security protocols rely on revenue from canonical bridges (e.g., Arbitrum's bridge, Optimism's Bedrock). This revenue is a tax on cross-chain activity, which is dominated by speculative asset transfers secured by third-party bridges like LayerZero and Wormhole.
public-goods-funding-and-quadratic-voting
Blog
Why Cross-Chain Public Goods Rely on a Failing Bridge Economy
The promise of cross-chain public goods funding is being undermined by the broken economic models of the bridges it depends on. We analyze the systemic risk and the path forward.
introduction
THE PARADOX
Introduction
Cross-chain public goods are funded by an extractive bridge economy whose security model is fundamentally misaligned with their long-term success.
Security is a misaligned incentive. The economic security of these third-party bridges depends on extracting maximum fees from users. This creates a direct conflict: public goods need cheap, secure interoperability, but the dominant bridge providers profit from a fragmented, fee-extractive status quo.
Evidence: Over 70% of cross-chain value flows through these third-party bridges, starving canonical bridges of the fee revenue they need to fund protocol development and decentralized sequencer sets, creating a long-term security subsidy from VCs.
thesis-statement
THE INCENTIVE MISMATCH
The Core Contradiction
Cross-chain public goods are funded by a bridge economy that prioritizes extractive fees over sustainable security.
Bridge revenue funds security. Protocols like Across and Stargate generate fees from users, a portion of which is directed to public goods like the Optimism Collective. This creates a direct link between cross-chain volume and ecosystem funding.
The revenue model is adversarial. Bridge security relies on validators or relayers whose incentives are to maximize fee extraction, not minimize systemic risk. This misalignment makes the funding source itself a critical vulnerability for the public goods it supports.
Evidence: The 2022 Wormhole and Nomad hacks, which resulted in over $1 billion in losses, demonstrated that bridge security is the weakest link. These events directly threatened the treasury flows for the ecosystems they served.
key-trends
WHY PUBLIC GOODS ARE UNDERFUNDED
The Three Pillars of the Bridge Economy Crisis
Cross-chain public goods rely on a bridge economy built on three unsustainable pillars, creating a critical funding gap.
01
The Problem: Fee Extraction Over Value Creation
Bridge protocols like LayerZero and Wormhole are designed to maximize sequencer/relayer fees, not fund shared infrastructure. This creates a tragedy of the commons where no single entity is incentivized to pay for security audits, standardization, or protocol research.
- Fee Models: Revenue flows to token stakers and operators, not R&D pools.
- Public Good Gap: Critical work like the IBC protocol or generalized messaging standards are chronically underfunded.
- Result: Ecosystem security and innovation lag behind commercial bridge deployment.
>90%
Fee to Profit
<1%
To R&D
02
The Problem: Fragmented, Inefficient Liquidity
The dominant locked-and-mint model used by Multichain (pre-hack) and others fragments capital across chains, creating systemic risk and inefficiency. Canonical bridges like Arbitrum's native bridge are safer but silo liquidity.
- Capital Inefficiency: $10B+ TVL is locked in bridge contracts, earning minimal yield.
- Risk Concentration: A single bridge failure can freeze assets across multiple chains.
- Solution Gap: Native yield-bearing bridges or shared liquidity pools (like Across's optimistic model) are not the default, as they reduce fee extraction potential.
$10B+
Idle TVL
100+
Siloed Pools
03
The Problem: Misaligned Security Incentives
Security is treated as a cost center, not a revenue driver. Bridges rely on external auditors and bug bounties instead of building sustainable, protocol-funded security pools. The Nomad hack and Wormhole exploit prove reactive funding fails.
- Reactive Funding: Major audits only occur after $100M+ exploits.
- No Security Sink: Fees do not automatically fund continuous verification or formal verification efforts like those needed for zk-bridges.
- Architectural Debt: Complex, unaudited middleware stacks (e.g., oracles, relay networks) become single points of failure.
$2B+
Bridge Losses
Months
Audit Cycle
CROSS-CHAIN PUBLIC GOODS DEPENDENCY
Bridge Tokenomics: A House of Cards
Comparison of economic models for major bridging protocols, highlighting the reliance on volatile, extractive fees to fund shared security and liquidity.
| Economic Metric / Feature | Liquidity-Based (e.g., Stargate, Across) | Validator-Based (e.g., LayerZero, Wormhole) | Intent-Based (e.g., UniswapX, CowSwap) |
|---|---|---|---|
Primary Revenue Source | Swap fees + LP rewards | Message passing fees | Solver competition surplus |
Security/Liquidity Backstop | Protocol-owned liquidity & ve-token bribes | Staked native token (e.g., ZRO, W) | No protocol-level backstop; user intent |
Fee Capture for Public Goods | ~0.06% - 0.1% per swap | ~$0.01 - $0.10 per message | Auction mechanism (variable) |
Token Emission to Sustain Model | High (>10% APR to LPs) | Medium (staking rewards) | None |
Vulnerable to MEV Extraction | |||
Relies on Sustainable Volume | |||
Cross-Chain State Shared Security |
deep-dive
THE INCENTIVE MISMATCH
The Slippery Slope: From Subsidy to Systemic Failure
Cross-chain public goods are funded by a bridge economy that prioritizes short-term volume over long-term security, creating systemic risk.
Bridge revenue subsidizes public goods. Protocols like Across and Stargate generate fees from asset transfers, which are then used to fund ecosystem grants and development. This creates a dangerous dependency where core infrastructure funding is tied to a volatile, competitive market.
Incentives prioritize volume over security. Bridge tokenomics reward TVL and transaction throughput, not protocol security or decentralization. This leads to riskier design choices and aggressive subsidization of user transactions to capture market share from competitors like LayerZero.
The subsidy model is unsustainable. When bridge revenue declines—due to market downturns or new entrants—the funding for public goods evaporates. This creates a fragile financial flywheel where the entire cross-chain stack relies on a single, failing economic layer.
Evidence: The 2022-2023 bear market saw bridge volumes and fees plummet by over 70%, forcing many ecosystems to slash grants and delay critical infrastructure upgrades, exposing the model's inherent fragility.
case-study
THE PUBLIC GOODS DILEMMA
Real-World Exposure: Protocols in the Crossfire
Cross-chain public goods like DEX aggregators and lending markets are critically dependent on a bridge economy plagued by rent-seeking and systemic risk.
01
The Liquidity Siphon: Bridges as Rent-Seeking Tolls
Public goods like UniswapX and CowSwap rely on bridges for cross-chain intents, but bridge operators extract value via ~10-30 bps fees on every transfer. This creates a direct tax on composability, siphoning value away from the dApps and LPs that generate the actual utility.\n- Value Extraction: Fees are captured by the bridge, not the source/destination protocols.\n- Composability Tax: Every cross-chain action becomes more expensive, stifling innovation.
10-30 bps
Fee Leakage
$100M+
Annual Extract
02
The Systemic Risk Sponge: When Bridges Fail, dApps Bleed
A bridge hack or failure doesn't just vaporize bridged assets; it freezes the liquidity pipelines for dependent protocols. The collapse of a major bridge like Wormhole or a halt in LayerZero messages would instantly cripple cross-chain aggregators and compounders.\n- Contagion Vector: A single point of failure can paralyze dozens of integrated dApps.\n- Uninsurable Risk: Protocol treasuries cannot feasibly underwrite billions in bridge TVL exposure.
$2B+
TVL at Risk
50+
Protocols Exposed
03
The Oracle Problem: Bridges as Arbiters of Truth
Bridges like Across and Chainlink CCIP ultimately function as price or state oracles. This centralizes finality decisions and creates a liveness dependency. If the bridge's attestation mechanism fails or is delayed, public goods relying on cross-chain data become unusable or exploitable.\n- Centralized Finality: A small set of relayers/committees control transaction validity.\n- Liveness = Utility: Protocol functionality is gated by bridge uptime and speed.
~2-10 min
Finality Delay
5-20
Critical Relayers
04
The Solution: Native Liquidity & Intents
The endgame is bypassing canonical bridges entirely. Protocols like Chainscore are building native cross-chain liquidity layers and intent solvers that connect pools directly, eliminating intermediary rent extraction and reducing systemic footprint.\n- Direct Pool Access: Source liquidity from destination chain AMMs without asset bridging.\n- Intent-Based Routing: Users express a desired outcome; a decentralized solver network finds the optimal path.
-90%
Fee Reduction
~1s
Quote Latency
counter-argument
THE MISPLACED FAITH
The Optimist's Rebuttal (And Why It's Wrong)
The argument that cross-chain public goods will be funded by bridge fees is structurally flawed.
Bridge revenue is insufficient. The fee market for bridges is a race to the bottom. Protocols like Across and Stargate compete on cost, not quality, compressing margins to near-zero.
Public goods require predictable funding. A volatile, competitive fee stream cannot sustain long-term development. The Ethereum L1 fee market funds core devs; cross-chain has no equivalent.
The value capture is misaligned. Bridges capture value from liquidity provision and MEV, not protocol development. This creates a principal-agent problem where builders are not the beneficiaries.
Evidence: The Total Value Secured (TVS) metric is misleading. A bridge securing $10B does not mean it generates $10B in sustainable fees for public goods. Fee revenue is often <0.1% of TVS.
takeaways
THE FUNDING PARADOX
TL;DR for Protocol Architects
Cross-chain public goods are structurally underfunded because they depend on a bridge economy that prioritizes rent extraction over ecosystem health.
01
The Problem: Bridges as Rent-Seeking Tolls
Bridges like LayerZero and Axelar monetize message passing, not value creation. Their fee models are optimized for transaction volume, not for funding the protocols (e.g., Uniswap, Aave) that generate the underlying demand. This creates a value capture imbalance where infrastructure taxes the application layer.
- Fee Leakage: ~0.05-0.3% of every cross-chain swap is extracted as rent.
- Misaligned Incentives: Bridge security (TVL) is prioritized over dApp sustainability.
>99%
Fees to Validators
$10B+ TVL
Locked for Security
02
The Solution: Intent-Based Abstraction
Protocols like UniswapX and CowSwap abstract the bridge away from the user. By submitting a signed intent, users delegate routing to a network of solvers who compete on price, bundling bridge costs into the swap. This shifts economic power from bridge operators back to dApps.
- Cost Internalization: Bridge fees become a variable for solver optimization.
- Demand Aggregation: Solvers batch intents, achieving better rates from bridges like Across.
-20-60%
Effective Cost
~500ms
Solver Latency
03
The Mechanism: Protocol-Owned Liquidity for Routing
Public goods must vertically integrate their liquidity layer. Instead of relying on generic bridges, protocols should deploy their own canonical liquidity pools on destination chains and use shared security models (e.g., EigenLayer, Babylon) to secure the messaging layer. This turns a cost center into a revenue stream.
- Fee Recycling: Bridge/relay fees are captured by the protocol treasury.
- Sovereign Security: Decouples from the economic cycles of third-party bridge tokens.
10x
Capital Efficiency
0 External Rent
Ideal State
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