Defensible vs Commodity Infrastructure
Thinking through cross-chain bridges and the potential they might represent
As I was on Twitter I came across this tweet from Richard Galvin from DACM Capital (an investor in ARCx and very switched on) which spurred some thoughts on investing in infrastructure.
One thing is for certain, crypto is the rails for all value capture and transfer in the next 5-10 years. Whether you believe that or not is subjective, but that’s my base assumption of how the future will look.
In this future though, the underlying infrastructure that powers this value is going to be a jenga of many different networks and protocols. Since 2017 to now, investors are still irrationally bullish on the value of infrastructure and far less indexed on the applications that will aggregate and control this demand.
The original tweet is from Max Bronstein who’s part of the Synapse team — which is building a cross-chain DEX. The bridge is basically acting as a demand aggregator for trading across chains and roll-ups. Teams which build expertise in knowing how to aggregate demand from all the weird technical quirks of each ecosystem will:
Start to attract users that can rely on that brand to integrate all the possible avenues of liquidity
Which will give more resources and confidence to build for more niche integrations
Leading to better prices and a better experience
That will once again attract more users
For any other aggregator to get in the game there will be
a) A high build cost in order to get in the game
b) Have a high CAC in order to get users to switch over
As I wrote this I decided to look into Synapse’s token which is sitting at a $143m market cap and $188m FDV. I have 0 exposure to the token or team (in any way) but it did give me the idea of investing in bridges. As the market continues to meltdown, there’s a good setup for the next wave that will need aggregators to abstract certain infrastructure. If Synapse hits closer to a $100m FDV I do think it’d mark an interesting entry point but also I haven’t done much research beyond this piece so take it for what it is.
The other thing outside of understanding the fair valuation for a bridge right now, is understanding what the maximum valuation for a bridge that aggregates demand would be.
If you have 10 networks worth $1b each, can a bridge that aggregates those 10 networks be greater than $1b?
If so, by how much?
What metrics will determine that?
Do investors need to reshift their framing of value?
Are they still going to be fixated on “Not an L1 so this isn’t valuable”?
What will it take for that flip to happen?
Which protocols are positioned to take advantage of that?
One thing that I do know, is that either you build defensible infrastructure that is impossible to build or you own users that love your product and that you can charge a mark-up for. Everything else is waiting to be killed. A good example is a majority of the L1s that currently exist. Simply having blockspace is not valuable if it is easy to switch between a network or aggregate it in another form.
I don’t have any answers to these questions yet, neither am I pretending to act like I do. What I do know is that forming a view on these questions with good thinking is worth at least 10 times multiple on your capital.
Happy Opportunity Market everyone!
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