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Restructured from flat .tex/.pdf files into per-paper subdirectories. Added Antje Worring as co-author on all papers. Synced PDFs to pdfs/ for download site.
26 lines
1.8 KiB
TeX
26 lines
1.8 KiB
TeX
\section{Problem Statement}
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\label{sec:problem}
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\begin{definition}[Bridge Capital Inefficiency]
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Let $L$ denote the total value locked across all bridge protocols, and let $r$ denote the risk-adjusted opportunity cost of capital (the yield those assets would earn if not locked). The annual capital inefficiency is:
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\begin{equation}\label{eq:inefficiency}
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\mathcal{I} = L \cdot r
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\end{equation}
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For $L = \$15\text{B}$ and $r = 4.5\%$ (weighted average of ETH staking and stablecoin lending yields), $\mathcal{I} = \$675\text{M/year}$.
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\end{definition}
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This inefficiency creates three downstream problems:
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\paragraph{Higher bridge fees.} Without yield income, bridge operators must charge higher fees to cover infrastructure costs, increasing friction for cross-chain transfers.
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\paragraph{Inferior bridge tokens.} Wrapped ETH (WETH) on a destination chain earns 0\% APY. Native stETH on Ethereum earns 3.5\%. A user who bridges ETH pays an implicit cost equal to the forgone staking yield for the duration of the bridge period.
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\paragraph{Liquidity fragmentation.} Rational capital avoids bridges because the opportunity cost exceeds the utility of cross-chain deployment. This reduces liquidity on destination chains, widening spreads and increasing slippage.
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\begin{remark}
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The capital inefficiency is not merely theoretical. As of Q1 2025, approximately \$3.8B of the \$15B in bridge TVL is ETH that could be earning 3.5\% in Lido~\cite{lidofinance}, \$2.1B is stablecoins that could earn 5--8\% in Aave~\cite{aavev3}, and \$1.4B is BTC that could earn 3--5\% through Babylon~\cite{babylon2024}. The remainder consists of altcoins with varying yield opportunities.
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\end{remark}
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% ============================================================
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