Blockchains operate like discrete distribution grids of various types of coins. The original holdings of one chain are not technically portable to the other. For instance, consumers are unable to shift their holdings between Solana and Avalanche.
But blockchain bridges serve as the missing link: they enable cross-network communication. Bridges, figuratively speaking, break down the dividing wall between various nets of blockchains, enabling them to collaborate more effectively. In addition to exchanging assets, bridges also make it easier to share information across multiple blockchains.
From this quick guide, you will learn about how cross-chain bridges operate and securely move cryptocurrencies from blockchain to blockchain.
What do blockchain bridges operate as?
The blockchain bridges were platforms which make it easy to transmit assets and other forms of information between blockchain ecosystems. These can be decentralized, centralized, or maybe on a mixed basis. Two methods of asset transfer by bridges exist: so-called wrapped tokens and liquidity pools.
The wrapped token approach
The holder of a born original asset of blockchain A is able to obtain the opposite of the same kind of asset in blockchain B. For instance, a customer can use the SOL cross-chain bridge to get the equivalence of WETH at Solana on Ethereum.
The smart contract latches the escrowed SOLs at the time of transmission to remove it from the exchange. It then issues WETH in return.
Another scheme is involved when you link tokens to the initial blockchain - for instance, trading WETH to Cardano with ETH to Ethereum. That WETH would be fused in return for ETH.
Liquidity pool approach
Certain blockchain bridges such as the protocol Synapse, Cross-Chain Bridge and others take a completely opposite method. These have pools of liquidity for a vast array of types of holdings. Such as the pools of liquidity for WETH exist on Polygon, BNB Chain and a few more.
What makes these pools of liquidity work is that they are serviced by banks. For example, when a user wants to connect WETH at Polygon with ETH to Ethereum, Cross-Chain Bridge releases resources out of its pool of liquidity in order to ship the customer’s ETH into Ethereum.
What are bridges using to transfer holdings into their pools of liquidity?
The majority of bridges that use this approach frequently have staking and yield farming programs, where customers are able to block their holdings in the pool and receive periodic rewards. With the locked assets, the bridge makes connection demands.
Kinds of crypto bridges
Cross-chain bridges vary depending on the designers standing for them and the amount of oversight they give to participants.
Entrusted bridges
Entrusted bridge is a cross-network protocol overseen by a centralized authority. During the bridge period, asset management shifts from users to the centralized authority. In order to perform a transaction, users must «trust» the integrity and efficiency of this authority.
They must assume that this centralized entity will certainly not ever shoplift their holdings and safeguard their holdings from criminals. Binance Bridge is a typical instance of an entrusted bridge.
Entrusted bridges appeal most to users who prefer faster speeds and smaller fees for gas rather than cross-network security.
Non-trusted bridges
In contrast to entrusted bridges, bridges in this category don’t depend on any central authority for their operation, but rather on algorithms as well as smart contracts.
In addition, their users are accountable for their own resources, since there isn’t a neutral centralized organization that can do this for them.
Bridges that do not require trust are much more decentralized than trusted bridges. While these bridges may not be as low-cost compared to their analogs, they’re more safe if the technology underpinning them is provably reliable.
Use cases for bridges
Cross-chain bridges are widely used in the crypto industry. Here are the key usage scripts:
Transferring a cryptocurrency to another blockchain
Bridges are necessary when the owner of a cryptocurrency wishes to migrate it between blockchains.
A cross-chain bridge typically simply borrows from the asset in blockchain A and provides the same asset’s counterpart in blockchain B. For instance, if a customer wishes to move ETH out of Ethereum and into the Binance Smart Chain, they place ETH in Ethereum and receive a token tied to the value of ETH on the BSC.
Harnessing the power of different ecosystem apps
Every ecosystem on the blockchain comes with unique dApps. One can bridge an asset from blockchain A to blockchain B to apply the capabilities of decentralized applications in blockchain B.
Cheap conversion
In most cases, conversion among assets within bridges involves cheaper operation commissions than those on alternative platforms. This is another of the causes of why customers frequently choose to utilize bridges.
Crypto bridge dangers
Any innovation carries risk, and crypto bridges are no exception.
Theft of funds
Theft of funds by a centralized authority is only possible in entrusted bridges. The centralized entity overseeing the bridge can steal users’ funds. While no originating crew of a single entrusted bridge has ever exposed users to such a danger, the threat is real.
Fake bridges
As the DeFi sector is booming, scammers often create clone bridges to trick unsuspecting users. The website looks like a real bridge and enables fraudsters to hijack the cryptocurrency that the user sends to the bridge.
Because of this, always check the bridge for phishing scams to make sure you are transferring funds to a real app.
Smart contract and cybersecurity threats
Blockchain bridges have been the target of some of the biggest threats in the global area of blockchain. Bridges have always been favored by scammers because of the relatively large amount of funds involved. Investigations prove that more than $2.5 bln was stolen off cross-chain bridges. A brief list of hacker attempts on cross-chain bridges and the funds stolen:
- Ronin Bridge — $522 mln
- Wormhole Hack — $320 mln
- Nomad Hack — $200 mln
- Multichain Bridge Hack — $3 mln
What’s the point of using bridges rather than crypto exchanges?
There are different ways to transmit funds from different blockchains to others. Though bridges are a popular choice, crypto marketplaces do provide cross-chain features as well.
For example, a customer has some Bitcoin and wants some Ethereum. They could swap their Bitcoin to Ethereum at a centralized stock market such as Binance. They will then be able to store the Ethereum in their Binance wallet or transfer it to a different ETH-compatible wallet.
There are four main reasons why users prefer bridges to crypto exchanges.
Expenses
The process of exchanging assets on an exchange and then transferring them to a different wallet can entail a considerable fee. On the other hand, many bridges provide for a one-time payment of fees for everyone. That said, the transaction fees of most bridges are very low compared to what exchanges impose.
Velocity
The procedures associated with an exchange can take quite a bit of time compared to using a bridge.
Airdrop eligibility
Blockchain ecosystems frequently reward decentralized interaction within the blockchain by rewarding their users with token giveaways (airdrops).
Final notes
Bridges are points of contact through which every user in the Web3 dimension can move holdings between blockchains, irrespective of their infrastructure or consent mechanisms. A considerable volume of DeFi trade flows through bridges.
In doing so, bridges are the target of hackers. Cross-chain bridge hacking is responsible for up to 50% of all cryptocurrency losses. This is why bridge designers need to check key parts of their software.
Firstly, an audit of the smart contract is needed to make sure that there aren’t any vulnerabilities in the code which is automating each transition between states. Secondly, the dApp should be secured to ensure that off chain components interact securely with blockchain networks.
