Despite the remarkable growth and widespread adoption of blockchain technology in recent years, it still faces several constraints that hinder its full potential. One of its most significant limitations has been the lack of interoperability between different blockchains. However, the emergence of blockchain bridges represents a major step forward in addressing this issue. Now, with the implementation of these bridges, the industry is moving closer to achieving the level of interoperability commonly seen in the traditional financial system.
This article will delve into the concept of blockchain bridges, their significance, and the challenges that come along.
Defining blockchain bridges: What are they?
A blockchain bridge, also known as a cross-chain bridge, is a protocol that connects two different blockchains and enables transactions or engagement between them.
Typically, the diverse technological architecture of various blockchains makes them fundamentally incompatible with one another. Each blockchain operates on its unique set of principles, from its consensus mechanism to its tokenomics and programming languages, resulting in a lack of interoperability.
Here come the blockchain bridges!
They create a “link” among such distinct blockchain ecosystems, thus facilitating interoperability or interaction of data between them. Interoperability is a critical element of today’s internet age where it fosters collaboration, innovation, and connectivity between machines worldwide. To replicate this frictionless system, blockchain bridges are striving to build a similar fluency in exchanging information and transactions within the blockchain realm.
An example of using blockchain bridge
For a better understanding of cross-chain transfers, let us look at an example. Suppose you want to transfer your Bitcoin to the Ethereum blockchain. One possible way to do this is by selling your BTC and purchasing Ethereum outright. However, using a bridge can help you achieve this task without selling your BTC or bearing hefty transaction fees.
If you utilize a bridge to send 1 BTC to an Ethereum wallet, the blockchain bridge’s smart contract will lock your Bitcoin and create an equivalent amount of its “wrapped” version (WBTC). The wrapped BTC, which is an ERC-20 token (compatible with the Ethereum network), will reach your destination Ethereum wallet while the original BTC will be held in a smart contract. Simply put, the BTC is wrapped by the bridge according to the target blockchain.
At any given point, it is possible to follow the opposite procedure in order to obtain the unwrapped or original version of the coin.
Remember that wrapped tokens represent a tokenized version of another cryptocurrency, with their value tied to that cryptocurrency. And blockchain bridges are used to achieve this target.
Types of blockchain bridges
There are several criteria that can be used when classifying blockchain bridges:
- Uni-directional and bi-directional bridges: A uni-directional or one-way bridge supports transferring of assets to the target blockchain but not back to the native blockchain. On the other hand, a bi-directional bridge allows the users to bridge in both directions, sending assets to and from the blockchains. Multichain and Wormhole are two popular examples of two-way bridges.
- Custodial and non-custodial bridges: This classification is based on who assumes control of the original assets used for creating the bridged ones. Custodial bridges, also known as centralized or trusted bridges, are handled by a central authority. In contrast, non-custodial or trustless bridges utilize smart contracts to facilitate the locking and minting of assets in a decentralized fashion.
- Note that the blockchain bridges may also be categorized according to their mode of functionality. Wrapped asset bridges deal with “crypto” interoperability. Whereas side chain bridges create interaction between a parent chain and a side chain having different consensus mechanisms. An example of a side chain bridge is xDAI or Omni which links Ethereum mainnet to the Gnosis chain.
Why use a blockchain bridge?
Blockchain bridges equip users with a range of advantages, allowing them to make full use of blockchain interoperability.
First and foremost, the bridges can enable the transfer of tokens or data to a much cheaper and faster blockchain relative to the original one. For instance, the Ethereum network is known for its poor scalability and high gas fee. By bridging their assets to a layer-2 blockchain like Polygon, participants can explore the Defi services and other benefits of the Ethereum ecosystem in the most optimal manner.
In addition, blockchain bridges provide an ideal way to access some DeFi protocols that are built on one specific blockchain. For example, while the DeFi protocol Orca is developed on the Solana blockchain, it supports wrapped versions of many tokens, including BTC, ETH, and AVAX, among many more.
Blockchain bridges can significantly boost the progress of the Defi and the dApps world, helping it to reach new heights. By breaking down the silos that currently exist between different protocols, blockchain bridges can break down the single network barriers and facilitate collaboration between separate blockchains.
What are some risks of blockchain bridges?
While blockchain bridges indicate a remarkable innovation in the Web 3.0 domain, they also incorporate several security risks.
Unarguably, bridges represent one of the most vulnerable protocols in the DeFi space because they are not yet as thoroughly tested as established blockchains. Moreover, developers of blockchain bridges are still refining the codes used to connect two separate chains, enabling malicious parties to exploit the bridge’s software.
Just in the past year, there have been countless incidents involving hacks of blockchain bridges. One of the biggest hacks occurred in February last year when a hacker exploited the security flaw of the Wormhole bridge. He managed to illicitly mint 120,000 wrapped ETH which were valued at approximately $325 million during the time of theft.
Later in June, there was yet another bridge hack that targeted the Horizon Bridge where attackers stole nearly $100 million worth of cryptocurrency. Moreover, the Nomad Bridge hack in August resulted in a loss of almost $200 million.
Bottom line
Blockchain bridges represent a major leap toward building a more communicative and interoperable blockchain ecosystem. However, the utilization of bridges also entails several challenges that need to be addressed, such as ensuring security and minimizing the vulnerabilities in the technology. Only with the removal of these obstacles, users might be able to unlock the full potential of blockchain bridges and experience a new era of Web 3.0 connectivity.
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