Staking basics

What are Blockchain Bridges: Explained

Zainab Saberi

Aug 13, 2023 • 6 min read

A bridge in the blockchain realm acts as a connection, enabling the movement of tokens or even diverse data from one blockchain to another. These chains can vary in their core protocols, governance, and rules. Yet, thanks to the bridge, they can cohesively and securely interact with each other.

Multiple designs of these bridges exist, but essentially they can be categorized into two distinct groups. First, we have centralized bridges which necessitate trust or federation to function. This type demands that users believe in a centralized mediator when they access an application or service. On the flip side, there are trustless bridges.

These operate without requiring users to place their trust in a single controlling body. Here, the trust is embedded within the software's mathematical accuracy. This decentralized system operates based on a consensus reached by various computer nodes in accordance with the predefined software rules. Such a system overcomes many centralized system challenges, such as potential corruption, by promoting transparency and encouraging broad participation.

Bridges are versatile tools. Beyond just enabling a token from one network to function on another, bridges can transfer a variety of data, ranging from decentralized identifiers, and smart contract operations, to off-chain data like stock market values. An illustrative example would be a Polkadot chain that anchors verifiable credentials, which could fulfill the KYC (Know Your Customer) criteria for a gaming entity developed on Ethereum. With bridges, applications transcend the constraints of their originating network.

Also Read: Ethereum Staking Rewards

How Blockchain Bridges Work?

Imagine blockchain bridges as intermediaries that usher assets and data between different blockchain environments. These intermediaries can be wholly decentralized, centralized, or a blend of the two. Primarily, there are two mechanisms they employ for transferring assets: the wrapped asset technique and the liquidity pool strategy.

Wrapped Asset Method:

Suppose you're an owner of a specific asset on Blockchain A. You can obtain its equivalent on Blockchain B via a bridge. A practical example is transitioning SOL on Solana to obtain an analogous Wrapped ETH on Ethereum.

As this transition occurs, a smart contract temporarily secures the SOL, removing it from circulation and then introduces the Wrapped ETH. When reverting tokens to the original blockchain, say trading WETH on Cardano for ETH on Ethereum, the process deviates slightly. In this case, the WETH gets destroyed to reintroduce the ETH.

Liquidity Pool Method:

Several blockchain bridges, like “Cross-Chain Bridge” and the Synapse Protocol, have diversified strategies. They've established liquidity pools for a multitude of assets, such as liquidity pools for WETH on BNB Chain and Polygon. Think of these pools as financial reservoirs.

If a user wishes to shift WETH from Polygon to Ethereum's ETH, the Cross Chain Bridge taps into its reservoir to facilitate the transfer. But, how do these bridges accumulate assets in their pools? Typically, bridges following this model have staking and farming schemes that incentivize users to deposit their assets, which the bridge then leverages to fulfill bridge requests.

Also Read: Ethereum Merge

Types of Blockchain Bridges?

Blockchain bridges vary, depending on their creators and the level of control they accord users.

Trusted Bridges:

A trusted bridge is essentially a centralized cross-chain system. During the bridging process, the asset's control transitions from its users to a central body. Users must rely on this entity's competence and reliability. It's a leap of faith, assuming this central authority won't misuse or lose their assets. An apt example is the Binance Bridge. Such bridges might appeal to those who value swift transactions and minimal gas charges over heightened cross-chain security.

Trustless Bridges:

In contrast, trustless bridges work autonomously without leaning on a singular central entity. They function based on intricate algorithms and smart contracts. Users retain control of their assets since no centralized mechanism oversees them. Among the two, trustless bridges champion decentralization. They might incur slightly higher costs than their centralized counterparts, but their robustness and security provided the underlying tech holds up, are unparalleled. They encapsulate the core spirit of decentralized finance (DeFi).

Are Blockchain Bridges considered secure?

Navigating the crypto sphere comes with inherent risks, and blockchain bridges aren't immune. Some of these decentralized bridges are in their initial phases and might lack thorough testing. Even established ones can fall prey to vulnerabilities. A case in point is the Wormhole incident. However, not long before that, Qubit suffered an $80 million loss due to a security breach.

Delving deeper into the Wormhole saga, insights from Elliptic, a blockchain analysis firm, highlighted a flaw that let the attacker produce 120,000-wrapped Ethereum without staking actual ETH. Capitalizing on this loophole, the attacker swiftly liquidated the undeserved WETH. In an effort to mitigate the fallout, Jump Trading, a renowned high-frequency trading house, stepped in to offset the losses.

Why use a Blockchain Bridge?

Shifting assets between blockchains offers a suite of advantages. Predominantly, the receiving blockchain might offer a more cost-friendly and efficient experience than the originating one. Ethereum serves as a classic example, where escalating transaction fees and lagging speeds often deter rookies. However, by migrating assets to a layer 2 network, like Arbitrum or Polygon, users can engage in ERC-20 token exchanges at reduced costs without sidelining Ethereum tokens.

Moreover, certain investors leverage bridges to access niche markets exclusive to particular blockchains. For instance, while the DeFi platform Orca operates solely on Solana, it does cater to a version of wrapped ETH. Advancements have streamlined bridges, integrating them within many DeFi platforms, thus allowing seamless token exchanges across varied protocols from a unified platform.

What are the Pros and cons of Blockchain Bridges?

Pros:

- Cost-effectiveness: Owning ETH on the Ethereum Mainnet but wanting to curtail transaction fees? BridgeTransition your ETH to an Ethereum L2 rollup for more affordable interactions.

- Access to diverse dAapps: Regularly using Aave on Ethereum Mainnet for USDT lending? Discover potentially higher lending rates on Aave on Polygon.

- Dive into alternate ecosystems: Keen on sampling dAapps on a new L1? BridgeTransition your ETH from Ethereum Mainnet.

- Genuine cryptocurrency ownership: If genuine Bitcoin (BTC) ownership is your aim, but your resources are on Ethereum Mainnet, use bridges. They can facilitate the conversion of WBTC into its native BTC counterpart.

Cons:

The developmental phase of blockchain bridges implies room for refinement. Engaging carries various risks:

- Unforeseen smart contract glitches.

- Potential software issues, inadvertent mistakes, and malicious breaches.

Moreover, trust-based bridges introduce added vulnerabilities:

- Possible intervention by bridge operators.

- Potential asset misappropriation by collaborating bridge operators.

Dangers lurk when:

- A smart contract malfunction arises.

- User errors occur.

- The foundational blockchain is compromised.

- Trusted bridge operators act with ill intent.

- The bridge itself is infiltrated.

Also Read: Ethereum Gas

Conclusion

Blockchain bridges, in their essence, are transformative tools designed to seamlessly connect disparate blockchain ecosystems. Their potential in reshaping the decentralized finance space is immense, from cost-saving opportunities to granting access to varied dAapp environments.

Yet, the technological infancy of these bridges means they come with a risk-reward balance. As users navigate this realm, it's pivotal to stay informed, proceed with caution, and anticipate a future where bridges evolve to offer enhanced security and convenience.

Also Read: What are Dapps

FAQs

Q: What is a bridge in a blockchain?

A: A bridge in blockchain refers to a transformative tool designed to connect different blockchain ecosystems, enabling the transfer of assets and data between them.

Q: Are there fees associated with using blockchain bridges?

A: Yes, using blockchain bridges often involves transaction fees, which may vary depending on the specific bridge and the networks involved.

Q: What are the most used blockchain bridges?

A: Based on the provided content, some of the most used blockchain bridges are Wrapped Bitcoin, Multichain, Avalanche Bridge, Polygon Bridge, and Fantom Anyswap Bridge.

Q: What is the best bridge between blockchains?

A: The "best" bridge is subjective and can vary based on individual needs. According to the content, Wrapped Bitcoin dominates the bridge market in terms of value, while Multichain is noted as the largest cross-chain bridge.

Q: Are blockchain bridges safe?

A: Blockchain bridges, especially those in their developmental phase, come with inherent risks. While many are secure, vulnerabilities can exist, making it essential for users to exercise caution and conduct thorough research.

Q: How can I stay updated on new blockchain bridge developments?

A: By following reputable crypto news outlets, joining related forums or community groups, and monitoring analytic platforms like DeFi Llama or Dune Analytics.

Q: How does a cross-chain bridge work?

A: A cross-chain bridge allows the transfer of assets and data between different blockchains. It operates by locking the original asset on its native chain and minting a representative token on the target chain, ensuring assets remain conserved across networks.

Q: Why do we need a blockchain bridge?

A: Blockchain bridges are essential for porting assets between blockchains, offering advantages like cost-efficiency, speed, access to niche markets, and the ability to engage with various decentralized applications across different blockchains.

Q: What is an example of a blockchain bridge?

A: An example of a blockchain bridge mentioned in the content is Wrapped Bitcoin, which facilitates the conversion between Bitcoin and its representative token on the Ethereum network.