Staking basics

What are Cross-Chain Bridges?

Zainab Saberi

Aug 16, 2023 • 12 min read

In the ever-evolving digital world of cryptocurrency, cross-chain bridges are crucial software applications that facilitate transactions across diverse blockchains. Digital asset owners must rely on them to transfer their cryptocurrency, non-fungible tokens (NFTs), or digital assets between various blockchain networks.

These bridges play a vital role in broadening the digital ecosystem by empowering the transfer of assets between networks previously bound to a single blockchain. They allow users to maximize the value of their crypto portfolios in many practical applications.

However, these bridges have their share of concerns. Their implementation comes with potential security risks, as these platforms have been victims of exploits. Therefore, a deep understanding of the technicality of cross-chain bridges crypto and cautious handling is recommended to prevent any unforeseen crypto losses.

Also Read : Ethereum Staking Rewards

Understanding Cross-Chain Bridges

Blockchains are distributed databases that carry an indisputable record of all transactions specific to that blockchain network. Although they offer several advantages, blockchains are usually self-contained systems with limited interaction with other networks. This is where cross-chain bridges come into the picture, enabling connectivity between different blockchain networks.

To illustrate their concept, let's consider some of the leading cryptocurrency blockchains today, such as Ethereum. It is a renowned and extensively utilized network for smart contracts, offering support for various blockchain features, including NFTs and cross-chain bridges. For example, a cross-chain bridge could facilitate the transfer if you wish to use your $2,500 worth of USDC stored in your Ethereum (ETH) wallet for a transaction with your Polygon (MATIC) wallet.

Their potential scope is enormous. As digital assets diversify to include other asset classes like real estate or stock shares, cross-chain bridges become as integral to your finances as Automated Clearing House (ACH) transactions are to bank accounts.

Also Read : Matic Staking Rewards

Why Cross-Chain Bridges are necessary in Web3?

In their default state, blockchains cannot interact with each other, as they cannot usually observe or comprehend activities on other networks. Each chain operates by its unique rules regarding protocol design, currency, programming language, governance structure, and culture, making communication between chains challenging. This absence of inter-blockchain interaction restricts the economic activities in the Web3 ecosystem, as individual networks often represent separate, disconnected economies.

Let's consider a simple analogy to understand the necessity of cross-chain bridges. Imagine blockchains as separate rooms in a vast museum. One room houses a priceless collection of ancient artifacts, another displays exquisite paintings, and the third is filled with rare and valuable gemstones. Each room is unique and valuable in its own right, but they are isolated from each other, with locked doors in between.

The optimal solution is to unlock these doors, allowing visitors to move freely from one room to another, appreciating the museum's full spectrum of art and history. Just as unlocking these doors would create a more enriching and seamless experience for museum visitors, establishing cross-chain bridges between distinct blockchain ecosystems results in a more integrated and vibrant world of cryptocurrency, enhancing the overall utility and innovation of the ecosystem.

Also Read : Blockchain Bridges

Example of a Cross-Chain Bridge?

Bitcoin (BTC) is undoubtedly the largest cryptocurrency by market capitalization out there. Its broad usage and popularity often stimulate crypto investors' interest in leveraging their BTC beyond the Bitcoin blockchain. However, the reality is that transferring cryptocurrency between blockchains is only sometimes possible. For instance, if you wish to purchase an NFT on the Ethereum blockchain and only have Bitcoin at your disposal, utilizing a cross-chain bridge is the solution.

An ideal method to shift your Bitcoin to your Ethereum wallet is through Wrapped Bitcoin (WBTC). WBTC functions as a cross-chain bridge by generating a new WBTC token on the Ethereum network, simultaneously securing a bitcoin in a smart contract on the Bitcoin network. The quantity of WBTC will always correspond to the quantity of bitcoin in the WBTC cross-chain bridge smart contract. Upon employing the cross-chain bridge, you possess a Bitcoin-backed ERC-20 token that is operable on the Ethereum network.

Also Read : Components of Ethereum Network

How Do Cross-Chain Bridges Work?

Basically, a cross-chain bridge is a decentralized application that supports the transfer of assets from one blockchain to another. By enhancing cross-chain liquidity between different blockchains, cross-chain bridges augment token utility. Fundamentally, this mechanism involves locking/ burning tokens on the initial chain through a smart contract and then unlocking/ minting tokens via another smart contract on the destination chain.

Cross-chain bridges usually employ a cross-chain messaging protocol for a specific objective—transferring tokens between blockchains. A cross-chain bridge is a narrowly defined use case for a cross-chain messaging protocol. Many bridges function as application-specific services between two blockchains. Alternatively, cross-chain bridges can enable broader functionality, such as cross-chain decentralized exchanges (DEXs) and cross-chain money markets, or provide more generalized cross-chain functionality.

Also Read : What is DEX

Types of Cross-Chain Bridges

The underlying mechanisms of cross-chain bridges primarily fall into three categories.

Lock and mint: Users can lock tokens in a smart contract on the initial chain, which leads to the creation of wrapped versions of those locked tokens on the destination chain as a form of IOU. Conversely, the wrapped tokens on the destination chain are incinerated to unlock the original coins on the initial chain.

Burn and mint: Users can incinerate tokens on the initial chain, following which the same native tokens are re-issued (minted) on the destination chain.

Lock and unlock: Users can lock tokens on the initial chain, which then permits unlocking the same native tokens from a liquidity pool on the destination chain. This cross-chain bridge typically attracts liquidity through financial incentives such as revenue sharing.

Moreover, cross-chain bridges can integrate arbitrary data messaging capabilities—empowering the transfer of tokens and any data between blockchains. These programmable token bridges seamlessly integrate token bridging with arbitrary messaging. And then trigger a smart contract call on the destination chain as soon as the tokens are delivered there.

Programmable token bridges facilitate more intricate cross-chain functionality upon the successful execution of the bridge function. They enable actions like swapping, lending, staking, or depositing the tokens in a smart contract on the destination chain in the same transaction executed by the bridging function.

A different perspective for categorizing cross-chain bridges can be explored by analyzing their position on the trust-minimization spectrum concerning validating the state of the originating blockchain and transmitting the resulting transaction to the receiving blockchain. Generally, as a cross-chain solution veers more towards trust minimization, it tends to be more computationally expensive, less adaptable, and less generalizable.

These compromises are made to accommodate use cases necessitating the strongest trust-minimization assurances.

Also Read: Ethereum Upgrade

Exploring the Utility of Cross-Chain Bridges

Below are some instances where the application of a bridge is beneficial:

Reducing Transaction Expenses
Imagine holding ETH on Ethereum Mainnet and seeking reduced transaction fees to delve into varied dapps. You can enjoy lessened transaction expenses by transferring your ETH from the Mainnet to an Ethereum L2 rollup using a bridge.

Interacting with Dapps on Different Blockchains
Suppose you have been lending USDT on Ethereum Mainnet using Aave, but the interest rates for the same lending process through Aave on Polygon are more profitable.

Venturing into Blockchain Ecosystems
If you hold ETH on Ethereum Mainnet and are eager to explore an alternate L1 to engage with their native dapps, a bridge could transfer your ETH from Ethereum Mainnet to the selected alt L1.

Owning Native Crypto Assets
Say you wish to own the native Bitcoin (BTC) but are limited to Ethereum Mainnet funds. You could buy Wrapped Bitcoin (WBTC) to taste BTC exposure on Ethereum. However, WBTC, being an ERC-20 token native to the Ethereum network, is essentially an Ethereum interpretation of Bitcoin rather than the original asset on the Bitcoin blockchain.

To possess native BTC, you must use a bridge to transfer your assets from Ethereum to Bitcoin. This bridge will transform your WBTC into a native BTC. On the contrary, if you wish to apply BTC in Ethereum DeFi protocols, a bridge would be required to transition from BTC to WBTC, which can be utilized as an asset on Ethereum.

Also Read : What is Polygon Zkevm

What are the challenges of Cross-Chain Bridging?

Secure Blockchain Interaction: The demand for secure inter-blockchain communication without a trustworthy third party can be daunting. This form of communication necessitates inherent security, trust, or flexibility trade-offs that are optional for interactions occurring on a single blockchain.

This also means that composability between smart contracts on different blockchains can only be accomplished by making inherent trade-offs in security, trust assumptions, or configuration flexibility, which are not required for composability between smart contracts on the same chain.

Scalability: There are theoretical limits to how much activity a single blockchain can process due to constraints in computing power, bandwidth, and storage capabilities if decentralization and credible neutrality are core network values.

Differing Optimal Qualities: Individual blockchains and scaling solutions optimize for various qualities such as speed, security, and decentralization. There will always be a dispute over the best combination of these values, leading to demand for multiple chains and solutions.

Wrapped Assets versus Native Assets: There's a big question mark on using wrapped assets versus native assets. Wrapped or bridged assets introduce varying security and trust assumptions due to the requirement of one or multiple entities taking custody of the underlying tokens. These limitations can be mitigated by decentralized verification supported by Chainlink Proof of Reserve.

Guarantee of Fund Availability: Finality or the assurance that the funds on the destination chain are available once they have been successfully committed to the source chain is another challenge. Without guaranteed finality, a reversed transaction on the source chain (like a block reorganization) could have severe consequences on the destination chain, such as the creation of unbacked bridged tokens.

Security Concerns: Cryptoeconomic systems are only as resilient as their weakest attack vector. Unsecure bridges can leave funds vulnerable even if the underlying blockchains or layer-2 networks are secure. When securing a bridge, key considerations are the attack cost and the number of participants needing to be bribed.

Due to these complexities, attacks on bridges account for many exploits in the Web3 space, necessitating a security-first mindset when designing cross-chain messaging protocols.

Also Read : Polygon Supernets

Which are the best Cross Chain Bridges?

Binance Bridge:
Topping the list of top-tier cross-chain bridges in cryptocurrency is the renowned Binance Bridge. It is a reliable facilitator for asset transfers from Ethereum to the Binance Smart Chain. Deemed as a dependable bridge between Ethereum and Binance Smart Chain, Binance Bridge allows users to convert crypto tokens into formats that align with Binance Chain and BSC.

It's equally capable of reverting the tokens to Ethereum-compatible formats. The Binance Bridge supports the conversion of ERC-20 tokens and several other coins on various networks. Some of the coins Binance Bridge supports include XRP, ONT, LINK, XTZ, DOT, and ATOM.

Understanding how the Binance Bridge, a leading cross-chain bridge, works is straightforward, leading to improved usability. When a token transfer request is received, the bridge wraps and converts the ETH tokens into BEP formats. After the conversion, the tokens are used as native BEP-20 tokens in staking and swapping activities across various Binance Smart Chain ecosystem protocols.

This uncomplicated conversion process can be finished in minutes for network token bridging. Interestingly, Binance Bridge stands out among cross-chain bridges as it doesn’t charge transaction fees. Users are only responsible for gas fees on the originating and destination blockchain networks. Additionally, accessing the Binance Bridge interface doesn't require a Binance account.

Avalanche Bridge:

Another noteworthy name among the best cross-chain bridges is the Avalanche Bridge. It acts as a bi-directional cross-chain crypto bridge between the Avalanche and Ethereum blockchain networks. The Avalanche Bridge, also known as Avax Bridge, presents a superior alternative to the traditional Avalanche-Ethereum Bridge or AEB. It enables effortless asset transfers between the two networks, driving Avalanche's growth.

Avalanche Bridge is the industry's leading cross-chain bridge, and its functionality attests to this. It utilizes ChainSafe's ChainBridge and enables two-way transfers of crypto tokens and NFTs. Users can request cross-chain swaps or use ERC-20 tokens in Avalanche's dApp ecosystem. Users only need to deposit and lock their tokens in the ChainBridge smart contract.

Once the assets are deposited and locked, the bridge generates a proposal and sends it to the relayers. Relayers on the Avalanche Bridge, such as Avascan, Protofire, POA Network, and Hashquark, ensure the bridge's security. Relayers compare the proposal with data on the Avalanche blockchain and use a voting process to approve or reject the proposal. This voting process offers additional security during asset transfers.

Synapse Bridge:

It's a unique decentralized layer protocol that facilitates cross-chain interoperability in the DeFi ecosystem. Synapse's significant components include the Synapse AMM and Synapse Bridge. Synapse links blockchains via a customizable cross-chain messaging protocol, supporting smart contract calls, multiple assets, and other functionalities.

The Synapse Bridge can enable smooth transfers of crypto tokens and assets across various blockchain networks. Some popular blockchains supported by the Synapse Bridge include Avalanche, Polygon, Arbitrum, Binance Smart Chain, Harmony, Fantom, and Boba.

Synapse's features also include the seamless cross-chain swapping of stablecoins across various blockchain networks. The infrastructure of Synapse Bridge comprises multi-party computation validators that ensure the bridge's security. Simultaneously, these validators can also respond to various events on blockchain networks associated with Synapse.

Polygon Bridge:

A notable name among top-tier cross-chain bridge crypto platforms is the Polygon Bridge. It's a widely used crypto bridge for transferring NFTs and ERC tokens to the Polygon sidechain. Polygon hosts two unique types of bridges: the Plasma Bridge and the Proof of Stake Bridge.

These bridges transfer assets between Ethereum and Polygon but have unique security infrastructures. For instance, the PoS Bridge employs Proof of Stake consensus for security and is useful for transferring ETH and ERC-standard tokens.

In contrast, the Plasma Bridge offers additional security benefits using the Ethereum Plasma scaling solution. It enables the transfer of ETH, ERC-721, ERC-20, and MATIC tokens. Choosing the Polygon Bridge guarantees lower gas fees and faster processing as it doesn't involve third-party protocols.

Tezos Wrap Protocol:

Concluding the list of recommended cross-chain bridges is the Tezos Wrap Protocol. It's a decentralized, permissionless, and bi-directional crypto bridge that facilitates the transfer of assets between Ethereum and Tezos blockchain networks. This bridge protocol aids in wrapping ERC-20 tokens in the FA2 standard for use in the Tezos blockchain ecosystem.

The wrap protocol allows ERC-20 token owners to enjoy scalability, lower transaction costs, and improve network speed. Moreover, the wrap protocol supports the wrapping of ERC-721 tokens, offering flexibility for transferring NFTs.

Conclusion

While cross-chain bridges are vital tools for cryptocurrency and digital asset management, they have risks. When utilized correctly, cross-chain bridges significantly enhance the capabilities of blockchain networks. Paired with other smart-contract features, cross-chain bridges can boost the functionalities of blockchains, cryptocurrencies, NFTs, and more.

Frequently Asked Questions [FAQs]

What problems does the Cross-chain Bridge solve?

A. The Cross-chain Bridge addresses several key problems, primarily the need for interoperability between various blockchains. It allows seamless token transfers across multiple chains, fostering liquidity and value exchange within the crypto ecosystem.

2. What makes the Cross-chain Bridge unique?

A. The Cross-chain Bridge is unique due to its capacity to enable interoperability among disparate blockchain platforms. This allows for a seamless flow of information and assets across numerous blockchains that would otherwise operate independently.

3. What is the use case of the Bridge Token?

A. The Bridge Token has a dual function. It acts as the native token facilitating transactions within the cross-chain platform, and it also functions as a governance token, allowing token holders to participate in decision-making processes related to the cross-chain ecosystem.

4. Where to buy Bridge Tokens?

A. Bridge tokens can be purchased from various exchanges that support its trade. Some top cryptocurrency exchanges like Binance and Uniswap often list such tokens.

5. How secure is the Cross-chain Bridge?

A. The Cross-chain Bridge exhibits robust security thanks to its underlying technologies. However, the level of security can vary depending on the design of each bridge and the technology it utilizes.

6. What are the key technologies and protocols used in building cross-chain bridges?

A. Cross-Chain Bridges are built on a variety of technologies and protocols. These include atomic swaps, hash time-locked contracts (HTLCs), and relay or notary schemes. The choice of technology depends on the specific requirements of the bridge.

7. How can developers and blockchain projects utilize cross-chain bridges to expand their applications and user base?

A. By using Cross-Chain Bridges, developers, and blockchain projects can significantly expand their applications and user base. These bridges foster interoperability between diverse blockchains, thereby allowing applications to reach a larger user pool, assets, and data.

8. How do cross-chain bridges handle different consensus mechanisms and block confirmation times across diverse blockchains?

A. Cross-Chain Bridges are designed to be flexible and can adapt to various consensus mechanisms and block confirmation times across different blockchains. They usually employ sophisticated algorithms and systems to ensure this adaptability.

9. What are some popular examples of Cross-Chain Bridges, and how do they differ in terms of functionality and supported blockchains?

A. Popular examples of Cross-Chain Bridges include the Ethereum-Polygon PoS Bridge, Binance Smart Chain Bridge, and Avalanche-Ethereum Bridge. Each of these bridges offers unique functionality and supports different blockchains.

10. Are there any limitations or challenges associated with Cross-Chain Bridges, such as scalability and potential security risks?

A. Yes, Cross-Chain Bridges do come with certain limitations or challenges. These may include scalability issues and potential security risks. The extent of these challenges depends on the specific technology used in the bridge's architecture.