Digital Assets and blockchain technology have come a long way since the birth of Bitcoin and its whitepaper publication in 2008. Since then, we’ve experienced an explosion in blockchain networks, with blockchains coming up, serving a plethora of purposes. From general-purpose blockchain networks, all the way to special-purpose blockchains – built to address a specific need.
As blockchain technology gains wider adoption, more people are coming up with new innovative ideas to solve existing problems and help transition to Web 3.0 – the decentralized web. Since there’s no such thing as one solution-fits-all-problems, the number of blockchain networks deployed will continue to rise. Some will be specialized for some specific applications, such as social media or medical record-keeping, while some others might have special rules to meet the rules and regulations of specific jurisdiction.
This plethora of blockchain networks though creates one problem. The interoperability problem. Interoperability refers to the ability of blockchain networks to communicate with one another, exchanging assets and information. This problem exists because blockchain networks work as closed networks. They know whatever is happening on their own platform.
You can think of blockchains as islands or colonies from the colonization era. Each colony or island has its own resources and based on those resources, they produce associated products. As long as those islands work in silos, their production capabilities are limited to the resources of their island. Once, they established trade routes between the different colonies, they were able to produce more complex products from resources from various islands.
That’s exactly what is also required in the blockchain space. Different blockchain networks and platforms, do what they can do best, based on their underlying technology, and then a mechanism to transfer assets from network to network, platform to platform, or ecosystem to ecosystem is required. This mechanism in the blockchain world is called, the bridge.
What is a Blockchain Bridge?
A blockchain bridge is a type of protocol that establishes a connection between two blockchains and allows the transfer of assets and/or other types of data from one chain to another. The two blockchain networks might have completely different types of underlying technology, rules, or governance models. The blockchain bridge has the responsibility to provide a secure way that enables the two or more blockchains to interoperate with one another.
Like with everything in the blockchain and Web 3.0, blockchain bridges come in a variety of designs and characteristics. Bridges can be custodial or non-custodial. Custodial bridges are more centralized by nature and rely on a 3rd party organization or central authority to operate. This implies that users require to place their trust in the third party operating the bridge. On the other hand, there are the non-custodial bridges, that by design are meant to be more decentralized and trustless. In this case, the bridge does not rely on a central authority to operate, but rather everything is coded into a protocol and smart contracts on the various chains while relying on decentralized governance or a DAO to make decisions associated with the future directions of the protocol
Another common distinction between the bridges is associated with the direction of asset transfers. Some bridges are uni-directional, while some others are bi-directional. As the names imply, uni-directional bridges allow the transfer of native assets from a base chain to another chain and back, while the bi-directional bridges allow the transfer of native assets in both ways.
How do Blockchain bridges work?
Presently, there are many different types of blockchain bridges and other cross-chain value-transfer protocols deployed, that facilitate the transfer of tokens from one chain to another. Among them, some of the concepts implemented by bridges are described below.
You may have seen already many types of digital assets having the prefix w-, such as wBTC, wETH, etc. These types of assets (although not always) are the representation of bridged assets on a chain other than their native chain. For instance, a bridged BTC on the Ethereum network carried the ticker wBTC, a bridged ETH on the Avalanche network carries the ticker wETH and so on. Sometimes bridges might use other prefixes or suffixes to represent the bridged asset.
These types of bridges lock the original token on the originating blockchain and mint another token, representing the original one, on the destination blockchain. The tokens on the destination blockchain are called wrapped tokens. They have the same value as the original tokens, however, they are implemented in a way that allows the destination chain to treat them in the same way as its native tokens.
At any point in time, the tokens can be transferred back to their native chain. They are not really transferred, rather the bridge’s protocol on the non-native chain burns or destroys the wrapped tokens, and unlocks or releases the original tokens on the native chain.
For instance, when you transfer Tether (USDT) from Ethereum to Avalanche, your original USDT is locked on Ethereum and the bridge creates an equivalent amount of wrapped USDT on Avalanche. You can use your wrapped USDT on Avalanche as you wish. When you transfer your USDT back to Ethereum using the bridge, the bridge will destroy the wrapped USDT and release an equivalent amount of USDT on Ethereum.
One major drawback of this bridge arises when you have multiple bridges deployed on the same network. This leads to multiple wrapped versions of the same tokens existing on a network which leads to fragmented liquidity on the target chain. For instance, if three bridges from Ethereum to Polygon wrap Tether (USDT), and different protocols use a different representation of USDT on Polygon, then users will have to switch from representation to representation all the time, depending on which protocol they indent to use.
That’s a problem the other two concepts are aiming to solve.
In order to avoid the creation of new tokens on the destination chain, some bridges take a slightly different approach. First, they use a similar mechanism to the one used by decentralized exchanges, to incentivize users to deposit their funds in the bridge’s protocol, on all chains the bridge supports.
For example, if a bridge allows transfers between Ethereum, Harmony, and Moonbeam, for USDT, USDC and DAI. Then individuals can deposit their idle stablecoins on the three different blockchains in exchange for rewards. These rewards usually are coming from fees paid by the usage of the bridge as well as other liquidity incentives provided by the bridge itself.
Then users can transfer one of the supported assets across chains. When a user transfers funds from one chain to another, the funds from the originating chain go to the liquidity pool of the originating chain, and an equal amount of funds is released from the liquidity pool on the destination chain.
This type of bridge avoids the problem of creating wrapped tokens, however, it faces the challenge of attracting adequate liquidity to enable the transfers as well as finding assets that are native on multiple chains.
To go around some of the shortcomings of the aforementioned bridge, some bridges issue their own token on multiple blockchains and allow only the transfer of their own native token across chains. Then, they ensure that liquidity exists in decentralized exchanges on all supported chains for their own token. This allows users to exchange the token with any other type of asset they wish.
How does it work? First, the bridge issues its own token on all supported blockchains. Let’s call this token $BRI. The bridge protocol is able to mint (create) and burn (destroy) $BRI on all supported chains. Hence, if you wish to transfer 10 $BRI for chain X to chain Y, the bridge will destroy 10 $BRI on chain X, create 10 $ BRI on chain Y and send them to your wallet. Simply, the bridge controls the transfer of tokens and at the same time the circulating supply of the protocol’s token.
In order for this mechanism to work, bridges need to ensure that there’s adequate liquidity on all supported chains for their own token $BRI, ideally paired with the native currency. For instance, if the bridge supports transfer between Ethereum, Harmony, and Moonbeam, then there needs to be liquidity for ETH/BRI, ONE/BRI, and GLMR/BRI on the three blockchains respectively. The bridge can deploy its own AMM on each chain as part of the bridge’s protocol to incentivize liquidity or can collaborate with other AMM DEXes on the supported chains.
To further enhance the user experience, these types of bridges can take it one step further, providing a DEX-like experience, and allowing cross-chain swaps, by connecting different AMM routes.
This type of bridge seems to be the most advanced as it avoids the problem of creating wrapped tokens which leads to fragmented liquidity. Furthermore, it prevents the trouble of finding native assets on all chains to support. However, for this model to work, the bridge has to ensure that there’s adequate liquidity on all chains for their token, paired with the chain’s native currency.
Are Blockchain bridges safe?
Blockchain bridges, being a type of protocol that attracts a lot of liquidity, naturally have also become the target of many hackers in the past. The largest smart contract exploits and thefts in the crypto space were associated with bridges. Most notable bridge exploits include Poly network exploit worth $600M, Ronin bridge exploits of $650M and the most recent Wormhole exploit of about $320M. According to Vitalik Buterin, bridges are also extremely vulnerable in the event of 51% attacks.
As a bridge user, ensure that you always disconnect from bridges after you use them and ensure that you denounce any rights that you may give to the protocol.
Although bridges have become a honeypot to hackers and have their vulnerabilities, they are very crucial for the growth of every ecosystem, especially in the initial stages. Considering the current growth in the number of blockchain networks and the trend toward specialization, blockchain bridges will be needed to facilitate asset transfers from one blockchain to another. It is very likely that new concepts will emerge in the future as well as existing ones to get improved.