Blockchain Bridges: What are they & How do they work?
This article explains what blockchain bridges are, how they work, and what the associated benefits and risks are.
What is a blockchain bridge?
As the name suggests, blockchain bridges, or cross-chain bridges, connect different blockchain networks, allowing users to move assets or data seamlessly between them. They are protocols that foster blockchain interoperability - the ability of different blockchain networks to communicate, share data, and build on each other's features and use cases.
Why are blockchain bridges important?
Blockchain bridges are critical because they enable blockchain interoperability, which helps open up more possibilities for developers and users in the blockchain landscape. Without bridges, the result is a series of unconnected blockchains that cannot communicate with one another, preventing the seamless flow of data and value across different networks.
Why do blockchains struggle with cross-chain communication?
This is because blockchains operate with different purposes and characteristics, such as protocols and standards, hashing algorithms, or consensus models.
A simple example is Bitcoin and Ethereum. While Bitcoin is mostly used as a medium of exchange and store of value, Ethereum is used for implementing complex smart contracts and decentralized applications. Therefore, their technology is also different from each other. While Bitcoin uses the Proof-of-Work (PoW) consensus mechanism that focuses on security, Ethereum employs Proof-of-Stake (PoS) model that prioritizes scalability. This difference in consensus mechanism makes it difficult for the two blockchains to interact, necessitating a blockchain bridge.
In another scenario, even if two blockchains have the same PoS consensus mechanisms, they also have different token standards and frameworks for building applications, tokens, and smart contracts. Therefore, a bridge is also essential.
How do blockchain bridges work?
Bridges Functioning Process
The two most common methods are Wrapped Asset (Lock-and-Mint) and Liquidity Pool.
Wrapped asset method (Lock-and-Mint)
When you transfer assets between blockchains, the original asset is “locked” on the first chain, and a new "wrapped" token is created on the second chain. This wrapped token represents the value of the original asset. To get the original asset back, you “burn” (destroy) the wrapped token, and the original is released from the smart contract.
For example, if you lock 20 ETH on Ethereum, the bridge mints 20 wrapped ETH (wETH) on another chain like Solana. The original assets remain locked until the user decides to reverse the process, where the wrapped tokens are burned on the destination chain, and the original assets are unlocked and returned on the source chain.
Liquidity pool method
The liquidity pool type of cross-chain bridge operates by relying on pools of assets provided by liquidity providers on both the source and destination blockchains.
When a user wants to transfer assets from one blockchain to another, they deposit their assets into a liquidity pool on the source chain. The bridge then uses the liquidity pool on the destination chain to fulfill the equivalent amount of assets to the user. This enables instant transfers without the complexities of locking and minting tokens, relying solely on the available liquidity in the pools.
Key Components of a Blockchain Bridge
These components create the infrastructure that allows blockchain bridges to function.
Smart contracts
Smart contracts are automated digital contracts that form the foundation of many blockchain bridges. They streamline processes like locking, minting, burning, and releasing tokens.
Oracles
Oracles provide external data to smart contracts, ensuring transactions are executed correctly. For example, they verify that assets have been locked on one chain before releasing them on another.
Validators/relayers
These are the bridge’s quality control team. They verify transactions and maintain consensus between blockchains, and ensure the flow of assets. In decentralized bridges, validators often stake their own tokens as collateral, ensuring they act honestly.
Multi-signature wallets
Multi-signature wallets provide an extra layer of security by requiring multiple keys for transactions. This helps prevent unauthorized access to the bridge's funds.
Benefits of Blockchain Bridges
Enhanced Interoperability
Blockchain bridges enable seamless communication and asset transfer between different networks, fostering a more interconnected and collaborative ecosystem.
Increased Liquidity
By connecting to larger networks like Ethereum, smaller blockchains can benefit from increased liquidity, potentially leading to higher trading volumes and price discovery.
Expanded Use Cases
Blockchain bridges open up new possibilities for cross-chain applications, such as decentralized finance (DeFi), gaming, and supply chain management.
Challenges and Risks
Security concerns
One of the biggest challenges facing blockchain bridges is security. Since blockchain bridges are created to transfer digital assets between different blockchain networks, they are susceptible to security threats such as hacks, attacks, and other malicious activities.
Two exploits that illustrate this security risk are the Ronin bridge hack (2022) and Wormhole exploit (2022).
The Ronin bridge, used in the Axie Infinity ecosystem, was hacked for over $600 million, largely due to centralized control over the bridge’s validation mechanism. On Ronin, five out of the nine validators used to approve transactions were hijacked after their private keys were stolen. This gave hackers the ability to validate transactions without oversight, draining over $600 million worth of cryptocurrency.
The Wormhole bridge, which connects Solana and Ethereum, was exploited for $325 million. This was because the bridge’s security was compromised, allowing attackers to mint 120,000 worth of wrapped Ethereum without having to stake any ETH.
Lack of traceability
Blockchain transactions offer a level of anonymity not found in traditional finance. This can be problematic when assets are moved between different blockchains. Law enforcement and regulatory agencies may find it difficult to trace illicit funds that have been routed through cross-chain bridges. Therefore, it’s possible for hackers to anonymously move funds across blockchains without any investigators tracking them.
Centralized control
Instead of an attacker draining the funds, the risk is that the company that holds staked assets is corrupt or negligent or loses control over the assets because of incompetence or orders from a third party, such as a government’s requests to freeze assets.
Bottom line
Blockchain bridges are vital in bridging the gap between isolated blockchain networks. Although enabling interoperability, increased liquidity, and expanded use cases, these bridges have raised certain concerns about their security risks. As the technology continues to evolve, we can expect to see even more scalable and secure blockchain bridges emerging.
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