What are Blockchain Bridges?
What Are Blockchain Bridges
and Why Are They So Popular?
Bridges, as weve known them
for years, are man-made structures carrying a road, path, or railway, across a
river, road, or other obstacles. Blockchain bridges might now use the same
amount of steel or be that instagrammable, but they essentially serve the same
purpose they create a communication pathway between two endpoints while
resolving an issue.
What is a blockchain bridge?
A blockchain bridge, also
known as a cross-chain bridge, connects two blockchains allowing
users to send cryptocurrency from one chain to another. Basically, if you have
token on Cardano, but want to spend it on Ethereum, a bridge allows you to move
them from one chain to the other one. Please note that blockchain bridges are
independent entities that dont belong to any blockchain.
One of the biggest
cryptocurrency challenges is their inability to work together. Lets
demonstrate with an example. Before 1 January 1999 and the Euro ()
introduction, all European countries operated with their own currency:
Germany German Deutschmark
Greece Greek drachma
Ireland Irish pound
Italy Italian lira
What did that mean for people
that wanted to travel from country to country? Exchanging their home-country
currency to their destinations currency. You couldnt show up to Italy and pay
with the Greek drachma. Take the same logic and apply it to crypto. Bridges are
not what exchanges used to be back in the day. The fees and processes
associated with exchanging one crypto for another are both high and
time-consuming.
Without bridges them, youd
have to convert Cardano to Ethereum on a trading platform, withdraw it to a
wallet and then deposit it again to another exchange. This would take
considerable time while you incur insurmountable fees in the process.
How do cross-chain bridges work?
In most cases, the same token
is being transferred from one chain to another one. However, actually this is
not how bridging really works. In most cases the tokens are locked in a smart
contract on the source chain and then a corresponding amount of tokens minted
on the destination chain.
In another use case, bridges
can also just enable smart contracts on different chains to communicate with
each other.
The crypto involved in the transfer
does not move anywhere. What happens is that the amount you want to transfer
gets locked in a smart contract while you gain access to an equal amount of the
destination crypto.
The blockchain bridge Catch-22: a centralized
mechanism for a decentralized future?
If we had to pinpoint what
makes blockchain technology so promising and unique, that would be
decentralization. The ability to remove the middleman, authority, or
organization from any financial transaction, eliminating any supervision or decision-making
from them.
If thats the goal, dont
bridges sound like centralized mechanisms? Users need to give up control of
their coins, trusting a third-party system to convert them. Bridges are
categorized on the trust mechanism they have in place. What that means is
whether they are centralized or decentralized.
Trusted bridges
Trusted (centralized) bridges
require users to keep funds on the source chain with pre-selected validators.
In this case, custodians must confirm user deposits, lock up tokens, and mint
tokens on the destination chain.
Trustless bridges
Trustless bridges are
considered by many the Holy Grail for blockchain interoperability as they
operate in a decentralized environment. Validators are not randomly selected
but rather receive incentives to maintain the bridges. Here, trustless bridges
work on mathematical truths and are devoid of human errors, corruption, or
random mistakes.
Here are some of the bridges
on the market at the moment:
Recap: benefits of cross-chain bridges
Bridges are becoming
increasingly popular in the crypto space for many reasons. Here are some of the
most prominent.
Enable communication between blockchains
Quickly and efficiently transfer assets (tokens)
between networks
About Polkastarter
Polkastarter is the leading decentralized fundraising platform enabling
cryptos most innovative projects to kick start their journey and grow their
communities. Polkastarter allows its users to make research-based decisions to
participate in high-potential IDOs, NFT sales, and Gaming projects.
Polkastarter aims to be a
multi-chain platform and currently, users can participate in IDOs and NFT sales
on Ethereum, BNB Chain, Polygon, Celo, and Avalanche, with many more to come.
The cryptocurrency world has a variety of
blockchain networks, including Ethereum, Binance Smart Chain, Algorand,
Avalanche, Cosmos, Polkadot, Tezos, Solana, and others. Each blockchain has its
own features and functions. Most use different algorithms and rules for
reaching consensus. Bridges are used to exchange data between different
blockchains.
As of April 2022, the total value of the 18 major cross-chain bridges has reached $20.2 billion, or 8.21% of the DeFi TVL ($246 billion). Although each DeFi ecology is relatively independent, multi-chain interoperability has become an inevitable need for well-developed ecosystems.
Blockchain Bridge is a connection between blockchains that
allows you to transfer any type of data, including tokens and smart contracts,
from one chain to another.
Interoperability allows blockchains with
the same underlying architecture to share information. Its the ability to send
and receive information between different blockchains. When you send information
to a different blockchain, the person on the other side can access it and
respond effectively.
Cross-chain technology enables two
separate blockchain networks to interact with each other. Cross-chain
technology aims to eliminate the need for an intermediary between two
blockchains, thereby improving interoperability and helping to support the
decentralization of blockchain technology. The most common forms of cross-chain
implementations are asset exchange and asset transfer.
Depending on the underlying technology,
internetwork communications can be classified as follows:
Isomorphic
Chains have an agreed-upon security
method, consensus algorithm, network topology, and block creation verification
logic; the chain interaction is simple and clear.
Heterogeneous
Chains have a different composition of
blocks and a deterministic guarantee mechanism, making it difficult to develop
a mechanism for direct interaction between chains; third-party support services
are usually required for interworking in heterogeneous chains.
Cross-chain development has become more
complex as more blockchains emerge that differ from one another. These problems
are caused by mismatches between chains. Cross-chain technology needs to
account for these differences.
Heres how a cross-chain blockchain bridge
works:
1.
The user sends asset A to a deposit address in the
source chain (for example, Ethereum) and pays an intermediate fee;
2.
Asset A is locked by a randomly selected validator in a
smart contract (for a trustless bridge) or with a trusted custodian (for a
trust-based bridge);
3.
An equivalent amount of asset A1 is issued in the target
chain (for example, Solana);
4.
Asset A1 is sent to the users address in the target
chain (Solana wallet).
Suppose the user decides to return their
original asset A. In that case, the one needs to send asset A1 to the specified
address (where the tokens are burned), and the smart contract or custodian will
send the original asset A back to the users wallet.
The token lock part is an important and
often misunderstood bridge element. In fact, you cannot transfer AAVE, COMP,
UNI, etc., to another blockchain. Instead, the original asset is stored in a
(hopefully) secure location, and a copy is created on another chain. The total
number of tokens in existence increases, but the number of tokens in
circulation remains the same.
Most blockchain bridges can be classified
into one of the following categories.
One asset, two or more chains
Using these bridges, you can send one
cryptocurrency from one blockchain to another. For example, WBTC and tBTC can
transfer BTC from the Bitcoin network to Ethereum.
Many assets, two chains
These bridges allow users to transfer
different cryptocurrencies across two blockchains. For example, Rainbow Bridge
can send ETH and hundreds of ERC-20 tokens from Ethereum to the NEAR network.
Its also worth mentioning the bridges that connect Ethereum to popular L2
scaling solutions, like Arbitrum and Optimism.
Many assets, one chain connected to several others
In this case, you can transfer many
different tokens. Examples include Avalanche Bridge, PolkaBridge, and Wormhole
on Solana.
Many assets, several chains
Such bridges can be integrated into
various dApps to bring additional liquidity from multiple networks. Good
examples are RenBridge by Ren Protocol and Liquidity.
Many assets, several chains, but a single application
These bridges can be plugged into just about any blockchain as modules or adapters. They are designed for one type of app, such as exchanges, lending services, etc. A good example is Multichain (rebranded from AnySwap).
Blockchain bridges can be divided into two
categories: trust-based and trustless bridges.
Trust bridges, also known as federation
bridges or custodial bridges, are centralized bridges that require a central
entity or federation to operate. In this case, users must rely on federation
members to verify and validate the transaction. Trust-based bridges can be a
quick and cost-effective choice when transferring large amounts of
cryptocurrencies. However, it is important to understand that federation
members are largely interested in keeping transactions running, not detecting
and preventing fraud.
A federated bridge works similarly to a
private or enterprise blockchain. A node must meet several strict criteria if
it wants to become part of the control network. Only in this case, it will be
able to control the movement of tokens.
An example of a trust-based bridge is the
Wanchain Bridge. Specialized nodes called custodians use secure multi-party
computing to lock up tokens on the Ethereum blockchain, issuing an equivalent
number of tokens on the Wanchain blockchain. When a user wants to transfer
funds back, he submits a request to the custodians, each of whom provides him
with his own private key fragment. Only the full key unlocks the stored ether.
Trustless bridges are decentralized
bridges that rely on machine algorithms (i.e., smart contracts) to operate. This
type of bridge works like a real blockchain, with separate networks involved in
verifying transactions. Trustless bridges can provide users with a better sense
of security and greater flexibility in moving cryptocurrencies.
The trustless bridge works like a complete
decentralized system. Any user can join it, who will then be motivated to
perform the functions of a network agent to check the correctness and
reliability of transactions.
This is how the Syscoin bridge works.
Verifying agents receive a commission for their work. And if any node thinks
another is doing its job incorrectly, it can report this problem to the
network. If the accusers claim is correct, 3 ETH will be deducted from the
violator in favor of the plaintiff. If the accusation is false, the accuser
will pay 3 ETH.
Lets look at some concrete examples of
blockchain bridges.
Binance Bridge
Binance Bridge allows users to transfer
assets between Binance Chain and other chains, such as Ethereum, using Binance
Smart Chain tokens wrapped in a shell.
Portal by Wormhole
The portal offers unlimited asset
transfers between Solana and several other DeFi blockchains such as Ethereum,
Terra, Binance Smart Chain, Avalanch, oasis, and Polygon.
Avalanche Bridge
The Avalanche Bridge is used to transfer
assets between the Avalanche Proof-of-Stake blockchain and Ethereum.
Cross-chain technology can help the DeFi
ecosystem evolve and transform by addressing the disadvantages of centralized
approaches, such as high costs, scalability, and long transaction times. This
can accelerate the development and adoption of blockchain technology, paving
the way for new financial systems based on the interoperability of existing
blockchain systems.
Sidechains are one of the practical
implementations of cross-chain technology. Lets take a closer look.
A sidechain or child chain is a secondary
blockchain linked to the main or parent chain, allowing assets to be exchanged
at a fixed rate between the parent and the sidechain. Sidechains can also be
thought of as protocols that allow tokens and other digital assets from one
blockchain to be securely used in another blockchain and then returned to the
original blockchain when needed.
Lets say a user wants to make a
transaction with tokens from the parent chain. The user must first transfer
their tokens to the output address. Tokens are temporarily locked and not
available for spending. Once a transaction is completed, a confirmation is sent
down to the chains, followed by a waiting period for additional security. After
a waiting period, the corresponding amount of coins are released on the
sidechain, where the user can access and spend the coins. The reverse process
occurs when moving from the side chain to the main chain.
Miners and validators are required for the
Proof-of-Work and Proof-of-Stake sidechains, respectively. With Proof-of-Work
models, miners can be rewarded for collaborative mining, which involves mining
two different cryptocurrencies simultaneously based on the same algorithm.
Each sidechain is responsible for its own
security. However, since each side chain is isolated, any security breach will
only affect the side chain itself, not the main chain.
Bridges are useful not only for users but
also for the entire ecosystem, especially for decentralized finance. They have
several main advantages:
The flexibility of the entire system with the help of
bridges, participants can transfer assets and valuable data from one blockchain
to another and take advantage of various technologies without limiting
themselves to the capabilities of one network;
Bridges provide interaction between parent and child
networks, not just
different blockchains. Thus, developers can implement decentralized
applications simultaneously on several DeFi platforms, which increases the
speed of project development;
Bridges greatly improve network scalability by distributing traffic
across multiple blockchains, which is advantageous for high transaction
volumes, especially when the main chain is congested;
Efficiency With bridges, users can move their
assets from a non-scalable blockchain to a high-performance blockchain and
enjoy low transaction fees.
The basis for the widespread adoption of
blockchain technology is directly related to the evolution of cross-chain
technology. Cross-chain technology enables the seamless transfer of assets
between blockchain networks, reducing traffic and gas costs. It also makes it
easier for developers from different networks to collaborate and create new
user platforms. From the users point of view, cross-chain technology provides
faster transaction processing speed and instant exchange between different
tokens.
Due to the significant development of the
DeFi industry, cross-chain bridges are becoming more and more popular compared
to conventional exchanges. Technologies are in demand on the market, and more
and more new projects are appearing, which indicates the prospects of this
direction.
Given the relative immaturity of this
nascent field, it is inevitable that some bridging implementations will also
experience problems. However, it seems inevitable that with the current focus
on scalability and interoperability, bridges will become an integral part of
the blockchain landscape of the future.