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.
How do blockchains communicate?
Interoperability allows blockchains with the same underlying architecture to share information. It’s 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.
What types of blockchains exist?
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.
How does a cross-chain bridge work for the end-user?
Here’s how a cross-chain blockchain bridge works:
- The user sends asset A to a deposit address in the source chain (for example, Ethereum) and pays an intermediate fee;
- 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);
- An equivalent amount of asset A1 is issued in the target chain (for example, Solana);
- Asset A1 is sent to the user’s 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 user’s 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.
What types of cross-chain bridges exist?
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. It’s 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).
Source: Multichain. Networks supported by the Multichain Bridge
Trusted vs. Trustless
Blockchain bridges can be divided into two categories: trust-based and trustless bridges.
Trust-based 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
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 accuser’s 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.
Let’s 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. Let’s take a closer look.
What are sidechains?
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.
Let’s 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.
Benefits of Blockchain Bridges
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.
Final thoughts
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 user’s 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.
