Blockchain Bridges Explained
This blog post will cover:
- How are blockchain bridges used?
- How do blockchain bridges work?
- Kinds of blockchain bridges
- The risks of using blockchain bridges
One of the main issues that still exist in the world of crypto is the need for more interoperability. This means that blockchains exist as independent entities, with their rules and principles of work, and problems arise whenever users want to send assets or information from one chain to another. For example, if someone wants to exchange Ethereum for Bitcoin, they would need to first sell ETH, then purchase BTC, which is not convenient. Also, they would have to pay fees and suffer from price volatility.
Luckily, there is another way — turning to a blockchain bridge, a protocol that allows interactions between different separate blockchains. In a way, it is similar to how regular bridges connect the banks of a river.
How are blockchain bridges used?
The main benefit of these protocols is the fact that they allow for sending crypto assets and data between otherwise disconnected blockchains. This helps not only users but also developers who can collaborate. Additionally, bridges give the opportunity to use the advantages of layer 2 networks.
For instance, some users may find that transactions of Ethereum are slow and expensive, which is why users might want to port their assets to a blockchain that works on top of the native chain. This will allow them to trade tokens without paying high fees while still having exposure to Ethereum.
How do blockchain bridges work?
When someone bridges their crypto assets, a smart contract is created. It locks the cryptocurrency they are porting and issues the same amount of so-called wrapped tokens (e.g. wrapped Bitcoin, WBTC), and those are suitable for the receiving blockchain. As a rule, the process can be reversed, meaning that the token can be “unwrapped” if necessary.
Kinds of blockchain bridges
There are two main ways of categorizing blockchain bridges. Here are their main distinctions:
- Custodial and non-custodial. They can also be called centralized and decentralized, trusted and trustless. The first type essentially means that a user allows some centralized entity to execute the transaction. Since they have to give up control over their assets, thorough research on the operator is necessary. The second type, non-custodial bridges, rely on smart contracts and algorithms; crypto assets in this case are held by the protocol. The difference between these two types of bridges can be explained by an airport analogy. Custodial bridges are like checking in to a flight with the help of an airport employee: you trust them to get the information in the system correctly. Non-custodial ones are similar to self-check-in: users are in charge of their data which they process with the help of a machine.
- Unidirectional and bidirectional bridges. The first type implies that the bridge ports crypto to the target blockchain only; the second type supports bridging in both directions.
The risks of using blockchain bridges
Unfortunately, there is a catch: using bridges comes with risks — they might be subjected to hacker attacks. There are two reasons for that: first, such platforms are still new, and their designs are changing, which is why there are vulnerabilities. Second, these are desirable targets for attacks because they are essentially storages of large volumes of crypto that back the bridged tokens.
In February 2022, Wormhole, a platform that bridges several chains, suffered losses because of an exploit (an error that allows stealing from the system). The hacker minted WETH (wrapped Ethereum) which looked like regular WETH to the platform but was not backed up with ETH. Then the attacker bridged it to the Ethereum chain. Wormhole losses were estimated at roughly $320 mln.
What is more, in theory, custodial bridges can steal users’ crypto, which is why it is often recommended to only use ones with a good reputation.
Interoperability is absolutely necessary for the future of crypto because it is a key aspect of innovation. With the increasing number of people and businesses adopting blockchain technologies and the widening scope of the opportunities that these technologies provide, further separation seems impossible. Hopefully, in the near future, the risks associated with blockchain bridges will be eliminated, and they will be used to their full potential.