Blockchain is not only popular but also a rapidly developing technology, necessary for the implementation of many projects and applications. However, isolated blockchain networks prevented the interaction and transfer of assets between different chains, so these problems needed to be addressed. This is how multi-chain bridges appeared - innovative protocols designed to overcome the gap between disparate blockchains, ensuring the smooth movement of digital assets and data across decentralized networks.
These bridges serve as important channels that not only increase liquidity and availability but also facilitate collaboration and development in the blockchain space. In this article from Notum, we will delve into the world of bridges, exploring the way they work, their types, and the impact they bring to the broader blockchain industry.
What Are Cross-Chain Bridges?
Cross-chain bridges (also known as multi-chain bridges) are blockchain and crypto technology solutions that allow the exchange of data, assets, and execution of smart contracts between different blockchain networks. They play an important role in solving the isolation problem of various blockchain platforms and ensuring their interaction. Thus, they create a so-called interoperable bridge between blockchains that help to solve most of the existing problems.
Basically, each blockchain platform can be seen as a separate ecosystem with unique features, like protocols and tokens. Cross-chain bridges solve the problem of no interconnection between these ecosystems as they allow users to transfer assets and perform smart contract transactions between different blockchains with no intermediaries. Mostly, they are based on smart contracts that run on blockchain networks and control the transfer of assets between networks. Thus, cross-chain bridges provide transaction transparency and security, since all the asset information is recorded on the blockchain.
Thus, cross-chain bridges opened multiple opportunities for blockchain platforms and cryptocurrencies. They not only facilitate the integration of ecosystems but also enable the exchange of data and value between different blockchains. This improves the network’s efficiency, as well as expanding access to various assets, and helping to create unique decentralized financial products and services. However, cross-chain bridges also face some challenges and risks, such as security, transaction processing speed, and scaling. Now developers are actively working to improve these technologies to provide more reliable and efficient bridges between blockchains and overcome the existing limitations.
How Do Cross-Chain Bridges Work?
As known, cross-chain bridges facilitate the exchange of data, assets, and execution of smart contracts between blockchain networks. Generally, cross-chain bridges operate using a combination of specialized smart contracts, cryptographic techniques, and decentralized protocols. But how exactly do they work? Let's find out. Here are the main principles of cross-chain bridges operation:
- Locking of Assets. When a user initiates a cross-chain transaction, the assets they want to transfer are locked in a smart contract on the source blockchain. This locking action prevents double-spending and ensures that the assets are reserved for the transfer.
- Proof Generation. Once the assets are locked, the bridge generates cryptographic proof, usually in the form of a Merkle tree, containing information about the locked assets. This proof serves as evidence of the locked assets' validity and is used to verify the transaction on the destination blockchain.
- Propagation to Destination Chain. After this, the proof is propagated to the destination blockchain where it is verified by a corresponding smart contract on that chain. This verification process ensures that the assets were locked on the source chain and are now eligible for transfer to the destination one.
- Asset Minting or Release. After successful verification, new assets or tokens are minted on the destination blockchain, representing the locked assets from the source chain. These newly minted assets can now be accessed and used within the destination blockchain's ecosystem.
- Bi-Directional Functionality. Cross-chain bridges can often work bi-directionally, which allows users to move assets back and forth between the connected blockchains. This bidirectional functionality increases liquidity and flexibility, enabling users to take advantage of opportunities on different blockchain networks.
By establishing a secure and trustless connection between disparate blockchains, cross-chain bridges enhance the overall utility and efficiency of decentralized ecosystems. However, different cross-chain bridge protocols may have distinct approaches to achieving interoperability, and ongoing research and development aim to improve their security, scalability, and user experience.
Types of Cross-Chain Bridges
Cross-chain bridges can be divided into several main categories:
- Bridges that work on liquidity pools
The mechanism of pools operation in cross-chain bridges is in many ways similar to the DEXs operating on liquidity pools. For example, on Uniswap V3, any pair is represented as a pool of two tokens. On the one hand, there are traders who swap tokens and pay a commission for each trade. On the other hand, there are liquidity providers that provide liquidity in exchange for a share of these fees. Same about the bridge: there is pool A in blockchain 1, and pool B in blockchain 2. People use the liquidity of the bridge to perform cross-chain transactions while paying a commission for the completed transfer. In turn, liquidity can be added to the pools both by the bridge itself and by external providers, in exchange for a share of the fees generated by the protocol.
Liquidity providers in such bridges supply liquidity in only one of the assets on a particular blockchain (the so-called “one-way” liquidity, as opposed to “two-way” on Uniswap - where both tokens that make up a pair must be provided). The advantage of one-way liquidity is that liquidity providers are not exposed to the risk of impermanent loss. Thus, the cross-chain exchange mechanism itself is quite simple: the user puts token A into the pool on blockchain 1, and after the transaction in blockchain 1 has been confirmed, information about this is transmitted to blockchain 2. After accepting this information, tokens B are released from the pool in blockchain 2. Also, liquidity pool bridges are the most used type of bridge.
- Bridges that work on “Lock/Mint & Burn/Release” mechanism
On the sender blockchain (in the diagram it is “Ethereum”, in general it is “Source Chain”), a certain smart contract is created (in the diagram it is “Custodian”, in general it is “Escrow-account”), to which the user must send tokens. After the tokens have been sent to this smart contract, a signal is also sent using the “Communicator” to another blockchain (in the diagram it is “Another Chain”, in general it is “Target Chain”) to the smart contract, which on picture is called “Debt Issuer”. This smart contract creates digital token certificates that were sent on the original blockchain. These digital certificates are 1:1 equal to the tokens that were locked on the smart contract of the original blockchain. The bridge works in the same way in the opposite direction.
The Most Popular Cross-Chain Bridges
Recently, multiple cross-chain bridges were gaining popularity in the blockchain space and all of them are continually evolving. Here are some of the most popular cross-chain bridges at the time:
- Portal Bridge. Portal is a cross-chain bridge that allows assets to be transferred between the Solana and Ethereum blockchains. “Portal offers unlimited transfers across chains for tokens and NFTs wrapped by Wormhole.” – PortalBridge.
- Connext Bridge. Connext is a state channel network that allows for fast and low-cost transactions on Ethereum. The Connext Bridge enables off-chain transfers of assets between different channels and networks
- Stargate. The Stargate Crosschain Bridge enables seamless interoperability between different blockchain networks. By creating a secure and efficient bridge, it allows digital assets and data to flow freely across disparate blockchains, unlocking new possibilities for dApps and facilitate widespread adoption of blockchain technology.
- Orbit. Orbit Bridge is a cutting-edge crosschain bridge solution with its robust and secure architecture, that connects various blockchain networks, fostering interoperability and data exchange across decentralized ecosystems.
- Poly Network. Poly Bridge is a prominent crosschain bridge platform that facilitates the transfer of digital assets and data across multiple blockchain networks. With its innovative technology, Poly Network aims to create a frictionless and decentralized experience for users, fostering a more interconnected and efficient blockchain ecosystem.
Risks Associated with Cross-Chain Bridges
Even though crosschain bridges allow users to transfer assets or data between different blockchains, there are still risks associated with their use. For example, when using crosschain bridges, there is a possibility of losing assets in the process of transfer. If something goes wrong during the transition of assets between blockchains, they can be lost forever. Also, as crosschain bridges represent complex technological solutions, they can become a target for cyberattacks or vulnerabilities. Attackers may look for ways to break bridges and steal assets or disrupt networks. The use of crosschain bridges can also lead to errors or incorrect transactions that can cause loss of assets or lead to unexpected results.
Even though most crosschain bridges are decentralized, some of them still require third party participants or entities, which can lead to centralization and potential control over the network or assets. Also, depending on the specific bridge and the amount of assets being transferred between blockchains, there may be a problem of low liquidity, which can make transactions difficult or slow. Moreover, it should be considered that some blockchains may be incompatible with each other or have different protocols, which can create difficulties when creating crosschain bridges.
Thus, while crosschain bridges can provide significant benefits, it is important to understand the risks associated with their use and take the necessary steps to ensure that cross-chain transitions are secure and reliable. Each project must conduct a thorough risk analysis and find appropriate solutions to minimize potential threats.
Crosschain bridges technology opens up new horizons and opportunities for the cryptocurrency world. It improves interoperability between different blockchains, which contributes to a more efficient exchange of assets and data in a decentralized environment.
However, it is important to remember that when using crosschain bridges, one should take into account the risks and possible vulnerabilities associated with the security and reliability of networks. The development of this technology in the future will require the active cooperation of the developer community, auditors, and users to constantly improve the mechanisms and ensure the security of funds.
All in all, crosschain bridges are an important tool for breaking down the boundaries between blockchains and empowering decentralized systems, allowing us to move towards a more connected and interoperable world of cryptocurrencies.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.