“This is a fundamental view of the world. It says that when you build a thing you cannot merely build that thing in isolation, but must repair the world around it, and within it, so that the larger world at that one place becomes more coherent, and more whole; and the thing which you make takes its place in the web of nature, as you make it.”–Christopher Alexander
In the absence of inter-chain communication protocols, cross-chain operations are a challenge. There are currently more than 100 active public chains on the market, and most of them, by default, don’t talk to each other very well – or at all. As enterprises and the end-user continue to adopt blockchain solutions, they realize that no blockchain protocol can exist or attain its optimal efficiency in complete exclusivity.
Such “siloed” blockchains do not have the innate capability to communicate with one another. Therefore, the strengths of one chain can’t benefit others, and the limitations of a particular blockchain can’t be compensated by leveraging the features of another. This fragments the potential and value of Blockchain as an industry, eroding user experience and hindering industry growth.
The blockchain space as a whole offers a host of functionality and opportunities. A world of siloed blockchains would mean stunting decentralized projects and blockchain growth by locking users into whatever network they’ve bought into. At a time when dApps (decentralized applications) are disrupting financial services, gaming, NFTs, as well as digital services and industries as diverse as instant messaging and code collaboration, it’s more important than ever to establish robust mechanisms for independent blockchains to communicate with one another.
Just imagine what would have been the efficiency of email services if it wasn’t feasible to send an email from Gmail to Yahoo or Outlook. Interoperability and federation between multiple ecosystems have made the Internet what it is.
Blockchain ecosystems also need interoperability – the ability to transfer information and exchange data between any blockchain seamlessly. Cross-chain technology is all about strengthening blockchain communication through the development and deployment of interoperable blockchain systems.
A cross-chain architecture facilitates interoperability, enabling two or more blockchains to trade-off their efficiencies, decentralization, feature sets, and security properties. This can improve chain efficiency, reduce fragmentation, and allow users and features to flow more freely across multiple blockchains.
In this insight, we are going to look into the solution of the interoperability barrier – Cross-chain bridges, types and how they work.
What are blockchain bridges?
Like a physical bridge, a blockchain bridge (also known as a cross-chain bridge) connects two distinct locations or communities so that traffic and resources can go back and forth freely.
Individual blockchain projects operate under different assumptions, protocols, rules and governance models. Bridging enables the transfer of token assets and smart contract data between different blockchains by allowing them to communicate securely in both directions.
In other terms, it aims to turn all blockchains into a team sport, that work together to solve the main problem they all have been created for.
Blockchain users will no longer be limited in the options that are offered to them, which means they will be able to transact with other parties regardless of the blockchain ecosystem they’re currently locked into.
Types of cross-chain bridges
Oracle-based bridges are easiest to deploy but are effectively centralized entities. These bridges do not have a blockchain of their own but use oracles – external services that interact with blockchains. Thus, Oracle-based bridges resort to off-chain mechanisms for supporting liveness, can support fast transaction times, withdrawal integrity, and data availability.
These bridges connect to other chains, wrap the original asset’s value in a native mechanism, and broadcast them onto the other chain. Unlike bi-directional bridges, they can connect with any chain, and these types of bridges use oracles and their own security model, separate from the blockchains themselves.
Wrapped bridges use oracles to broadcast their transactions across the chain. Oracles read and broadcast transactions from other chains. When users transfer tokens across the chain, oracles read the transaction moving the tokens to the bridge, lock them in a smart contract and issue a newly wrapped asset to an account on the other chain.
Wrapped assets like wBTC operate on this kind of cross-chain bridge. These assets are normally fully collateralised by the underlying chain adopting any custodial or non-custodial option. Due to the monster liquidity of the Bitcoin network, it is one of the most bridged assets on other chains. Although we also have wETH.
- Simple. Fast and easy to implement.
- Centralized. Oracles are run by a single authority, and if that authority is malicious or compromised, funds may be lost.
- Strongly platform-dependent.
Method of operation
Oracle-based bridges work in the following way:
- First, the assets are locked or “frozen” on the source chain. Usually, this is done by transferring them to a smart contract on the source chain, or a similar mechanism for chains that do not support smart contracts.
- Next, new tokens of an equal amount are created on the receiving blockchain. These are usually referred to as wrapped tokens and their symbols are commonly prefixed with a lowercase letter.
- When the user wants to redeem the assets, the wrapped tokens are burned, and the original assets are unlocked.
This way, assets can’t be used on both chains at the same time. When a user transfers assets via a centralized initiative that enables Bitcoin (BTC) users leverage the benefits of Ethereum: Wrapped Bitcoin (wBTC). Users deposit X amount of Bitcoin via partners into a wallet controlled by a trusted (centralized) custodian, which stores the BTC securely and then mints wBTC or similar projects, such as imBTC and HBTC, each provide a simple and effective solution to the problem of moving value across siloed blockchains tokens of equal value on Ethereum. Because all wBTC are backed 1:1 by BTC, the two tokens are roughly equivalent in value. Also, and most importantly, since wBTC is an ERC20 token, it, unlike Bitcoin, can be used as collateral in popular Ethereum dapps.
Native (L1) bridges, such as the Gravity Bridge from Cosmos, connect native assets across two chains. The goal of these bridges is to bring more liquidity onto a network by enabling token holders to transfer their assets across the bridge to be used in other circumstances. The native L1 chains rely on bridges to accurately represent data from other chains, such as the transaction record of a token, NFTs, or other assets.
One key aspect is that running infrastructure for the bridge becomes a part of running the infrastructure for the network’s security. As such, they often become a part of the network themselves and are not incentivized. For example, Cosmos Hub validators will run the Gravity Bridge infrastructure on Cosmos, just as the Ethereum nodes undertake the responsibility for broadcasting and receiving transactions. Therefore, the bridge shares the underlying chain’s security model.
- Truly decentralized.
- Increased security guarantee, due to being secured by miners on the main chain.
- Restriction on child tokens. In most cases, a simple ERC20 token is deployed on child chains without any bells and whistles.
- The transaction period is usually 7 days (much slower than PoS mechanism).
- Platform-dependent. For example, Cosmos IBC only supports blockchains built on the Cosmos platform.
- Fraudulent transactions maybe just flagged, but there are no guarantees for recovering funds.
Method of operation
These bridges use the so-called “mint-and-burn” mechanism. For example, let’s say we’re bridging between chains A and B. When moving funds from A to B, we mint new tokens or unlock existing ones on B, while burning or locking the tokens on A. Similarly, when moving funds from B to A, we emit new tokens on A, while temporarily removing them from circulation on B.
This is similar to how we teleport a person. Their mind (token information) are replicated at the destination (token in B) and their body at the start location (token in A) is destroyed/frozen. Problems arise when the body is not replicated at the destination (token in B is not generated) or the original body is intact/unfrozen (token in A is still accessible), or else at the end of the teleportation (transaction), there could be 2 bodies (gain of funds) or 0 bodies left (loss of funds). Hence there’s often a mapping between the tokens on A and B to ensure they are representing the same token information.
Liquidity cross-chain bridges serve where there is no liquidity on either side of the bridge, and it is the bridge’s responsibility to fill that role to provide that. These bridges have the greatest flexibility in the Web 3 space. They can bridge any protocol, provide incentives, and utility through supporting applications. Bridges like Axelar and Connext have levels of application and use cases across networks, and they have applications beyond just bridging networks.
- Uses proof-of-stake – not dependent on a single authority.
- Faster than completely decentralized solutions (deposits within 7-8 minutes and withdrawals within 30 minutes as compared to a 7-day withdrawal process);
- Usually platform-independent/multiple platforms offer similar bridging features
- Similar to centralized bridges, if the validators are malicious, can lead to lose/gain of funds;
- Slower than centralized bridges;
- Incentivization schemes for validators to behave properly isn’t very clear
Method of operation
Cross-chain liquidity bridges operate akin to a peer-to-peer network where each node acts as a router that holds an inventory of assets from both the source and the destination chains.
In this mechanism, tokens are not minted/burned but transferred between the user and the token pool of the bridge. The initial tokens are added to the token pools by liquidity providers that earn a portion of the fee paid by users to bridge their tokens. To bridge tokens using this mechanism, the users deposit tokens in a token pool on one blockchain and withdraw them from the token pool of a different blockchain. The limitation of this approach is that you can only bridge tokens as long as there is liquidity/tokens available in the token pool of the target chain.
These networks usually leverage the security of the underlying blockchain; through the use of locking and dispute mechanisms, users are guaranteed that router nodes cannot appropriate the users’ funds. Because of this, liquidity networks like Connext are a safer option for users who are transferring large amounts of value. This type of bridge is best suited for cross-chain asset transfer because the assets provided by routers are native to the destination chain rather than derivative assets, which have reduced fungibility.
Benefits of cross-chain bridges
In a growing multi-chain world, we need more liquidity for decentralized applications. But beyond that, the future of Web 3 hinges on cross-chain accessibility and interoperability. Interoperability between blockchains—including between the main chain and a sidechain/parachains—allows users to access the benefits of each without sacrificing the advantages of every blockchain. Bridges are important because they enable users to access new platforms, protocols to interoperate with each other, and developers to collaborate on building new products. More specifically, they enable:
- Greater productivity and utility for existing crypto assets – Bridges enable existing crypto assets to travel to new places and do new things.;
- Greater product capabilities for existing protocols – Bridges expand the design space for what protocols could achieve.;
- Unlocking new features and use cases for users and developers – Bridges give users and developers more choice.
With the market no longer having a singular blockchain ecosystem that can single-handedly serve all purposes and with the blockchain network constellation continuing to expand before our very eyes, all signs point towards a shared system. Adoption resides in making true interoperability real, with the importance of an intuitive user interface being just as powerful. For blockchain to gain adoption across industries, interoperability is a must. The need for interoperability is not limited to just swapping crypto assets across blockchains. But going forward, it must also facilitate sharing of other information such as health records, supply chain records, certificates, DeFi projects, gaming and so on.