What is a bridge in blockchain?
A blockchain bridge is a protocol that connects two different blockchains and allows them to exchange information and tokens.
One of the biggest problems regarding blockchains is the lack of interoperability. Every blockchain is limited to the borders of its own domain, consensus mechanism, governance rules, programming language and smart contracts. These factors often cause high transaction costs and congestion problems.
With the rise of DeFi and its countless services, communication between different chains has become essential. Bridges were born for this purpose, allowing the interconnection between different chains.
Let’s see together what they are and how they can be used!
Why are blockchain bridges important?
As explained by Ethereum.org, blockchain bridges are essentially like physical bridges connecting one place to another. They are protocols that can put communication between two isolated blockchain ecosystems, facilitating interconnection between blockchains through transferring information, data and assets.
A practical example could be: if a bitcoin holder wants to transfer some of their BTC to the Ethereum network, the blockchain bridge will hold the coins and make ETH equivalents of the same. The coins can then be used on the ETH network. In actuality, the coins move nowhere, the BTC the holder wants to transfer gets locked in a smart contract, and he/she gets access to ETH tokens of equivalent value. When he/she wants the ETH tokens converted back to BTC, the ETH tokens will be burned, and the BTC locked in the smart contract will be released into that wallet. Shardeum.com
Different types of bridges
There are several types of bridges depending on intrinsic functions.
The two macro-categories are custodial or centralized bridges and non-custodial (or decentralized ones). The first category requires users to place their trust in a central entity to properly and safely operate the system; instead, the non-custodial relies on smart contracts to manage the crypto locking and minting processes, removing the need to trust a bridge operator.
We can also identify 2 subcategories which carry out their functions:
Cross-chain facilitates the transfer of assets between two blockchains.
Multi-Chain is a bridge deployable to any L1 or L2 blockchains.
Bridges can also be distinguished by their particular assets, so how they move assets across blockchains:
Unidirectional (one-way): restricts users from returning tokens to their native blockchain after bridging assets to another blockchain. (an example can be Wrapped Bitcoin).
Bidirectional (two-way): Asset bridging is possible in both directions. (Examples are Wormhole and Multichain).
How does a cross-chain bridge work?
As we have just mentioned, blockchains are not natively able to communicate with each other, and at the same time, we need more liquidity for the growing DeFi applications in an always more multi-chain world. For this reason, the future of web3 is more cross-chain oriented, fostering interoperability between different chains.
A cross-chain bridge is an infrastructure that enables users to put in communication two blockchains and allows them to transfer their assets from a source blockchain to a destination chain. This type of bridge typically involves locking or burning tokens through a smart contract on the source chain and unlocking or minting tokens through another smart contract on the destination chain.
Usually, cross-chain bridges are used to create synthetic versions of native assets from source chains and wrap them onto destination chains. (These particular tokens are called wrapped). These technologies allow assets that may be locked in smart contracts elsewhere to be put to work as collateral on a different chain.
More specifically, cross-chain bridges are powered by three main mechanisms:
Lock and mint. A user locks tokens in a smart contract on the source chain and then wrapped versions of those locked tokens are minted on the destination chain. These wrapped tokens are burned to unlock the original coins on the source chain.
Burn and mint. A user burns tokens on the source chain, then the same native tokens are re-issued (minted) on the destination chain.
Lock and unlock. A user locks tokens on the source chain and then unlocks the same native tokens from a liquidity pool on the destination chain.
Benefits and risks of using bridges
As we said at the beginning of this guide, the most important benefit of bridges is improving interoperability between different chains. They are scaling solutions to faster transactions and lower transaction costs. They enable the exchange of tokens, assets, information and data across blockchains (also between layer1 and layer2 protocols).
Risks of using a blockchain bridge
But the best blockchain bridge that will stand against all risks and threats has not yet been made. Let’s see in detail all the possible downsides of using a blockchain bridge:
Malicious attacks, spam, faulty software, and other factors may interfere with user operations.
The possibility that a programming error could result in the loss of user funds.
Concerning custodial bridges, we can add the censorship risk where bridge operators might prevent users from moving their assets and conspire to take users’ tokens.
What is the best crypto bridge?
Cross-chain technology encourages quicker transaction processing times and immediate token exchanges from the user’s perspective. For this purpose, more and more bridges are created in the web3 that facilitate the connection between chains.
Have you ever used any blockchain bridge before? What were your experiences?
How do you imagine the expansion and development of DeFi?