What Are Blockchain Bridges and How Do They Work?

If you want to move tokens from one blockchain to another, you will need a blockchain bridge to allow those assets to travel.
A blockchain bridge is a tool that lets you port assets from one blockchain to another, solving one of the main pain points within the blockchain – the lack of interoperability.

Since blockchain assets are often not compatible with each other, bridges create synthetic derivatives that represent assets of another blockchain.

If you use a bridge to send a Solana coin to an Ethereum wallet, that wallet will receive a token that has been “wrapped” by the bridge – converted into tokens based on the target blockchain. In this case, the Ethereum wallet will receive a “bridge” version of Solana that has been converted to an ERC-20 token – the common token standard for fungible tokens on the Ethereum blockchain.

While the bridges open up new markets and work toward a brighter multi-chain future, they come with their own security challenges, as proved by the massive $326 million exploit on the nascent Wormhole Bridge in February 2022.

Types of Blockchain Bridges

Some bridges, known as unidirectional or one-way bridges, allow you to port assets only to the target blockchain and not the other way around. For example, WrappedBitcoins allows you to send Bitcoin to the Ethereum blockchain – to convert BTC into an ERC-20 stablecoin – but it does not allow you to send Ether to the Bitcoin blockchain.

Other bridges like Wormhole and Multichain are bidirectional or two-way, meaning you can freely convert assets to and from the blockchain. Just as you can send Solana to Ethereum’s blockchain, you can send Ether to Solana.

Also, Read Blockchain Explained! Attributes, Transaction Process, Blockchain Secure?

Read this and stay tuned with us!

Read more: What is a solana?

Bridges are either custodial (also known as centralized or trustless) or non-custodial (decentralized or trustless). The difference explains who controls the tokens used to create the bridged asset. All wrapped bitcoin (WBTC) is held in custody by BitGo, making it a centralized bridge. Conversely, assets bridged over Wormhole are kept by the protocol, meaning it is more decentralized.

While staunch supporters of decentralization may venture that the custodial nature of WBTC makes it less secure than decentralized alternatives, decentralized bridges over bridged assets are not necessarily secure, as demonstrated by the Wormhole Bridge exploit.

Why Use Blockchain Bridge?

Porting assets from one blockchain to another has myriad benefits. First, the blockchain on which you port assets may be cheaper and faster than your native blockchain. This is certainly true for Ethereum, where high transaction fees and slow throughput make it difficult for newcomers to join decentralized finance (DeFi).

If investors ported assets to a Layer 2 network – a faster blockchain that sits atop the Ethereum blockchain, such as Arbitrum or Polygon – they can buy ERC-20 tokens for a fraction of the cost without sacrificing the risk of Ethereum tokens. can do business.

Other investors can only use bridges to make the most of the markets that exist on other blockchains. For example, the DeFi protocol Orca is only available on Solana, but supports a wrapped version of ETH.

Bridges are becoming easier to use. Many DeFi protocols have integrated bridges so that their users can exchange tokens from different protocols without leaving the platform. This makes the process of converting tokens through bridges less cumbersome.

Which are the biggest blockchain bridges?

According to the DeFi Lama, there was $21.8 billion worth of crypto locked in bridges as of March 2022. The largest blockchain is Bridge Wrapped bitcoin, which accounts for nearly half of the bridge market, with a total value locked (TVL) of $10.2 billion. DeFi Lama envisions multichain as the largest cross-chain bridge, with nearly $7 billion in TVL.

A dashboard on Dune Analytics shows that Avalanche Bridge is the largest Ethereum bridge, with nearly $6 billion in TVL, followed by Polygon ($5 billion TVL) and Phantom Anyswap Bridge ($4.2 billion TVL).

Are Blockchain Bridges Secure?

Like all crypto, your capital is at risk. Some of the novel decentralized bridges are relatively untested and even the ones that have been tested are subject to exploitation. The most notable recent example is the wormhole, but a week before that attack, a bridge called Qubit was exploited for $80 million.
According to an analysis by blockchain analytic firm Elliptic, the wormhole attack occurred because the wormhole allowed the attacker to stake 120,000 worth of wrapped Ethereum without having to stake any ETH. Then the attacker took back the free WETH. A high-frequency trading firm called Jump Trading covered the losses to salvage the protocol.

Trusted bridges have different risk profiles. Instead of the risk that an attacker exploits the protocol and drains it of funds, the risk is that the company that holds staked assets is corrupt or negligent or loses control over the assets because of incompetence or because of orders from a third party, such as if a government requests that the company freeze assets.

Leave a Comment