Understand bridges to make the most of Crypto and blockchain | by Ash Perera | Apr, 2022
What: A Tool that lets you port assets from one blockchain to another
Why: Incompatibility of assets between blockchain networks
How: Bridges create synthetic derivatives that represent an asset from another blockchain. The original asset is ‘wrapped’ into a digital vault and a new token is created to transact on other platforms. This is often referred to as the “Burn and mint” approach.
- Explore other blockchains: Bridges allow users to participate in DeFi protocols across other blockchain networks. It allows developers from multiple blockchain networks to collaborate and build new products.
- Improves innovation across all networks. As a network is incentivised to increase its user base, it has no option but to innovate. Users can enjoy benefits across platforms.
- dApps: dApps can exist in multiple blockchain networks. Helps dApps leverage the benefits of multiple networks which accelerates their growth.
- Higher speed and lower transaction fees: Benefits from transferring to another network due to cheaper fees and higher speed and improved functionality as a result of wrapping. Enables users to enjoy the benefits from other chains.
Example: Bridging ETH to polygon to save fees on transactions. Sandbox (link here), an Ethereum based metaverse platform migrated to Polygon to minimize transaction fees and network congestion.
Custodial
- Centralised or trusted
- Users need to give up control of their assets and base their trust on the reputation of the bridge operators
- Users have to trust the custodian
Non-Custodial
- Decentralised or trustless
- Operated through smart contracts and algorithms
- Users remain in control of their assets
- Users have to trust the code
Apart from the control of the bridges, there is a variation in the direction bridges allow users to send and receive assets
Unidirectional/one way: Allows to port assets to target blockchain but not back. Wrapped BTC allows users to transfer BTC to ETH as an ERC-20 token but doesn’t allow them to send ETH back to the BTC blockchain.
Bidirectional: Port assets both ways. Wormhole on Solana allows users to transfer their digital assets between SPL and ERC-2 blockchains.
- Wrapped Bitcoin: accounts for almost half of the bridge market, with $10.2 Billion in Total value locked(TVL). All wrapped bitcoin is held in the custody of BitGo, making it a centralised bridge.
wBTC is controlled by a Decentralised autonomous organization(DAO) comprising 17 members. Each member holds a key to the multi-signature wallet that secures the system. Voting takes place on adding/removing members and making changes to the smart contract. Therefore, in this case, the safety depends on the DAO and its 17 members.
- Multichain: $6 Billion TVL
- Wormhole: $3.6 Billion
Keep up with Bridge TVL rankings with Defi Llama
- Smart contract Risk: Risk of a bug in the code and exploits. DeFi protocols have to connect with oracles which bring data from the outside world.
- Technology Risk: Human errors, spam, software failure.
- Custodial Risk: Bridge operators stealing user funds
- Exploits: Hackers can target vulnerabilities
The Ronin Network, an Ethereum powered sidechain that powers axle infinity was hacked on the 23rd of March which resulted in losses of over $600 million USD.
$320 million in Wrapped Ethereum(wETH) were hacked through the wormhole bridge in early February 2022. The funds were replaced by Jump Trading Group. According to CertiK, the attackers injected spoofed data, bypassed the verification, and withdrew the corresponding tokens on the target chain.
Interoperability has been a limiting factor in the wider use cases that can be explored with blockchain. For the mass adoption of DeFi, metaverse and NFTs, lower transaction fees and higher speeds are essential. As evident from the recent hacks, bridges have a long way to go in terms of security, but nevertheless, present the current best solution for interoperability.