Blockchain Bridges Part 1: What They Are and How They Work
What are blockchain bridges; how do they work; types of bridges by general principles of operation and differences in operating mechanisms and the future of blockchain bridge technology development
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Introduction
1. What is a Blockchain Bridge?
2. How do they work?
3. Types of bridges
4. Risks
5. Future of Bridges
Conclusion
Introduction
In a rapidly evolving technological world, blockchain has emerged as a transformative force, disrupting numerous sectors, from finance to supply chain, healthcare, and beyond. Yet as innovative as these individual blockchain ecosystems may be, they exist largely as isolated islands of information, each with its own unique standards, protocols, and rules. The growing need for these diverse ecosystems to communicate and interact has given rise to a novel concept known as 'Blockchain Bridges.’
Blockchain Bridges provide a pathway for the seamless transfer of data and assets from one blockchain to another, paving the way for enhanced interoperability within the blockchain world. They are the secret corridors that connect isolated cryptospheres, expanding possibilities and enabling new functionalities that were once deemed impractical or impossible.
In this guide, we will dive into the world of Blockchain Bridges — exploring their function, understanding how they work, and discussing the different types of bridges that exist. We will also weigh the potential risks and rewards associated with their usage, examine a range of use cases that illustrate their transformative potential, and look into what the future may hold for these digital connectors.
What is a Blockchain Bridge?
Let’s do an analogy with a real physical bridge. Imagine there are two countries: Country A and Country B. Both have their own unique culture, currency, and way of doing things. A large river (akin to technological differences) separates these two countries, making travel and trade between them difficult.
To solve this, the two nations decide to construct a bridge over the river. This bridge isn't just a physical connector; it also has facilities for customs and currency exchange. Now, citizens of Country A can easily travel to Country B, exchanging their currency for the local one, enjoying the different culture, and conducting trade. The bridge has not only connected the two land masses but also facilitated interoperability between two different systems.
In the world of blockchain, we could take Ethereum as Country A and Binance Smart Chain as Country B. The "river" here is the technological differences and unique protocols each blockchain has. The blockchain bridge serves as the physical bridge, the currency exchange, and the customs. Ethereum-based tokens can be transferred over this bridge, converted into a format compatible with Binance Smart Chain, and then used in the Binance ecosystem. For example, a blockchain bridge can be used to transfer ETH to Binance Smart Chain, enabling the user to participate in DeFi projects on that platform.
Now, we understand the basic info that Blockchain Bridge is a tool that allows moving assets from one blockchain to another one. Let’s explore in the next section how they exactly work and what information we can transfer besides the assets themselves.
How do they work?
While the exact process of “bridging” can vary depending on the specific type of bridge and the chains involved, the general mechanism usually involves the following steps:
Locking of Assets. The process begins when a user initiates a transaction to send tokens from one blockchain (source blockchain) to another (destination blockchain). The original tokens on the source blockchain are locked into a smart contract. This means they are temporarily taken out of circulation and you cannot get access to them.
Minting of Mirror Assets. Once the tokens are locked on the source blockchain, the bridge creates an equivalent amount of mirror (or wrapped) tokens on the destination blockchain. These mirror tokens represent the original tokens but are compatible with the destination blockchain's protocols.
Transfer of Mirror Assets. The user can now use these mirror tokens on the destination blockchain just like any other token native to that chain. These can be transferred, traded, or used in smart contracts on the destination blockchain.
Burning and Releasing. When the user is done with the destination blockchain and wants to move the assets back to the original blockchain, the mirror tokens are 'burned' (destroyed), and the equivalent amount of original tokens are unlocked from the smart contract on the source blockchain.
Example:
I want to move 1 BTC from Bitcoin Blockchain to Ethereum Blockchain.
I put 1 BTC in a smart contract. Smart contract locks my 1 BTC and I can’t get access to it on Bitcoin Blockchain (to prevent doubling my assets on different blockchains).
The smart contract mints 1 BTC on Ethereum, but now it’s called WBTC (because BTC is wrapped, it is now based on another blockchain).
Now I can use WBTC on Ethereum. Note: BTC is a coin on Bitcoin Blockchain, WBTC is a token on Ethereum Blockchain.
If I want to move my 1 WBTC back I do the following:
I access the smart contract and burn my 1 WBTC on Ethereum Blockchain.
My 1 BTC on Bitcoin Blockchain is now unlocked and I can use it.
But the blockchain bridges can transfer not only assets, but other information as well, such as results of DAO Voting, smart contracts’ logs, etc.
So bridges exist to connect blockchains, allowing the transfer of information and tokens between them. Here’s a few examples how bridges are useful for the industry:
The cross-chain transfer of assets and information
dApps to access the strengths of various blockchains – thus enhancing their capabilities (as protocols now have more design space for innovation)
Users can access new platforms and leverage the benefits of different chains.
Developers from different blockchain ecosystems collaborate and build new platforms for the users.
But the most useful and common use of bridges is moving assets to another blockchain to get lower transaction fees. Imagine you possess ETH on the Ethereum Mainnet and are intrigued to experiment with various decentralized applications (dapps). However, the high transaction costs are proving to be a deterrent. In such a scenario, you can utilize a blockchain bridge to transfer your ETH from the Ethereum Mainnet to an Ethereum Layer-2 (L2) rollup. By doing so, you can take advantage of lower transaction fees, making your exploration of different dapps more affordable.
In practice, the main use case of cross-chain bridges lies in the field of economic incentives. Assets must be assets, which means it will always flow to where the risk-reward ratio is most favorable for investors.
As an example, consider a recently launched DeFi Protocol on Arbitrum, that offers exceptionally high APY for liquidity providers. Suppose an investor holds assets on Ethereum and desires to transfer them to Arbitrum to take advantage of more appealing returns. In such a scenario, the investor would use a bridge, linking the two blockchains, to transfer the assets.
Types of bridges
To start with, there’s no “official thing” as “Types of Bridges” or “Classification of Bridges”, because each difference can be perceived in its own way, but the key difference is how it verify the move of the assets.
Here are 3 main types of bridge verification:
Natively Verified (validators verify the transaction). This is a type of bridge where the chain’s underlying validators verify the transactions. These bridges serve to verify the agreement of a source chain when transferring it to a destination chain. Their validation is focused solely on confirming that the majority of consensus on the source chain supports the transaction, rather than validating the transactions themselves. Notable examples of this type of bridge include the Polygon Proof-of-Stake (PoS) bridge, which verifies the consensus of the Heimdall chain, and the Cosmos Inter-Blockchain Communication (IBC) protocol, which verifies the signatures of another Cosmos chain.
Optimistically Verified (watchers can prove fraud within a delay window). This refers to a specific kind of bridge that allows a group of watchers to detect fraud within a specific time frame. When utilizing optimistic bridging, the system assumes the accuracy of the submitted transaction details and the correct amount. Within a period of 7 days, there is an opportunity for nodes to dispute the accuracy of the details. If a challenge is raised and fraud is proven, the bridging transaction will not succeed. However, if no challenge is raised, the funds will be bridged once the 7-day period elapses. Some examples of such bridges include Hop Protocol, Connext, etc.
Externally Verified (some middleman verifies the transaction). Externally verified transactions in bridges involve the validation of transactions by entities external to the bridge or the participating chains. Here are a few common approaches for externally verified transactions in bridges: External Validators, Oracles, Cross-Chain Communication Protocols, Proof of Stake Consensus Mechanism.
While the verification is one of the most important features in a bridge, because usually externally verified bridges are getting hacked, it is some more complex classification of bridges:
Interoperability Bridges:
Single-Way Interoperability Bridges: Facilitates the transfer of tokens between different chains and enables the transfer of non-token assets (e.g., NFTs, digital assets)
Two-Way Interoperability Bridges: Allows tokens to be transferred back and forth between two chains and supports the bi-directional transfer of non-token assets
Cross-Chain Communication Bridges:
Consensus-Based Bridges: Proof-of-Authority (PoA) Bridge, Threshold Signature Bridge
Messaging Protocol Bridges: Cross-Chain Messaging Protocol (e.g., Cosmos IBC), Cross-Chain Atomic Swap Bridge (allows direct swaps between the blockchains)
Verification Mechanism Bridges:
Natively Verified Bridges: Merkle Proof Bridge, Smart Contract Verification Bridge
Externally Verified Bridges: External Oracle Bridge, External Validator Bridge
Centralization Spectrum Bridges:
Centralized Bridges: Trusted Third-Party Bridge, Federated Bridge.
Decentralized Bridges: Trustless Smart Contract Bridge, Proof-of-Stake (PoS) Bridge
Optimistic Bridges:
Optimistic Rollup Bridge: Assumptions are made regarding transaction validity, with the possibility of subsequent challenges.
Optimistic PoS Bridge: Implements an optimistic approach combined with a PoS consensus mechanism for transaction assurance.
Zero-Confirmation Bridge: Allows immediate transfers without transaction confirmation, assuming low-risk scenario
Risks
The interoperability trilemma, inherent to bridges as well as blockchains, presents itself in the following manner:
Similar to the Scalability Trilemma, there exists an Interoperability Trilemma in the Ethereum ecosystem. Interop protocols can only have two of the following three properties:
Trustlessness: having equivalent security to the underlying domains.
Extensibility: able to be supported on any domain.
Generalizability: capable of handling arbitrary cross-domain data.
Keeping that information in mind, there come the following risks:
Centralization Risk. While the goal of blockchain technology is decentralization, some bridge solutions might introduce points of centralization. This could be due to multi-signature wallets, where control over funds is given to a small group of entities, or reliance on specific validators.
Oracle Risk. Some bridges rely on oracles to fetch and verify information from other chains. Oracles can be manipulated or compromised, leading to incorrect information being used which could affect the operation of the bridge.
Liquidity Risk. Some bridges require liquidity pools to function effectively. If there is a lack of liquidity, this can limit the usability of the bridge and could result in losses for those providing the liquidity.
Economic Attacks. In certain scenarios, it might be profitable for malicious actors to exploit the bridge's economic model, for instance through flash loan attacks or other types of economic manipulation.
Network Congestion. During times of high demand, some networks may become congested, which can slow down or halt bridge transactions, leading to potential losses or inefficiencies.
Custody Risk. Some blockchain bridge designs may require users to give up control of their assets during the bridging process, which exposes them to custody risk.
Future of Bridges
Blockchain bridges currently serve a vital role, allowing for communication and interoperability between disparate blockchain networks. It facilitates the transfer of data and assets between different blockchains, thus solving the problem of siloed networks. However, despite their critical function, it does come with limitations. It can be complex, often requiring specialized knowledge to build and maintain, and carry potential security risks due to their more centralized nature.
The IBC (Inter-Blockchain Communication) Protocol, in essence, provides a more standardized and secure methodology for inter-blockchain communication. It enables different blockchains to talk to each other, facilitating the safe and reliable transfer of assets between these networks, without the need for blockchain bridges. The true potential of the IBC Protocol lies in its decentralized and trust-minimized approach, making it resistant to many of the security issues associated with blockchain bridges.
Complementing the IBC protocol is the modular architecture, a design philosophy that organizes a system into smaller, independent modules, each responsible for a distinct function. In the context of blockchain, a modular architecture offers increased flexibility and scalability. It allows for the implementation of custom modules tailored to specific needs without the risk of disrupting the entire system. This means that blockchains built using a modular design can be more easily upgraded or changed, with new features, mechanisms, or even entire modules added or removed without affecting other parts of the network.
When we envisage the impact of the IBC protocol coupled with a modular architecture, we are looking at a future where different blockchain networks can interact seamlessly, without the need for complex bridges. These technologies will offer a new level of adaptability and security that blockchain bridges might struggle to compete with.
So, the principle of IBC can be quite correctly compared to a postal service:
The sender (Sender Blockchain) writes a letter (IBC Message) to the recipient (Receiver Blockchain) and wraps it in an envelope (IBC Packet).
Takes it to customs (Application Layer), where they check that the letter and envelope are intact and nothing is damaged.
Logisticians (Transport Layer) think about how best to send the envelope (IBC Package) so that it reaches the recipient (Receiver Blockchain) as quickly as possible.
The envelope (IBC Package) arrives at the recipient (Receiver Blockchain), customs (Application Letter) checks the integrity of the package and checks if there is anything prohibited in it (fraud OR incorrect transactions) and hands it over to the recipient (Receiver Blockchain).
However, it's essential to consider that such a shift won't occur overnight. We are in the early stages of these technologies, and there is much left to explore, test, and understand. Moreover, while the IBC protocol and modular architecture certainly hold the potential to revolutionize inter-blockchain communication, it doesn't necessarily mean they will 'kill' blockchain bridges. Rather, they could usher in a new era of coexistence where blockchain bridges might evolve to complement these new developments, serving specific use-cases or niche scenarios.
So, is the death knell sounding for blockchain bridges? Only time will tell. What is clear, though, is that the IBC Protocol and modular architecture are paving the way for a new era of blockchain interoperability, one defined by increased security, efficiency, and flexibility. As these technologies continue to mature and evolve, they could very well reshape our understanding of how different blockchain networks can interact, potentially outshining the existing solutions offered by blockchain bridges.
Conclusion
Blockchain bridges foster interoperability among diverse blockchain platforms, enabling seamless asset and information transfers. As the digital ecosystem grows, these bridges play a pivotal role in ensuring collaboration across chains, promoting a more integrated blockchain world. Future endeavors must focus on security, scalability, and user experience to fully harness cross-chain potential.
In the next segment, we'll delve deeper into the world of cross-chain communication. Specifically, we'll be comparing IBC, LayerZero, and Chainlink CCIP, dissecting their intricacies, advantages, and potential drawbacks. Stay tuned as we continue our exploration into the frontier of blockchain interoperability.