Since DeFi's Total value lock (TVL) spike in 2021, blockchain bridges have emerged as a breakthrough solution, allowing for seamless value transfers between independent blockchain networks. Let's learn how it works and the important role blockchain bridges play in connecting the DeFi ecosystem.
Each blockchain operates as a separate distributed network with its own token, resulting in digital assets on each blockchain that cannot be directly converted to another blockchain. For example, you cannot transfer assets from Avalanche to Solana because they are in two separate ecosystems. The blockchain bridge was born to solve this difficult problem, ensuring cross-chain interoperability. They break down barriers between blockchain networks, allowing them to interact effectively. The bridge is capable of converting assets on blockchain A into equivalent assets on blockchain B.
More than just transferring assets, blockchain bridges also facilitate the exchange of data between different blockchains.
Working mechanism of blockchain bridge
Blockchain bridges are platforms that support the transfer of assets and data between blockchain ecosystems. They can be decentralized, centralized or hybrid. The two main asset transfer methods of blockchain bridges are Wrapped Asset and Liquidity Pool.
Imagine you drive a car to the border between two cities separated by a bridge, you will put the license plate number on city A to drive the car with the same license plate number on city B. With Wrapped Asset, users get the equivalent asset on blockchain B by “wrapping” the original asset of blockchain A. For example, you can use a cross-chain bridge to convert SOL on Solana to Wrapped ETH (WETH) on Ethereum. The smart contract will lock the sent SOLs to take them out of circulation, then release the corresponding WETH. Conversely, when converting WETH on Cardano back to ETH on Ethereum, WETH will be burned in exchange for ETH.
Some blockchain bridges, such as “Cross-Chain Bridge” and Synapse Protocol, use Liquidity Pool for multiple asset types. These Liquidity Pools operate similarly to banks. When a user wants to convert WETH from Polygon to ETH on Ethereum, Cross Chain Bridge will use resources from its Liquidity Pool to send ETH to the user on Ethereum. Bridges often implement staking and farming programs, encouraging users to lock their assets into the pool to receive periodic rewards, thereby providing resources for the Liquidity Pool.
Classification of cryptocurrency bridges
Based on the developer and the level of control given to the user, blockchain bridges are classified into two main types: Trusted Bridges and Trustless Bridges.
Trusted Bridges are controlled by a centralized entity. During the conversion process, control of assets is transferred from the user to this intermediary. Users must "trust" in the reputation and efficiency of the centralized unit in carrying out transactions. Binance Bridge is a prime example of Trusted Bridges. This type of bridge is suitable for those who prioritize speed and low gas fees over cross-chain security at the expense of decentralization.
In contrast, Trustless Bridges does not depend on any centralized entity. They rely on algorithms and smart contracts to operate. Users are responsible for their own assets because there is no centralized system to do it for them. Trustless Bridges are more decentralized than Trusted Bridges. While they may not be as cheap, they are more secure if the underlying technology has been proven to be reliable.
Application of blockchain bridge
Blockchain bridges have many useful applications in the cryptocurrency industry. They allow you to convert cryptocurrencies to other b lockchains, explore dApps on other ecosystems, convert assets at lower costs, participate in Airdrops and increase decentralization.
Risks when using bridges
Besides the benefits, blockchain bridges also have some potential risks such as the risk of centralized entities for Trusted Bridges, fraud via fake websites, and attacks on smart contracts and network security.
Blockchain bridges are popular targets of attacks due to the large amount of assets they store. According to statistics, more than 2.5 billion USD has been stolen from blockchain bridge attacks. Some typical attacks with huge damage include:
Ronin Bridge: $522 million
Wormhole: $320 million
Nomad: $200 million
Multichain: 3 million USD
Why use a bridge instead of an exchange?
There are many ways to transfer assets between different blockchains. Besides bridges, cryptocurrency exchanges also offer cross-chain functionality.
For example, if a user has BTC and wants to convert to ETH, they can do a swap on centralized exchanges like Binance. They can then keep the ETH in their Binance wallet or transfer it to another Ethereum wallet.
However, there are many reasons why users prefer using bridges over exchanges:
Costs: The process of swapping on exchanges and transferring wallets can incur various fees. Meanwhile, users only need to pay the fee once when using the bridge. Furthermore, the transaction fees of most bridges are very low compared to exchanges.
Speed: Using an exchange usually takes longer than a bridge.
Participate in Airdrops: Blockchain ecosystems often incentivize users to interact on decentralized on-chain by rewarding Airdrops. Users using centralized exchanges will not be eligible to participate in these Airdrop programs.
Decentralization: Finally, many users choose bridges for security and privacy reasons. Using a bridge gives them greater control over their assets.
Conclude
Bridges play an important role in connecting different blockchains, opening the door for the explosive growth of DeFi. However, users need to be cautious and thoroughly learn about the risks before using the bridge. Choosing a reputable bridge and applying the necessary security measures will help you take full advantage of this breakthrough technology.
