What is Cross-chain Bridge? In the cryptocurrency world, cross-chain bridges refer to technical solutions for asset transfer and interaction between different blockchains. With the rapid development of blockchain, many different types of blockchain have emerged, so cross-chain transfer has become a common demand among users. Cross-chain transfers allow users to transfer crypto assets from one blockchain to another to participate in DeFi protocols on the target blockchain or to obtain more rewards. As the blockchain industry develops towards a multi-chain parallel future, cross-chain bridges and other technical solutions have emerged. In addition to common cross-chain bridge solutions, some major cross-chain technology solutions will be introduced below.
What is a cross-chain bridge?
The simple concept of a cross-chain bridge is a virtual "bridge" that allows different and independent blockchains to transfer data and assets across chains.
Traditionally, blockchain technology has faced some challenges in enabling cross-chain communication. In short, since each blockchain has unique rules and mechanisms, there is usually a lack of direct cross-chain communication mechanisms between different blockchains. This means that assets from other blockchains such as Bitcoin cannot be directly used on the DeFi platform on Ethereum.
Using the analogy of the world being made up of different countries, a blockchain network is like a map of the world made up of many different countries. In this analogy, "cross-chain" is equivalent to "cross-border" travel, which requires following set procedures while taking processing time and cost into consideration. The cross-chain bridge is similar to the infrastructure connecting two blockchain "countries", like a bridge or tunnel.
Basically, the goal of cross-chain solutions is to enable users to transfer cryptocurrencies between different blockchains and facilitate the use of decentralized applications (dApps) on other blockchains. Cross-chain bridges are critical infrastructure to achieve this goal.
Why is cross-chain needed?
Since each blockchain has its unique services and technical advantages, it attracts users to join and stay in their respective "countries". If the user wishes to use features and applications on another blockchain, they will need to move the tokens to the target blockchain, similar to exchanging currency to the currency of the destination country before departure, such as if you are traveling to Japan. Convert Hong Kong dollars to Japanese yen.
For example, network fees (gas fees) on the Ethereum blockchain may be considered high by users, so some blockchains billed as "Ethereum killers" strive to provide lower fees and faster transaction processing times. Advantage. These advantages may attract users to transfer cryptocurrencies to these "more cost-effective" blockchains through cross-chain bridges to save subsequent transaction costs.
Another major cross-chain demand stems from the pursuit of higher DeFi returns. We all know how to invest tokens into DeFi protocols to earn returns, and the benefits offered by various DeFi platforms on different blockchains vary. Therefore, the pursuit of higher returns is one of the common reasons for cryptocurrency cross-chains.
Specifically, how big is the cross-chain demand in the blockchain field? According to data as of December 31, 2022, more than $7.7 billion in cryptocurrency has been transferred to other chains through cross-chain bridges. With the future development of multi-chain parallelism, cross-chain technology solutions will become the main trend in the market.
The 4 most commonly used cross-chain bridges
Cross-chain bridge is a connection channel between different independent blockchains, aiming to achieve cross-chain transmission. Below, we will introduce the 4 most popular types of cross-chain bridges and explain their operating modes.
Cross-chain bridge: transfer cryptocurrencies between two blockchains
A common type of cross-chain bridge is designed for a specific combination of blockchains with the purpose of facilitating the transfer of cryptocurrency between those blockchains. The way this cross-chain bridge operates is relatively simple: it locks tokens on the source chain and mints corresponding synthetic tokens on the target chain.
For example, we can take the example of Polygon Bridge, a cross-chain bridge specifically designed to transfer tokens from Ethereum to the second layer network Polygon. Let's say you want to transfer USDC tokens on Ethereum to the Polygon chain. Within Polygon Bridge’s user interface, you can select the USDC token in your Ethereum wallet and sign and approve transactions. Once you deposit USDC into Polygon Bridge, the cross-chain bridge will lock the corresponding amount of USDC in the smart contract on Ethereum. After confirming that USDC has been successfully locked, Polygon Bridge will mint USDC tokens of equivalent value on the Polygon chain. You will receive these USDC tokens on the Polygon chain in your wallet and can use them in various dApps on the Polygon chain.
In Polygon Bridge, smart contracts are used to lock your Ethereum USDC tokens. When you wish to transfer crypto back to Ethereum, you need to send Polygon USDC tokens to the Polygon Bridge again. During the token redemption process, Polygon Bridge will receive your Polygon USDC tokens, perform a burn operation, and then mint the corresponding number of Ethereum USDC tokens. This way, you can use these USDC tokens on Ethereum.
What is Wrapped Token?
A wrapped token is a token designed to facilitate the cross-chain movement of cryptocurrency. According to the design, each packaged token “contains” an equal amount of the original cryptocurrency, which is equivalent to having a 1:1 mortgage asset value.
Let’s say you want to use Bitcoin (BTC) on a DeFi platform on Ethereum and earn rewards, but don’t want to exchange your Bitcoin for other tokens. You can choose to convert your Bitcoin to Wrapped Bitcoin (wBTC). wBTC is a token that complies with the Ethereum blockchain standard and adopts the ERC-20 token specification. Each wBTC represents the same value as Bitcoin. You can use wBTC for trading and other operations on decentralized exchanges (DEX) and DeFi platforms directly on the Ethereum blockchain.
Here’s the brief process for converting BTC to wBTC: You’ll need to make a token exchange request to a member of the wBTC merchant network, similar to transacting with an exchange store. After verifying your identity, the merchant receives your Bitcoins and initiates the wBTC minting process with the custodian of the wBTC Merchant Network. The merchant will use a smart contract to lock Bitcoin (BTC), then obtain the corresponding amount of wBTC from the custodian (i.e. mint new tokens), and send the wBTC to you. If you want to redeem original Bitcoin (BTC), this requires a "token burning" process, where the custodian destroys the wBTC and unlocks the original Bitcoin and sends it to you.
WBTC is one of the most popular wrapped tokens, along with renBTC and wETH (wrapped ETH). By the end of January 2023, there were over 176,000 wBTC (worth approximately $4 billion) in circulation.
Cross-chain DeFi applications
In addition to solutions that provide cross-chain services for specific blockchains, there are also many decentralized finance (DeFi) applications specifically designed for cross-chain purposes. These applications enable users to perform cross-chain operations directly through the DeFi platform, thereby reducing tedious operating steps. In addition, another selling point of cross-chain DeFi applications is to provide one-stop services, allowing users to enjoy cryptocurrency liquidity on multiple blockchains.
Cross-chain DeFi protocols currently on the market include THORChain, Multichain, Synapse, etc., which provide one-stop cross-chain services for multiple blockchains such as Bitcoin, Ethereum, and Binance Smart Chain (BSC).
Many of the cross-chain DeFi platforms use a "liquidity pool" structure to provide cross-chain cryptocurrency liquidity.
To explain how cross-chain DeFi works in a non-technical, simple way, the cross-chain DeFi platform first creates liquidity pools on both chains.
For example, let's say you want to exchange Bitcoin (BTC) from the Bitcoin blockchain to Ethereum (ETH) on the Ethereum chain. Behind the scenes, the cross-chain DeFi platform will conduct two transactions on the liquidity pools on these two chains. When you deposit Bitcoin, you will receive ETH tokens sent by the liquidity pool on the Ethereum chain. From the user's perspective, the process is like a simple redemption operation completed within a platform.
Cross-chain bridge: suitable for cross-chain transmission of multiple blockchains
With the increase in emerging blockchains and the increasing market demand for cross-chains, a number of blockchain protocols have emerged specifically designed for various cross-chain uses, aiming to allow users to transfer cryptocurrencies from one chain to multiple Blockchain. Let us take the cross-chain bridge protocol Wormhole (wormhole network) as an example to illustrate.
Wormhole is a multi-chain, multi-purpose cross-chain information transfer protocol that is compatible with a variety of blockchains, including Ethereum, Solana, Binance Smart Chain, Polygon, Fantom, Aptos, Arbitrum, etc. . The core component of the Wormhole cross-chain network is a node network composed of 19 guardians. The role of these guardians is to track activities that occur on different blockchains to ensure the accuracy and security of cross-chain transactions.
In cross-chain transactions, Wormhole will send messages from the source chain. Guardians receive and verify these messages, then sign and lock the tokens on the source chain. Transactions need to be verified by more than two-thirds of the guardians. Once verified, Wormhole delivers the message to the target chain, which then processes it and completes the cross-chain transaction.
Multi-purpose cross-chain protocols have become a rapidly expanding sector. In addition to the Wormhole wormhole network, others include LayerZero, Axelar, and Nomad.
Interoperable blockchains: Polkadot, Cosmos
In addition to cross-chain bridges, there are also some blockchains themselves that can realize interoperability between blockchains. They start from the infrastructure level of the blockchain and further promote the transmission of cross-chain cryptocurrency. For example, interoperable blockchains such as Polkadot and Cosmos strive to facilitate easier and more secure interoperability between different blockchains.
Polkadot adopts a "dual chain" architecture, including a relay chain and a parachain, to realize the interconnection function of the blockchain. Polkadot allows various types of organizations and blockchain projects to create parachains of their own design and control, and connect these parachains to Polkadot’s main chain relay chain. The Relay Chain also connects Polkadot’s parachains to other blockchains, such as Bitcoin and Ethereum, through cross-chain bridge functionality.
In Polkadot’s blockchain structure, parachains connect to Polkadot by renting slots on the relay chain. It is estimated that Polkadot currently supports up to about 100 parachains, which means there are approximately 100 slots available. Due to the limited number of slots, Polkadot mainly allocates slots in the market through on-chain auctions.
Cosmos, on the other hand, is positioned as the "Internet of Blockchains" and focuses on accelerating the speed and efficiency of cross-chain communication between blockchains. In the Cosmos blockchain architecture, the main chain Cosmos Hub connects different "zones" (Zones, independent blockchains) in the entire Cosmos network. Cosmos is designed to facilitate the free transfer and trading of data and assets between different "zones" through the Inter-Blockchain Communication Protocol (IBC).
Unlike Polkadot, the Cosmos ecosystem does not use an auction to allocate resources. Cosmos wants anyone to be able to create their own blockchain in the Cosmos ecosystem using the Cosmos Software Development Kit (Cosmos SDK). Currently, there are more than 272 applications and services provided by different organizations or projects on the Cosmos network, including Binance Smart Chain, Terra and crypto.org.
Inter-Blockchain Communication Protocol (IBC)
The Inter-Blockchain Communication (IBC) protocol is part of Cosmos’ Stargate upgrade in March 2021 and provides the infrastructure for cross-chain technology. Through IBC, different self-designed blockchains are connected in the Cosmos ecosystem, enabling communication between blockchains.
IBC provides the infrastructure for communication between different blockchains, establishing secure cross-chain connections and verifying data transmission. Its goal is to enable blockchain developers to create a variety of cross-chain applications, including token transfers, NFT transfers and oracle data sources. For example, through IBC, blockchains in the Cosmos ecosystem can use liquidity from the Ethereum blockchain and record events in the Corda distributed ledger.
Is cross-chain bridge safe?
With the widespread application of blockchain technology, users' demand for cross-chain transmission of cryptocurrency continues to increase. Cross-chain bridges bring many benefits to users, but they also bring potential risks, such as theft and hacker attacks. At present, the scale of cryptocurrency assets locked and circulated on cross-chain bridges has increased significantly, making cross-chain bridges more likely to become targets of hacker attacks and making asset security the focus of market attention.
The security issues of cross-chain bridges mainly involve its trust mechanism, especially the transaction verification and asset custody verification processes on cross-chain bridges.
Different cross-chain bridges adopt different trust mechanism designs. One common type of cross-chain bridge is the centralized cross-chain bridge. Centralized cross-chain bridges rely on a few organizations or institutions to verify transactions and act as custodians of cross-chain assets. The custodian is responsible for confirming that users have deposited tokens on the blockchain involved, and is responsible for operations such as locking and minting tokens.
As of the third quarter of 2022, there have been 13 attacks on cross-chain bridges, and the total value of stolen cryptocurrency is approximately US$2 billion. Source: Chainalysis.
Simply put, using a centralized cross-chain bridge often requires trusting the reputation of the cross-chain bridge operators and verifiers. This design often creates a single point of failure and is prone to vulnerabilities and risks.
Under this design, attack targets can be cross-chain asset custodians, issuers, and a small number of other key participating organizations. For example, a hacker could attack and control a majority of validators to steal user funds or manipulate the system to create false token proofs, instructing a cross-chain bridge to mint on another blockchain without locking the tokens. New token.
Potential risks of using decentralized cross-chain bridges
For the trustless decentralized bridges emerging on the market, their design goal is to reduce reliance on trust in individual organizations or operators, and instead rely on the security of the underlying blockchain architecture. To put it simply, decentralized cross-chain bridges mainly manage the cross-chain process of assets by using oracles, smart contracts and algorithms.
Smart contract vulnerabilities remain an important issue for decentralized cross-chain bridges. For example, hackers might exploit vulnerabilities in smart contracts to forward information, or instruct new tokens to be minted or redeemed by changing or corrupting oracle data across a chain bridge.
Vulnerabilities and hacker attacks in smart contracts have led to the large-scale theft of assets across multiple cross-chain bridges in recent years, including the theft of $600 million from PolyNetwork in 2021 and the theft of the Wormhole wormhole network in 2022, involving a cryptocurrency value of $3.25 One hundred million U.S. dollars. However, this does not mean that users will completely give up using cross-chain bridges, as there are some risks associated with cross-chain bridge technology. In the future outlook of multi-chain parallel blockchain, the importance of cross-chain bridges in the entire blockchain ecosystem cannot be ignored. Therefore, cross-chain bridges need to provide effective solutions to security issues to promote the development of the entire blockchain field.
How to transfer cryptocurrency between different blockchains? Use an exchange
A common way to transfer crypto assets between different blockchains is to use a cryptocurrency exchange, where tokens are exchanged or withdrawn to different blockchains through the exchange platform. Choosing a trustworthy exchange allows users to exchange tokens easily and safely.
For example, if you want to exchange Bitcoin (BTC) for Ethereum (ETH), you can first deposit the BTC into a cryptocurrency exchange. If the BTC/ETH trading pair is provided on the exchange platform, you can directly use BTC to purchase ETH. If you don't have this trading pair, you can make two transactions, such as selling BTC for stablecoins first, and then using the stablecoins to buy ETH. Finally, you can withdraw ETH to your cryptocurrency wallet and select ETH on the Ethereum chain during the withdrawal process.
It is important to note that if the exchange does not support the blockchain token of your choice, you may not be able to deposit or withdraw the blockchain token you want.
Finally, as the blockchain field develops in the direction of multi-chain parallelism, cross-chain solutions have become the key to opening up different blockchain ecosystems, thus enhancing the application value of the overall blockchain ecosystem. For users, cross-chain technology can realize interconnection between independent blockchains, thereby expanding the value of cryptocurrency assets in users’ hands.
As the market demand for cross-chain transfer of cryptocurrency continues to increase, various innovative cross-chain technologies are rapidly emerging, such as wrapped tokens (Wrapped Token), cross-chain bridges, cross-chain DeFi applications and interconnected blockchains, etc. These are important trends in the market to watch.
However, in addition to the advantages of cross-chain technology, we cannot ignore the risks it brings. Before deciding which cross-chain technology to use, users should consider their goals, time constraints, and tolerance for risk.
