Blockchain bridges function in the same way that physical bridges do. A blockchain bridge connects two blockchain ecosystems in the same way that a physical bridge connects two physical locations.
Bridges enable communication between blockchains by transferring information and assets.
Scroll down to learn how it works and about the various types of blockchain bridges available.
What Are Blockchain Bridges?
A blockchain bridge is a protocol that connects two economically and technologically distinct blockchains to allow them to interact. These protocols work like a physical bridge connecting two islands, with the islands being separate blockchain ecosystems.
Following the announcement of blockchain technology by Bitcoin in 2009, the number of blockchain networks began to rapidly grow, diverging not only in design but also in functionality.
The primary goal of blockchain technology is to decentralize financial governance for all stakeholders. As a result, despite having different protocols and rules, it is critical for blockchain networks to be able to connect.
This is done so that they can form a larger decentralized ecosystem with broader adoption and advance together through the exchange of innovation, intelligence, and resources.
A blockchain bridge effectively resolves this issue through interoperability, allowing for the secure transfer of crypto assets or data between blockchains with varying governance models. This makes it possible for one blockchain to tap another for services that it does not provide.
For example, despite being the most popular cryptocurrency, Bitcoin cannot be used in the DeFi (decentralized finance) system, nor can you access non-fungible tokens (NFTs), because both are based on the Ethereum blockchain, which limits Bitcoin’s use.
The increased liquidity of a blockchain bridge will allow different networks of services to interact and communicate with one another, thereby broadening the overall user base with more shared resources.
How Do Blockchain Bridges Work?
The token transfer is the most common use case for a blockchain bridge. For instance, suppose you want to move your bitcoin (BTC) to the Ethereum network. One option is to sell your BTC and then buy ether (ETH). This, however, would result in transaction fees and expose you to price volatility.
You can also achieve this goal without selling your cryptocurrency by using a blockchain bridge. When you bridge 1 BTC to an Ethereum wallet, a blockchain bridge contract locks your BTC and generates an equivalent amount of Wrapped BTC (WBTC), an ERC20 token that is compatible with the Ethereum network.
The amount of BTC you want to port is locked in a smart contract, and the equivalent tokens are issued or minted on the destination blockchain network. A wrapped token is a cryptocurrency that has been tokenized. It is linked to the value of the asset it represents and can typically be redeemed (unwrapped) at any time.
This process involves a few steps from the standpoint of the user. To use the Binance Bridge, for example, you must first select the chain from which you want to bridge and then specify the amount. The cryptocurrency will then be deposited to an address generated by Binance Bridge.
Binance Bridge will send you an equivalent amount of wrapped tokens on the other blockchain after the crypto is sent to the address during the time window. If you want to convert your funds back, simply repeat the process.
Bridge Use Cases
The following are some scenarios where you can use a bridge:
Lower transaction fees
Assume you have ETH on the Ethereum Mainnet but want to explore different dApps with lower transaction fees. Lower transaction fees can be obtained by bridging your ETH from the Mainnet to an Ethereum L2 rollup.
Dapps on other blockchains
If you’ve been lending USDT with Aave on Ethereum Mainnet, but the interest rate for lending USDT with Aave on Polygon is higher.
Explore blockchain ecosystems
If you have ETH on Ethereum Mainnet and you want to explore an alt L1 to try out their native dApps. You can use a bridge to transfer your ETH from Ethereum Mainnet to the alt L1.
Own native crypto assets
Assume you want to own native Bitcoin (BTC), but your funds are only on the Ethereum Mainnet. Wrapped Bitcoin can be purchased to gain exposure to BTC on Ethereum (WBTC). WBTC, on the other hand, is an ERC-20 token native to the Ethereum network, implying that it is an Ethereum version of Bitcoin rather than the original asset on the Bitcoin blockchain.
To own a native BTC, you would need to use a bridge to transfer your assets from Ethereum to Bitcoin. This will convert your WBTC into a native BTC bridge. You might also own BTC and want to use it in Ethereum DeFi protocols. This would necessitate a bridge from BTC to WBTC, which can then be used as an asset on Ethereum.
Types Of Blockchain Bridges
Blockchain bridges can be classified based on their functions, mechanisms, and levels of centralization, but in general, there are two types of blockchain bridges: custodial also known as centralized bridges, and decentralized or trustless bridges.
Custodial vs. non-custodial bridges
- They have trust assumptions with respect to the custody of funds and the security of the bridge. Users mostly rely on the bridge operator’s reputation.
- Trusted bridges depend upon a central entity or system for their operations.
- Users need to give up control of their crypto assets.
- They are trustless, i.e., the security of the bridge is the same as that of the underlying blockchain.
- Through smart contracts, trustless bridges enable users to remain in control of their funds.
- Trustless bridges operate using smart contracts and algorithms.
Benefits of blockchain bridges
The ability to improve interoperability is the most important benefit of blockchain bridges.
They allow the exchange of tokens, assets, and data between blockchains, whether between layer 1 and layer 2 protocols or between different sidechains.
WBTC, for example, allows bitcoin users to explore the Ethereum ecosystem’s decentralized applications (dApps) and DeFi services. A blockchain sector that is interoperable is critical to the industry’s future success.
Another benefit of blockchain bridges is that they improve scalability. Some blockchain bridges can handle a large number of transactions at the same time, increasing efficiency. The Ethereum-Polygon Bridge, for example, is a decentralized two-way bridge that serves as a scaling solution for the Ethereum network. Users will benefit from faster transactions and lower transaction costs as a result.
Risks of blockchain bridges
Blockchain bridges, on the other hand, have some limitations. Attackers have taken advantage of flaws in the smart contracts of some blockchain bridges. Malicious actors have stolen massive amounts of cryptocurrency from cross-chain bridges.
Users may be exposed to custodial risks when using custodial bridges. A centralized entity operating behind a custodial bridge could theoretically steal funds from users. When purchasing custodial bridges, look for well-known brands with a long track record.
Transaction rate bottlenecks are another potential technical limitation. The throughput capacity bottleneck of a single chain could stymie large-scale blockchain interoperability.
While a bridge can help relieve network congestion, moving assets to another chain do not solve the scalability problem because users will not always have access to the same suite of dApps and services. Some Ethereum dApps, for example, are not available on the Polygon Bridge, limiting its scaling efficacy.
Finally, blockchain bridges may expose the underlying protocols to risks associated with trust disparities. Because blockchain bridges connect different blockchains, the overall security of the network is only as strong as its weakest link.
The blockchain industry is growing due to constant innovation. A plethora of alternative layer 1 and layer 2 blockchains follow the pioneer protocols, such as the Bitcoin and Ethereum networks. The number of cryptocurrency coins and tokens has skyrocketed.
Blockchain bridges are required to connect disparate rules and technologies. A bridge-connected blockchain ecosystem is more cohesive and interoperable, allowing for greater scalability and efficiency. Researchers are looking for a more secure and robust bridge design in light of numerous attacks on cross-chain bridges.