Since the Bitcoin white paper was published in 2008, blockchain technology has gained significant advancements. Since then, a profusion of blockchain networks with a wide range of intended uses has been developed. One of the main benefits of blockchain technology is the promise of decentralization, which enables networks to be managed, owned, and controlled by numerous, perhaps hundreds or even millions, of stakeholders and users as opposed to the more traditional, more centralized corporation model.
However, even though the number and frequency the size of blockchain networks keep increasing, they continue to be largely isolated from one another, much like isolated islands with their populations and economies that are unable to exchange knowledge, information, or value with the outside world.
In addition to restricting decentralization, the absence of contact between blockchain networks also prevents the technology from developing and being relevant by putting restrictions on innovation, economic growth, and free trade.
Applications created for one network typically only function within that network, which restricts their potential for broader adoption. With each L1 blockchain and L2 scaling solution having its special features and trade-offs, Web3 has developed into an ecosystem. The need to transfer assets across chains grows along with the variety of blockchain technologies. We need bridges to meet this demand.
Bridge in Blockchain explained
A blockchain bridge, also known as a cross-chain bridge, is a bridge built on the blockchain function exactly like the ones we are familiar with. A blockchain bridge connects two blockchain ecosystems, much like a real bridge connects two actual locations. By transferring data and assets, bridges help blockchains communicate with one another. And also, connecting two blockchains enables interactions between them.
Although the two chains' protocols, laws, and governance structures may differ, they can nevertheless securely interact thanks to the bridge.
The capacity to link and communicate with the many existing blockchains is made possible by the Crypto Bridges or Bridges, which also increase the utility and breadth of cryptocurrencies and the ecosystems that have been created around them.
How bridges work in blockchain
A blockchain bridge enables you to participate in DeFi activities on the Ethereum network if you already own bitcoin but want to do so without selling it. To achieve interoperability within the blockchain ecosystem, blockchain bridges are essential.
You must first comprehend what a blockchain is to comprehend what a blockchain bridge is. Some of the most important blockchain ecosystems include Bitcoin, Ethereum, and BNB Smart Chain. These platforms use various consensus protocols, coding languages, and system regulations.
As a result, blockchain bridges enable interoperability, allowing digital assets and data maintained on different blockchains to communicate. The foundation of the internet is interoperability: To communicate with one another, machines all over the world use a standard set of open protocols. Blockchain bridges are necessary for the blockchain ecosystem, where numerous unique protocols exist, to enable similar ease of sharing data and value.
A token transfer is the most typical application for a blockchain bridge. For instance, you might want to send your bitcoin (BTC) to the Ethereum network. One method is to sell your BTC and buy ether (ETH).
This method involves a few steps from the user's perspective. For instance, to use the Binance Bridge, you must first choose the chain from which to bridge and enter the amount. The cryptocurrency will subsequently be deposited to a Binance Bridge-generated address. Binance Bridge will deliver you an equivalent quantity of wrapped tokens on the other blockchain after the cryptocurrency is sent to the address throughout the time window. If you want to convert your money back, follow the same steps.
Let's check an instance :
You are an American who is traveling to Europe. Although you have USD, you must spend EUR. You can use a currency exchange to convert your USD to EUR for a small fee.
What should you do if you wish to carry out a comparable exchange using a different blockchain? Imagine you want to convert your Ethereum Mainnet funds to Ethereum Arbitrum funds. We require a method to transfer our ETH from Ethereum to Arbitrum, just as we did for the currency exchange we built for the EUR. Such a transaction is made possible through bridges. In this situation, ETH can be moved from Mainnet to Arbitrum via a native bridge that is available in Arbitrum.
The need for Blockchain bridges
Blockchain's incapacity to collaborate was one of its main issues. Each blockchain is constrained by the boundaries of its area, despite being flexible and relatively effective as a standalone entity. Most frequently, this can result in expensive transactions and congestion.
This issue is resolved by blockchain bridges, which allow for the transfer of tokens, the exchange of data and smart contracts, as well as feedback, instructions, and other things between two separate platforms. Blockchain bridges assist in bridging these divisions and connecting the disparate crypto ecosystems. Tokens and data can easily be exchanged between blockchains that are connected.
Blockchain bridges offer further advantages besides facilitating cross-chain transactions. Users can access new protocols on other chains, making it possible for developers from other blockchain communities to work together. In other words, blockchain bridges will be essential if the blockchain industry is to become interoperable in the future.
However, blockchains have unique rules and consensus methods and evolve in closed contexts. This prevents them from interacting naturally and prevents tokens from moving freely between blockchains. Some bridges link blockchains, enabling the exchange of data and tokens between them.
Blockchain bridges and their types
Although there are many diverse bridge designs, they can be broadly categorized into two groups: more centralized bridges that depend on trust or federation and are known as trustless bridges, which are more decentralized. While users of centralized bridges must have faith in a middleman to use a specific app or service, centralized bridges are dependent on some sort of central authority or system to function. We can divide this into two :
Centralized bridge :
A centralized entity that manages the bridge and transfers tokens between the chains it supports is referred to as a centralized bridge. In essence, it functions like an exchange, but rather than swapping pairings, it just accepts a token and transfers it to you on the destination network of your choice. The OKex Bridge is an illustration of this kind of bridge.
A decentralized bridge is entirely managed by smart contracts, with no single central authority having any control over the cash. Multichain is a prime example of this kind of bridge.
In a nutshell, we may state that. In contrast, trustless bridges are trust-minimized and don't make any additional trust assumptions beyond those of the underlying domains, trustworthy bridges have trust assumptions.
Decentralized blockchain bridges, also known as trustless bridges, exist to enhance user confidence when moving their money. Individual networks contribute to the transaction validation process in these systems, making them function just like a real blockchain. Using a trustless bridge will ease your mind if you're concerned that your coins will end up in the wrong hands. Decentralized bridges have the drawback of being a freelance-based service. Because they are simply compensated to fulfill your request and not to remedy problems, this might become a liability when mishaps occur.
Benefits of bridges
As blockchain technology advances, many initiatives address the issue by building network bridges. As we migrate to a world where blockchains and systems are interoperable, applications will be able to build on one another's services and strengths.
The capacity to increase interoperability is the key advantage of blockchain bridges. They make transferring tokens, assets, and data possible between distinct sidechains, layer 1 and layer 2 protocols, and other blockchains.
Blockchain bridges also help to increase scalability. Some blockchain bridges can process numerous transactions at once, increasing productivity.
Permits users to move between Layers 1 and 2. For instance, users of the Ethereum network can move their tokens from Layer 1 (the Ethereum network) to Layer 2 networks, such as Polygon, Arbitrum, Optimism, and xDai, among others.
Since it enables the user to look for networks with better commissions to conduct their business, it helps to reduce operational costs. And it also brings users from other networks to those with more promising potential.
Bridges allow DApps to exploit the advantages of different blockchains and transfer assets and information across chains, boosting their functionality. Additionally, provide users with access to fresh platforms and let them benefit from various chains. Developers from different blockchain ecosystems work together to innovate new user-facing platforms.
Bridges are built to serve a variety of needs. They can be designed to exchange any kind of data, including smart contract calls, decentralized identifiers, off-chain data from oracles like stock market price feeds, and much more. They are also used on another network.
Risks attached to bridges
Bridge construction is still in its infancy. It's possible that the best bridge design hasn't yet been found. Any sort of bridge interaction involves risk, but all risks are custodial.
Custodial Risk: This type of risk has the potential to lead bridge operators to conspire in the theft of users' money. The user's funds are at risk in the event of an smart contract malfunction, user error, hacking of the underlying blockchain, bad intent on the part of bridge operators, or hacking of a trusted bridge. Solana's Wormhole bridge was one recent target of a hack, during which 120k wETH (USD 325 million) were taken. According to blockchain analytics company Elliptic research, a wormhole allowed the attacker to manufacture 120,000 worth of wrapped Ethereum without having to stake any ETH. After that, the attacker withdrew the free WETH. Jump Trading, a high-frequency trading company, covered the losses to save the protocol.
Bridges are essential for consumers exploring other ecosystems and onboarding users onto Ethereum L2s. However, users must be aware of bridges' compromises, considering the hazards associated with using them.
Due to the trust gap, blockchain bridges may expose the underlying protocols to dangers. Since blockchain bridges link many blockchains together, the security of the connected systems is only as strong as its weakest link.
Some largest bridges ever
DeFi Llama estimates that as of March 2022, $21.8 billion of crypto was trapped in bridges.
Wrapped Bitcoin, the largest blockchain bridge with $10.2 billion in total value locked, accounts for over half of the bridge market (TVL). With nearly $7 billion in TVL, DeFi Llama rates Multichain as the biggest cross-chain bridge.
According to a dashboard on Dune Analytics, the Avalanche Bridge, which has roughly $6 billion in TVL, is the largest Ethereum bridge, followed by Polygon ($5 billion TVL) and the Fantom Anyswap Bridge ($4.2 billion TVL).
Decentralization has always been a defining characteristic of blockchain, elevating it above other operational advancements like scalability. Constant innovation is what propels the blockchain industry's growth.
Bridges built using blockchain technology show they've moved past that idea. Even though the crypto economy may be lurching toward innovation and normalization, any advancement is preferable to remaining stuck in the past. They require blockchain bridges to be interconnected since they use different regulations and technologies. An ecosystem of bridges connecting a blockchain is more coherent and interoperable, providing prospects for increased scalability and efficiency. Cross-chain bridges have been attacked frequently, prompting the hunt for a more secure and durable bridge.