Blockchain Bridges: An Industry Overview Rootstock Smart Contract Platform Secured by the Bitcoin Network

Bridging to public chains is supported on Kaleido through products such as our NFT Platform. The existing blockchain protocols lack interoperability, which is critical for the entire web3 ecosystem to grow further. Lack of interoperability means two different blockchain protocols can’t communicate well with each other independently.

  • Successful attacks on “blockchain bridges” have become increasingly common over the past couple of years, and the situation with Ronin is a prominent reminder of the urgency of the problem.
  • Along with numerous benefits to decentralized apps and DeFi, blockchain bridges help reduce or eliminate transaction fees when users wish to convert one type of crypto to the other for trading.
  • Smart contracts enable users of trustless bridges to keep control of their finances.
  • We’ll also demonstrate the concept through example scenarios to understand why blockchain bridging is a boon for developers, industries, and people worldwide.
  • One of the primary benefits of bridging in blockchain is the ability to expand the reach and functionality of a particular blockchain.

Multichain uses secure multi-party computation to run threshold signature schemes to create public keys and sign messages sent between chains. These nodes trustlessly control externally owned accounts with public addresses corresponding to the split private key. These accounts are used to store and transfer assets to the target chain which simply checks if the sender’s address is trusted rather than verifying the message itself. Without a focus on security, it is inevitable that more oversights, and therefore exploits and losses, will occur.

What Are Wallet Addresses? How Do They Make Crypto Transfers Possible?

Thus, blockchain bridges are a necessity to allow the transfer of data, value and information efficiently among different protocols. Cross-chain bridges are an important cryptocurrency and digital asset management tool, but they are not without risks. When used as intended, cross-chain bridges enable a vast upgrade to blockchain network capabilities.

Due to that, it is vital for users to do their due diligence before interacting with any bridging ecosystem, which includes checking the documentation, the code and the maturity of the system. This is a means of protecting their crypto while the developers find a solution to overcome the limitations of current blockchain bridging protocols. The centralized entity behind a custodial bridge could theoretically steal users’ funds. When using custodial bridges, go for established brands with long-term track records.

I’m a freelance writer covering the latest trends in blockchain technology. Crypto Incident Response, a rapid response retainer service for cryptocurrency businesses and large organizations that are high-risk targets for cyber attacks, to help streamline this process. Thus, local verification is mostly used in cross-chain liquidity protocols involving liquidity pools that exist independently on each chain.

Risks of Blockchain Bridges

For example, users cannot use bitcoin on the Ethereum blockchain or ether on the Bitcoin blockchain. So if one user (let’s call him Billy) who holds all his funds in BTC wants to pay another user (let’s call her Ethel) for an item but Ethel only accepts ETH, Billy hits a wall. He can take extra steps to buy ETH or trade a portion of his BTC for ETH, but BTC cannot be sent directly to Ethel. This can be seen as a major disadvantage in comparison to fiat currencies and credit cards, which can be used across several providers. Joshua Tobkin is the CEO and a co-founder of SupraOracles, a blockchain oracle company that strives to bridge the gap between traditional capital markets and the Web3.0 ecosystem.

The Advantages of Bridges

In eleven separate hacks, October alone has seen $718 million stolen from Decentralised Finance protocols. Easy cross-chain transfer of assets and arbitrary data between blockchains. These bridges are focused on specific ecosystems and are used to support the movement of assets across a focused region within the ecosystem. Specialized bridges are designed to facilitate faster and cheaper cross-chain transactions. Ith a trustless bridge, users are in complete control of tokens and get full privacy when exchanging tokens.

In simple terms, a blockchain bridge can be considered a simple information exchanger between networks. Although blockchain bridges can be used for other things like converting smart contracts and data transfer, the most common use case is token transfer. While employing trusted Blockchain Bridges to transfer assets, operators can theoretically intervene in a transaction and even restrict users from transferring assets across different blockchain protocols. Censorship is among the most significant risks posed to the entire crypto ecosystem, including some of the pioneering Ethereum, Solana, and Polygon blockchains. Unidirectional blockchain bridges don’t allow users to transfer assets to their native blockchain. Such type of Blockchain Bridges ensures irreversible asset transfers across blockchain networks.

Explaining cross-chain crypto bridges

When a user redeems their tokens back on chain A, the tokens on chain B are sent to a burn address. The ability to port tokens from a congested or high-fee blockchain to a high-performance blockchain can be revolutionary. Low-fee and high-performance blockchains are especially beneficial to Web3 gaming projects and microtransactions. One recent hack was Solana’s Wormhole bridge, where 120k wETH ($325 million USD) was stolen during the hack.

In early 2020, hackers were able to drain billions of dollars from multiple cross-chain bridges. The blockchain research firm Chainalysis estimates that crypto bridge hacks now account for about 70% of the total cyberattacks in the blockchain industry. How blockchain bridges work” by reflecting back on the basics of blockchain.

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This is possible thanks to what we call ‘wrapped tokens’ – synthetic representations of existing tokens that are designed to support a different token standard. According to Chainalysis, at this rate, 2022 will surpass 2021 as the most “profitable” year for hacking in blockchain history. The PowPeg is one of the most secured peg-based on the multi-signature (multi-sig) system. The bridge is decentralized and is secured by the underlying Bitcoin blockchain.

The tokens are typically deposited into a bridge smart contract on the first blockchain, where they are locked and will be unlocked when the transaction is reversed. The pools of locked tokens represent a honey pot for any hacker, and when compromised, the value of any unbacked wrapped tokens on the destination chain is called into question. The Wormhole bridge attack in February and the Ronin bridge heist in March compromised a combined $1bn in assets, illustrating what can go wrong when bridges are not architected securely. Truly trustless bridges, which do not require users to place trust in a centralized or federated group of operators, can solve the urgent issues around security for bridges and their users. Trustless bridge solutions are critical for the long-term vitality of bridges and blockchains themselves. Multichain is a cross-chain messaging protocol derived from what was formerly Anyswap, a cross-chain token swap protocol.

Censorship Risks

Such an isolated nature goes against the fundamental principles of decentralization. This limits decentralized interactions and creates economic growth, trade, and innovation hurdles. As few blockchain bridges can manage several transactions, they also help address the scalability difficulties. For example, if you need to exchange $BTC for $ETH, you only need to deposit the $BTC into the bridge and choose to withdraw in $ETH to convert your Bitcoin to Ethereum. The bridge will create an identical quantity of $ETH on the Ethereum blockchain while locking the $BTC in a smart contract. The bridge would employ a mint-and-burn mechanism to limit the number of tokens available, the bridge would employ a mint-and-burn mechanism.

Risks of Blockchain Bridges

Like the currency exchange we made for EUR, we need a mechanism to move our ETH from Ethereum to Arbitrum. In this case,Arbitrum has a native bridgethat can transfer ETH from Mainnet onto Arbitrum. When working with Chainlink on layer-2 chains and sidechains, you must export your LINK tokens from Ethereum to the target chain using a cross-chain bridge. Follow this video for an example of moving LINK tokens from Ethereum to Polygon.

Although both blockchain platforms have different ownership and governance structures, blockchain bridges allow them to work securely in conjunction with each other. So, for example, if you have bitcoin and would like to swap it for Ethereum, you can do that using a blockchain bridge. Despite their capabilities of integrating two blockchain softwares, a bridge is an independent entity and is not owned by any individual blockchain. However, the continuous developments of blockchain networks have resulted in one network being practically cut off from another.

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Blockchain bridges are fundamental to achieving interoperability within the blockchain space. Bridge nodes are required to understand what is happening on both of the chains that they are connecting. For smart contracts on various chains to trust that actions have been completed on extraneous networks, they require valid cryptographic signatures from pre-authorized entities. In order for an asset to transfer from one blockchain to another, it must be “disabled” on the originating network, and an equivalent version is minted on the receiving side. These are typically known as “wrapped” tokens — they are not the same original token, as it is just not possible to have an exact token replication across chains.

Risks of Blockchain Bridges

By creating interrelationships between blockchains, cross-chain bridges also cause their security to be intertwined. Additionally, the complex relationships between “wrapped” assets on different blockchains make tracking the “true” value of an asset difficult in the wake of an attack. Blockchain bridge projects to improve interoperability among different blockchain networks.

Asset Transfer Mechanisms

There are the pioneer protocols like the Bitcoin and Ethereum networks, followed by a myriad of alternative layer 1 and layer 2 blockchains. A blockchain bridge is a protocol connecting two economically and technologically separate blockchains to enable interactions between them. These protocols function like a physical bridge linking what is a blockchain bridge and how it works one island to another, with the islands being separate blockchain ecosystems. A blockchain bridge is a protocol connecting two blockchains to enable interactions between them. If you own bitcoin but want to participate in DeFi activity on the Ethereum network, a blockchain bridge allows you to do that without selling your bitcoin.

The immense TVL held by bridges make them more attractive targets than ordinary protocols. In each of the aforementioned cases, the vulnerability exploited was not related to the bridging logic of the protocol, but instead to smart contract bugs and operational oversights. Even the most carefully written code and best audit practices are bound to miss bugs as the number of chains onboarded and the number of features enabled increase. For that reason, bridges need to be configured to work securely not just on an amortized basis, but more importantly under the worst conditions. Trusted bridges are sometimes called “custodial bridges” because a protocol’s leaders directly custody each user’s crypto.

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