As blockchains move forward in their journey to mass adoption, cross-chain interoperability becomes a must. Interoperability enables different blockchain networks to communicate and share data seamlessly. By breaking down the isolation of each blockchain and promoting decentralized connectivity, interoperability expands the possibilities for decentralized applications and improves scalability. But, how can two separate blockchains communicate with each other? This is why we have blockchain bridges!
Blockchain bridges solve the missing link between different networks to ensure seamless interoperability. But how do these bridges work? This article will guide you through everything you need to know about blockchain bridges.
What Is a Blockchain Bridge?
Blockchain bridges are a mechanism that allows the transfer of digital assets or data between two or more separate blockchain networks. But why do we need bridges? Well, blockchains are isolated networks. That means that each blockchain has its own distinct consensus, protocols, and set of rules.
For example, users cannot use Bitcoin (BTC) on the Ethereum blockchain. That’s because Ethereum only accepts ETH. This is a disadvantage to the blockchain network compared to regular fiat transferring. You can interchangeably send fiat currency to whatever bank you want using credit cards. So, the lack of interoperability in blockchains renders the technology inefficient.
Blockchain bridges however help fix this setback in blockchain technology. Since there is no natural interaction between blockchains, bridges permit cross-chain transfer of assets between multiple networks. Bridges work by being the intermediary that facilitates interoperability, enabling users to move assets between networks in a secure and trustless manner. They are literally “bridging” between multiple chains.
How Does It Work?
So, how do blockchain bridges work? Blockchain bridges work by locking assets and releasing assets between two networks. This means that users don’t really transfer cryptocurrencies between blockchains. Instead, it’s an imaginary transfer of assets. Confused? Let’s dissect it.
- Locking assets: When users want to transfer assets from one blockchain to another, they lock up their assets in a smart contract on the source chain. Let’s say a user wants to send 100 ETH from Ethereum to another network. The locking of coins ensures that the user will not spend them during the transfer process.
- Verification: The blockchain bridge verifies the deposit on the source chain by reaching a consensus among different validators.
- Transfer of assets: Once verification is complete, the blockchain bridge generates a corresponding representation of the locked assets on the destination blockchain. This representation is usually in the form of wrapped tokens. In this case, wrapped ETH. The wrapped ETH is then transferred to the user’s address on the other network.
- Unlocking assets: The user can now redeem the wrapped tokens on the destination blockchain. The user can only unlock the original assets on the source blockchain by locking the ones on the destination chain.
This method is called the wrapped assets method. However, there is another method in which blockchain bridges function: the liquidity pool method. Some blockchain bridges have liquidity pools for their assets that serve as banks. For example, when a user wants to send WETH to ETH, these blockchain bridges allocate funds from their liquidity pool to send the user ETH.
Types of Blockchain Bridges
Blockchain bridges are many and they are different from one another. Here are the two common types of blockchain bridges used:
Trusted Bridges
Trusted bridges are a cross-chain protocol that relies on a group of pre-selected and trusted entities to facilitate cross-chain interoperability. This means that these bridges are centralized. These bridges operate on the premise that the validators are reputable and can be relied upon to handle the transfer of assets.
Since the validation process is not fully decentralized, there is an inherent element of centralization and reliance on the trustworthiness of the selected validators. This can potentially lead to concerns about censorship if the validators are not operating in the best interests of the users.
Trustless Bridges
Trustless bridges don’t rely on centralized entities. Instead, the bridging happens through algorithms and smart contracts. This type of blockchain bridge operates on the principle of decentralization and cryptographic mechanisms to ensure the security and integrity of asset transfer between different blockchain networks. However, they may introduce complexities related to consensus mechanisms, cross-chain communication, and governance.
Bridges vs. Exchanges
But, if users want to use one currency instead of another, why don’t use an exchange? Well, for many reasons. It’s true that exchanges also offer cross-chain interoperability, however, many people prefer blockchain bridges to exchanges.
Here are the key differences between a blockchain bridge and an exchange platform:
Cost:
- Bridge: Users only spend a low amount of money when using a blockchain bridge.
- Exchange: Swapping on an exchange requires the user to spend a significant amount of fees.
Speed:
- Bridge: Transferring assets using a blockchain bridge takes less time than on a regular exchange platform.
- Exchange: Swapping on an exchange can be time-consuming.
Interoperability:
- Bridge: Blockchain bridges primarily focus on the secure transfer of assets or data across blockchains. They ensure that assets can be moved from one blockchain ecosystem to another’s.
- Exchange: Instead of transferring your assets, crypto exchanges work like regular exchanges where they swap a certain currency for another.
Decentralization:
- Bridge: Blockchain bridges can be both centralized and decentralized depending on which bridge type a user chooses.
- Exchange: An exchange platform can be either centralized (CEX) or decentralized (DEX).
Benefits and Drawbacks of Bridges
Blockchain bridges allow cross-chain interoperability between two separate blockchains, which in itself is beneficial. However, blockchain bridges have their drawbacks. Let’s take a look at the pros and cons of bridges.
Benefits
- Interoperability: The most obvious benefit blockchain bridges bring is that they facilitate interoperability between blockchains. Bridges enable assets to move seamlessly between separate networks.
- Decentralization: Trustless bridges leverage decentralized networks and smart contracts reducing the need for centralized authorities.
- Asset Liquidity: Since bridges allow the easy transfer of assets between blockchains, they improve liquidity and ultimately enhance trading and investment opportunities.
- Scalability Solution: Blockchain bridges can offload some of the transaction load from one blockchain to another which helps with scalability issues.
Drawbacks
- Security Concerns: Centralized bridges may lead to security threats if the validators or intermediaries are compromised.
- Complexity: Developing and maintaining bridges can be technically complex.
- Governance Challenges: Trustless bridges sometimes face governance challenges in terms of consensus, protocol, or upgrade.
The Importance of Cross-chain Interoperability
Blockchain bridges offer a powerful solution for achieving interoperability. Cross-chain interoperability is vital to the blockchain ecosystem as it enables seamless communication and asset exchange between different blockchains. It enhances decentralized applications, boosts liquidity, and fosters collaboration. Although they have their setbacks, blockchain bridges enable efficient cross-chain interactions, unlock new use cases, and amplify the overall potential of blockchain technology.