Blockchains that underlie most cryptocurrencies are designed to operate as siloed ecosystems with limited or no interaction with other chains. This design paradigm works well for many use cases. For starters, it ensures that each blockchain can remain true to its vision, governance model, and economic incentives. It also allows blockchains to be purpose-built for specific use cases.
However, this design has one major drawback: it doesn’t allow for easy interoperability between different chains. This lack of interoperability is a big problem for users who want to stabilize their digital assets. If you hold your money in one cryptocurrency and the price of that currency falls, you have no easy way to transfer your money to another currency without selling off your original investment.
Also, the lack of interoperability makes cross-border payments or exchanges between one cryptocurrency for another a pain in the neck as it requires going through a central exchange.
This is where cryptocurrency bridges come in.
A Crash Course in Cryptocurrency Bridges
A cryptocurrency bridge is a tool that allows for the transfer of assets between two different blockchains. This transfer is done without the need for a central exchange or any third-party involvement.
Bridges are built on the same principles that underlie atomic swaps. Atomic swaps are a type of smart contract that allows for the exchange of one cryptocurrency for another without the need for a central exchange.
Cryptocurrency bridges take this concept one step further by allowing you to transfer the value of digital assets between two different blockchains. This is done by creating a two-way peg between the two chains.
A two-way peg is a smart contract that locks up an asset on one blockchain in exchange for an equivalent amount of the same asset on the other blockchain. You can think of a two-way peg smart contract as a treasure trove or a check that stores the value of assets from the first blockchain and in exchange dishes out an equivalent value of tokens that are operable on the second blockchain.
Once the assets are locked up, they can be transferred between the two blockchains without any third-party involvement.
The Benefits of Using a Cryptocurrency Bridge
There are many scenarios where it would be beneficial for chains to interact with each other through a bridge. For example, a user may want to move their assets from one chain to another to take advantage of different features or avoid volatility, or simply access a wider range of services on the second blockchain.
Bridges also have the potential to help chains that are struggling to scale. Ethereum, for example, has been struggling to scale due to its popularity. By using a bridge, Ethereum could offload some of its transactions onto another blockchain that is better equipped to handle them.
Bridges also have the potential to help new blockchains get off the ground. By using a bridge, a new blockchain can offer its users access to the assets and services of an already established chain.
Risks Associated With Cryptocurrency Bridges
While cryptocurrency bridges have a lot of potential, there are also some risks associated with them.
For starters, because bridges rely on smart contracts, they are only as good as the code that powers them. If there is a bug in the smart contract code, it could allow hackers to exploit the system and steal funds. For example, a recent hack on the Meter.io bridge was said to have been caused by the hacker injecting a malicious code into a Bridge.deposit() function thereby enabling the hacker to take advantage of the protocol’s failure to block direct interaction with the gas tokens. In the end, $4.3 million worth of value was stolen. Bridges have been the target of numerous hacks over the years.
Another risk is that because cryptocurrency bridges connect two different chains, they can be used to attack one of the chains. For example, if a hacker was able to take control of the bridge’s smart contract, they could use it to DDos one of the chains by flooding it with transactions.
Lastly, because bridges rely on smart contracts, they are subject to the same limitations as other smart contracts. For example, if a chain decides to change its consensus protocol, it may not be possible to update the bridge’s smart contract to reflect the change, given that smart contracts are immutable. This could lead to a situation where the bridge becomes unusable and funds are stranded on one or both of the chains. Either way, funds on an on-chain bridge are vulnerable to attacks thereby leading to insurmountable loss.
If you’re interested in using a cryptocurrency bridge, there are a few things you need to keep in mind. First, you need to make sure that the bridge you’re using is reputable and trustworthy. Second, you need to be aware of the risks associated with using a bridge and take steps to mitigate them. Lastly, you need to make sure that the blockchain you’re bridging to is compatible with the one you’re currently on.
In some cases, funds are not lost due to the smart contract’s vulnerabilities but due to the user’s negligence. For example, the recent hack on the Ronin Bridge is reported to have been caused by a social engineering tactic that the hackers used to trick their way into accessing the private encryption keys used to verify transactions on the network. Also, the developers of the Ronin Bridge did not use rigorous security measures while setting up the keys, thereby allowing hackers to maliciously withdraw $540 million worth of Ethereum and USDC stablecoin.
How to Use a Cryptocurrency Bridge
Despite the risks, cryptocurrency bridges have a lot of potential and could play a big role in the future of blockchain technology. If you’re interested in using a bridge, there are a few things you need to keep in mind.
First, you need to make sure that the bridge you’re using is reputable and trustworthy. Second, you need to be aware of the risks associated with using a bridge and take steps to mitigate them. Lastly, you need to make sure that the blockchain you’re bridging to is compatible with the one you’re currently on.
The process of using a cryptocurrency bridge is pretty straightforward. First, you need to send your funds to the smart contract address associated with the bridge. Once your transaction has been confirmed, the tokens will be locked on the original chain, and an equal number of “wrapped” tokens will be issued on the destination chain.
Now, you can use your “wrapped” tokens on the destination chain without having to worry about volatility or security issues. When you’re ready to move your funds back to the original chain, you can simply use the bridge to send the tokens back. Your “wrapped” tokens will be burnt in the process.
Examples of Popular Cryptocurrency Bridges
Finally it’s worth looking at a few examples of famous crypto bridges currently in operation. Here’s a look at some of the most popular bridges by volume:
Kyber Network
The first is the Kyber Network. Kyber Network is a decentralized exchange that allows users to trade a variety of digital assets. Kyber Network uses a protocol called “atomic swaps” to facilitate these trades. Atomic swaps are a type of smart contract that allows two different parties to trade digital assets without the need for a third party.
Kyber Network also has a bridge that allows users to trade between Ethereum and other ERC20 tokens. The Kyber Network bridge is designed to be simple and easy to use.
Harmony Bridge
At the moment, the Harmony Bridge is the only bridge that allows users to trade between ERC20 tokens and BEP2 tokens. The Harmony Bridge is a non-custodial bridge that uses atomic swaps to facilitate these trades. This is a cross-chain bridge between Ethereum, Binance Smart Chain, and Harmony Blockchains. Users can bridge assets such as the BUSD stablecoin, LINK, and any ERC20 token such as USDT, WBTC, and WETH to mention a few.
Arbitrum Bridge
Built as a suite of Ethereum scaling solutions, this bridge features high-throughput, low coast smart contracts that guarantee security in a trustless decentralized ecosystem. The Arbitrum Bridge is built on Arbitrum’s roll-up blockchain which allows for fast and cheap transactions. The Arbitrum Bridge is compatible with any ERC20 token.
This bridge is currently being used by the decentralized lending platform, Compound, to scale its Ethereum-based lending products.
Polygon Bridge
The Polygon Bridge is a bridge that allows users to trade between Ethereum and Binance Smart Chain. The Polygon Bridge is built on the Plasma protocol which allows for fast and cheap transactions. The Polygon Bridge is compatible with any ERC20 token and boasts a 28.8% share of TVL across Ethereum’s bridges.
FAQS About Cryptocurrency Bridges
The benefits of using a cryptocurrency bridge include avoiding volatility and keeping your money safe. Bridges can also help you access different currencies quickly and easily.
Some risks associated with using a cryptocurrency bridge include the possibility of losing your funds if the smart contract is not executed properly. There is also a risk that the bridge may not be compatible with the tokens you want to trade.
A crypto bridge’s popularity is based on its reliability and security. Some of the most popular cryptocurrency bridges include Kyber Network, Harmony Bridge, Arbitrum Bridge, and Polygon Bridge which has a share of over 20% of the total value locked in bridges across the Ethereum network. Wormhole, a multi-chain bridge, is also popular.
There are two main types of cryptocurrency bridges: custodial and non-custodial. A custodial bridge is one where a central authority holds the private keys for the assets being transferred. This central authority can be a company, foundation, or individual. A non-custodial bridge, on the other hand, does not require a central authority. The private keys are instead distributed among a network of nodes. Non-custodial bridges are often seen as more secure since there is no single point of failure. Custodial bridges are generally faster and easier to set up; however since they do not require a network of nodes, they tend to be more vulnerable to attacks.
An atomic swap is a type of trade where two parties can trade different digital assets without the need for a third party. Atomic swaps are often used to trade between different cryptocurrencies.
The future of cryptocurrency bridges looks promising. With the increasing popularity of cryptocurrencies, there is a growing need for bridges that will allow users to trade between different blockchain ecosystems. Cryptocurrency bridges are still in their early stages, however, and more development is needed to make them more user-friendly and secure.
