The advancement of decentralized blockchain networks is essential for easy engagement and interoperability. Since the inception of Bitcoin in 2009, the number of blockchain networks has increased dramatically, with diverse designs and functionality.
As the blockchain community expands, restrictions in inter-network communication and data sharing have emerged, raising doubts about decentralization, as blockchain networks are meant to be governed by millions of participants rather than a centralized organization. In addition, because programs designed for one network only operate on that network, this has led to a lower adoption rate.
Various initiatives have been established to link networks, allowing for simple data flow and sharing between networks while also increasing adoption.
In this blog, we’ll look at what blockchain bridges are, how they function, the benefits and concerns associated with them, and the fundamental two types of bridges.
Let’s get started.
What are blockchain bridges (cross-chain bridges)?
A blockchain bridge, also known as a cross-chain bridge, is a technology that links two blockchains and enables users to transfer bitcoin from one to the other. In other words, if you have bitcoin and wish to spend it like Ethereum, you may do so via the bridge.
One of the most serious issues with blockchain was the inability to collaborate. While each blockchain is flexible and relatively efficient as a separate entity, it is constrained by the boundaries of its domain. This can frequently result in high transaction costs and latency.
With blockchain bridges, token transfers, smart contracts, data sharing, and other feedback and specifications between two distinct platforms are all possible.
These blockchains issue different currencies and follow other regulations; the bridge acts as a neutral zone, allowing users to transfer between them seamlessly. For most of us, having access to numerous blockchains over the same network dramatically improves our crypto experience.
Even though the two systems serve distinct goals, this idea is quite similar to Layer 2 solutions. Layer 2 is constructed on top of an existing blockchain; thus, while it improves speed, interoperability is still a problem. Cross-chain bridges are also separate entities that are not part of any blockchain.
Let’s consider an example:
You’re from the United States and considering a vacation to Europe. You have dollars, but you need euros to make a purchase. You may swap your USD for euros for a small fee at a currency exchange.
But what if you want to perform a similar transaction with a different blockchain? This is where blockchain bridges come into play.
Working of the blockchain bridges
Let’s consider the following scenario with two blockchain networks: Chain A and Chain B.
The bridge can be constructed to lock the token on Chain A and create a new one on Chain B when moving tokens from Chain A to Chain B. The overall amount of circulating tokens remain unchanged in this situation, but it is split across the two chains. Chain A will still have fifteen tokens (with five tokens locked) after transferring five to Chain B, but Chain B would have five more.
The minted tokens’ owner can redeem them at any moment by burning (or destroying) them on Chain B and unlocking (or releasing) them on Chain A. The value of each token remains consistent with the chain A market price since Chain A has always had a locked copy of it. This “lock-and-mint” and “burn-and-release” mechanism maintains the number and cost of tokens exchanged between the two chains.
Let’s consider another practical example:
When you have bitcoin and wish to move part of it to Ethereum, the blockchain bridge will store it and convert it to ETH equivalents for you to utilize. There is no movement of any of the crypto involved. Instead, the amount of BTC you wish to send is locked in a smart contract, and you get an identical amount of ETH in exchange. When you wish to convert back to BTC, the ETH you had, or whatever remains of it, will be burnt, and an equivalent amount of BTC will be returned to your wallet.
Advantages of the blockchain bridge
Each blockchain is constructed in a secure ecosystem with its own set of regulations and consensus methods, resulting in individual blockchain restrictions. As a result, there is no straight connectivity between blockchains or token transactions. On the other side, Blockchain bridges allow coins and information to be transferred from one chain to another.
Less network traffic
Blockchain bridges assist in moving traffic from busy blockchains, such as the Ethereum ecosystem, to less congested blockchains, hence improving the Ethereum network’s scalability.
Improved developer experience
Slow transaction processing speeds and high gas prices have caused problems for developers building DApps on the Ethereum network, especially during moments of heavy traffic and congestion. On the other hand, Blockchain bridges allow identical tokens to be processed on other blockchains more quickly and at a cheaper cost. As a result, developers from various blockchains continue to collaborate on new user platforms.
Restriction to monopolization
Cross-chain technology also helps keep markets stable by decreasing monopolization by large corporations. The most popular cryptocurrencies, for example, are Bitcoin and Ethereum, which account for more than 70% of the global market share. As a result of this hegemony, there is limited opportunity in the market for new businesses to test their strategies and get a footing in the current market.
Types of blockchain bridges (in a nutshell)
Bridges come in various types of designs and intricacies. Generally, they are divided into two categories: trusted and trustless bridges.
|Trusted Bridges||Trustless Bridges|
|For their functioning, trusted bridges rely on a central |
organization or system.
|Smart contracts and algorithms are used to manage trustless bridges.|
|They have trust implications about the bridge’s security and the safekeeping of cash. The reputation of the bridge operator |
is primarily relied upon by users.
|They are trustless, which means that the bridge’s security is identical to that of the underlying blockchain.|
|Users must relinquish control over their crypto assets.||Trustless bridges allow users to keep control of their cash by using smart contracts.|
Risks involved in blockchain bridges
Bridges are still in the planning stage. It’s possible that the best bridge design has yet to be identified. Any interaction with a bridge is fraught with danger:
- Smart Contract Risk — the possibility of a programming bug resulting in the loss of user funds.
- Technology Risk — Software failure, buggy coding, human mistakes, spam, and malicious attacks are all potential sources of disruption for users.
Furthermore, since trusted bridges include new trust assumptions, they introduce new risks, such as
- Censorship Risk — bridge operators might hypothetically prevent users from moving assets across the bridge.
- Custodial Risk — bridge operators may conspire to take payments from their customers.
Decentralization was always a key feature of blockchain; therefore, it takes precedence over other operational enhancements like scalability.
Developers are naturally hesitant of significant changes, worried that they would depart from the decentralizing principles. However, they’ve evolved past that attitude, as seen by the blockchain bridges they’ve developed. We may be making progress toward a more innovative and mainstream crypto economy, but any progress is preferable to the status quo.Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.