Blockchain networks are closed systems that have barely any way of communicating with the outside world. You always have to use an intermediary, like a fiat getaway, if you want to transfer money to a blockchain from a bank account. But these limitations don’t only pose a problem for the outside world – interoperability is an issue within crypto itself.
Have you ever wanted to move money from your Bitcoin wallet to Ethereum? Yeah, you might have noticed that it’s impossible. Bitcoin and Ethereum are two separate blockchains. They don’t support each other’s token standards. It’s like coming to Europe with dollars in your hands and wanting to pay without buying euros first.
Interoperability has been a long-term issue for the crypto industry. Luckily for everyone, the situation has gotten better over the years. Crypto bridges (or cross-chain bridges) are here to save the day by enabling you to wrap crypto assets and use them wherever you want.
A crypto bridge is a protocol that facilitates cross-network transactions between two or more blockchain networks. Also called cross-chain bridges, these protocols allow investors from one network to participate on another network without having to obtain new assets. A classic example is wrapping Bitcoins and using your coins inside Ethereum’s DeFi ecosystem.
In the previous example, the investor gains access to numerous features which he can’t enjoy on the original network. Bitcoin doesn’t have any smart contracts. Bitcoin also doesn’t have any decentralized lending protocols, decentralized exchanges, or platforms for providing liquidity. These limitations prevent Bitcoin investors from utilizing DeFi instruments.
Blockchain networks are isolated islands in the context of interoperability. However, many crypto bridge protocols help investors overcome these limitations by creating ways to use an asset from one network on a different network. For example, Ren Protocol wraps Bitcoin and allows you to use your coins on Ethereum.
Wrapping protocols represent the most popular type of crypto bridges. Wrapping cryptocurrencies works by locking assets into a smart contract and creating a new token on the other network. If you have 10 BTC and want to move your coins to Ethereum, you could wrap those coins and receive 10 WBTC which you can use there.
Wrapped assets have the same value as their native coins. The only difference is that one is the original, and the other is sort of a derivative. For some they’re also a variation of crypto synths. But whichever name you hear, they all work the same way. And if you ever change your mind, you can simply unwrap your coins.
What’s so great about crypto bridges is that they create symbiotic relationships between blockchain networks. Bitcoin developers don’t have to overhaul their network and incorporate smart contract functionality for their users to participate in DeFi. They can simply create a bridge that allows their users to leverage the features of a different network.
Can’t be bothered to pay hundreds of dollars in fees for an Ethereum transaction? Switch your ETH to Fantom and utilize the protocol’s fantastic scalability capabilities. Not satisfied with yield farming opportunities? Bridge your crypto to AVAX and provide liquidity to decentralized protocols offering lavish APY and APR rates.
There are almost no negatives and far too many positives to mention for the powers of interoperability. Interoperability makes crypto easier for new investors from an UX perspective. And for battle-hardened veterans, solutions such as crypto bridges make investing and trading much faster. It also creates a way to completely avoid centralized exchanges and rely purely on decentralized protocols.
Nothing is perfect. Even though the concept of a crypto bridge sounds great, there’s a tiny detail that I haven’t mentioned yet: they’re easy to hack. In 2022 alone we have seen too many exploits targeting crypto bridges. And according to a recent report from Chainanalysis, cross-chain hacks accounted for 69% of this year’s crypto exploits.
Devastating events such as the Nomad $190 million hack, BSC’s $100 million exploit, and Solana’s $325 million crime on Wormhole have caused concern among all bridge users. Can you really trust protocols tackling interoperability when hackers are capable of stealing more than a billion dollars worth of crypto assets with little to no repercussions?
A single crypto bridge contains hundreds of millions, making them eyecandy for any experienced hacker. Even audited protocols have suffered hacks – which means that even the most reputable bridges are not fully secure. To make matters worse, the nature of smart contracts doesn’t make it any simpler to create a fool-proof solution for exploits.
However, there is one logical conclusion everyone can gather from this: security is the number one objective developers have. When centralized crypto exchanges were mostly targeted a few years back, executives decided to focus on security and make their exchanges impenetrable. As a result, exchanges today are one of the least affected entities hacking-wise.
My advice for staying safe is to bridge assets only when you need to. Get in, and get out. This might be more difficult when wanting to lend assets or participate in yield farming pools. But hey, you can only have so much risk piled up. If a bridge doesn’t feel safe, simply exchange assets through an exchange that preferably doesn’t require KYC.
There are multiple types of crypto bridges. Some transfer assets only in one direction, while others force you to exchange custody for security. So carefully read the various types of crypto bridges and pick your poison.
As the name implies, uni-directional bridges are only capable of transferring assets to one network. So if you bridge assets to a different network, you can’t bridge them back. Think of it as sending something down a black hole.
Bi-directional bridges let you send assets between two networks in both directions. You can both send and receive crypto assets. This basically means you can unwrap your coins after wrapping them and vice-versa. Bi-directional bridges are the best solution for those wanting to frequently bridge between blockchain networks.
Trusted bridges represent centralized variations of cross-chain bridges that rely on a centralized entity. For example, such a bridge might depend on a 3rd-party platform to verify crypto holdings cross-chain and facilitate bridging. This solution is also non-custodial, meaning you have to give away control of your crypto while you bridge.
Trustless bridges follow the decentralized ethos of crypto by not relying on anyone but themselves. They’re non-custodial and never force you to give your crypto to anyone but yourself. The decentralization aspect of trustless bridges is made possible with the help of smart contracts. But that’s where the catch lies. Rather than relying on a 3rd-party, you rely on the security and safety of a crypto bridge’s underlying smart contracts.
Crypto bridges provide a fantastic solution to blockchain’s interoperability problem. They assist investors with utilizing each network’s beneficial (and sometimes exclusive) feature without forcing them to exchange assets. Moreover, they solve the final dilemma, other than scalability, that modern blockchain systems face.
Crypto bridges work by wrapping coins and generating wrapped versions of your assets on a targeted blockchain. Some bridges let you bridge assets to a network, while others allow you to unwrap assets and send them back where they came from. There’s also the question of decentralization. Not all crypto bridges are decentralized; some rely on 3rd-parties.
But the most controversial aspect behind crypto cross-chain bridges is their security. More than a billion dollars worth of crypto assets have been lost in 2022 alone due to bridge exploits. Famous hacks include the Nomad hack, last summer’s BSC hack, and most recently, a very painful hack on Wormhole.
There is currently no grand solution for getting rid of hackers and avoiding these pesky bridge exploits. But one thing is for sure, exploits have turned security into the number one priority for developers. If centralized exchanges could go from being the most hacked to the least hacked platforms, so too can crypto bridges.
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