Blockchain technology has made countless technological advancements since its white paper emergence in 2008. Since then, numerous blockchain networks have been created with various designs and intended functionalities.
The decentralized promise ensures that blockchain will be owned or operated by numerous stakeholders as opposed to a corporate and centralized model of governance. Such ownership and operational structure have been major contributors to the success of blockchain technology.
However, the continuous developments of blockchain networks have resulted in one network being practically cut off from another. Such an isolated nature goes against the fundamental principles of decentralization. This limits decentralized interactions and creates economic growth, trade, and innovation hurdles.
Several blockchain projects have begun to address the problem by building blockchain bridges between the networks. Blockchain bridges enable interoperability and allow the exchange and use of information to build on each other’s networks. Advancements in blockchain bridges can lead to several benefits for the DeFi industry, including increased liquidity and the ability to develop an interconnected network of services.
What is A Blockchain Bridge?
Simply put, a blockchain bridge, sometimes referred to as a cross-chain bridge, connects one blockchain technology with another. It allows the transfer of tokens or data between blockchain technologies.
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.
One of the major benefits of these bridges is that they increase the interoperability of blockchain technologies by enabling them to exchange and use information. Like all other technologies, blockchain bridges come with a few risks such as, risk of theft and exploitable vulnerabilities in digital contracts.
Why Do We Need Blockchain Bridges?
Despite all the advancements in blockchain technology, lack of ability to work and integrate with one another remains a primary reason for the need for blockchain bridges. Blockchain technologies work on decentralized models and have their own governance and communities. Although the data stored on these networks is transparent, the infrastructure of these networks is designed to support an independent and autonomous ecosystem. Such an isolated nature, combined with limited communication between blockchain platforms, prevents the progress of DeFi and other decentralized applications.
Blockchain bridges help interoperate the rules, tokens, and protocols of different blockchain networks. This provides users with integrated possibilities for ecosystems that otherwise would have been left isolated.
Along with the benefit of integration possibilities, blockchain bridges provide collaboration opportunities to developers from different blockchain communities. Considering all the benefits that blockchain bridges offer, it can safely be said that they are a vital part of future collaborations in the blockchain industry.
How Do Blockchain Bridges Work?
Users normally have to pay transaction fees when they send crypto from one network to another. However, that’s not the case with blockchain bridges. Blockchain bridges facilitate interaction between different blockchain technologies by using wrapped tokens and smart contracts.
These smart contracts can be better understood as digital contracts that are stored on a blockchain and automatically execute when predefined conditions are met. On the other hand, wrapped tokens represent the original crypto assets on a different blockchain.
When users send crypto from one blockchain network to another using a blockchain bridge, the amount is not practically transferred.
Instead, the amount gets locked in a smart contract while users gain access to an equal amount of wrapped tokens. When users wish to convert back to the crypto they started from, the excess amount of wrapped tokens gets burned, and an equal amount is deposited back into their wallet.
Benefits of Blockchain Bridges
Blockchain bridges enable interoperability between different blockchain technologies and allow individuals like Bitcoin users and developers access to integrated possibilities.
Some benefits of blockchain bridges include:
Interoperability in Decentralized Apps
Along with increasing communication and collaboration between different platforms, blockchain bridges connect a parent and a child chain. This enables blockchain developers to deploy decentralized applications on DeFi platforms. The opportunities opened by the bridges allow developers to innovate in protocols, resulting in new and creative solutions.
Increased Scalability
Blockchain bridges increase scalability by providing second connections between blockchain technologies. This allows the transaction load to be distributed across a crypto ecosystem. This is an important benefit for blockchain technologies as it allows them to scale their operations and manage transaction loads during peak timings.
Enable DeFi Progress
Blockchain bridges cater to the innovative and collaborative requirements of the DeFi ecosystem. Their ability to overcome the barriers of development and DeFi that exist within a single blockchain network makes them a critical factor in the growth of DeFi.
Fee Reduction
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.
Risks of Blockchain Bridges
Despite all the advantages of blockchain bridges, there are some risks and limitations that come with blockchain bridges. Some of the vulnerabilities of blockchain bridges have been attacked, which has led to massive amounts of embezzled crypto.
Some risks associated with centralized and decentralized blockchain bridges are:
Censorship Risks
Censorship risks are common to blockchain bridges that depend on an entity or system for their operations. These risks arise when certain transitions are not in the best interest of those operating the bridge, as they have the power to prevent transfers using the bridge.
Risk of Theft
Another risk that arises from the use of centralized bridges is the risk of theft. This occurs due to collusion formations where a centralized bridge's governing bodies steal the users' digital assets.
Smart Contract Risks
Smart contract risks are associated with a decentralized bridge. These issues arise when poorly developed smart contracts create exploitable opportunities and vulnerabilities that attackers can target.
Types of Blockchain Bridges
A blockchain bridge is developed on various different structures. Some bridges are governed and operated under a centralized structure. Others work using digital contracts, and wrapped tokens do not require the intermediary governance structure.
The four main types of blockchain bridges include:
Centralized Bridges
These types of bridges have a centralized control body. They allow users to make crypto transitions on a 1:1 ratio. Exchanges using a trusted bridge block the user’s digital assets in their network and offer similar ones in another network.
When the user wishes to return digital assets to the original network, the remaining assets are burned, and the base assets are then unlocked. This bridge requires mandatory identification and has significantly high transfer fees.
Decentralized Bridges
Decentralized bridges, commonly called trustless bridges, work based on smart contracts connecting with different blockchain technologies. As a result of the smart contracts, exchange operations are carried out automatically if conditions are met.
Transactions in a decentralized bridge are similar to those in trusted bridges. However, they don’t require any mandatory verification and don’t collect users’ data.
Side Chain Bridge
Side chain bridges connect a parent blockchain and a child blockchain network. Side chain bridges come with the implementation of smart contracts and help users move their digital assets across a blockchain network.
Although side chain bridges connect the parent and the child network together, they don’t interfere in the process in any way. However, they do allow token holders access to decentralized applications.
Multi Chain Bridge
Unlike others, multichain crypto bridges interact with many blockchain technologies and are used when exchanging crypto tokens across many blockchain technologies.
What Role Do Blockchain Bridges Play in DeFi?
The decentralized ecosystem and the layer-1 and layer-2 expansions of blockchain networks have shown rapid growth in recent years. Such developments emphasize that blockchain bridges are critical to the success and future of DeFi and provide numerous benefits to DeFi users. They help solve the lack of communication and collaboration in the decentralized finance (DeFi) ecosystem by connecting one blockchain network to another. This allows users to transfer their digital assets among blockchain technologies with ease.
Blockchain bridges increase the interoperability of the DeFi ecosystem, which can result in the development of decentralized apps built on each other's services and strengths. Along with this, blockchain bridges will allow the decentralized ecosystem to have increased liquidity and expand the available resources.
Final Thoughts
Blockchain bridge development is driven by the constant and dynamic evolutions in the behavior of DeFi users. Considering that each blockchain has separate operational and governance structures, the possibility for innovation and collaboration is limited.
Blockchain bridges, thus, help in removing such hurdles and allowing users to interact and collaborate among different blockchain technologies.
These bridges use smart contracts and wrapped tokens as trading mechanisms between blockchain networks. Although they provide various benefits, such as increased scalability and fee reductions, they are vulnerable to risk and serve as a critical factor for the growth and advancements in the DeFi ecosystem.
