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Definition and purpose of cross-chain bridges
The cryptocurrency market is growing, and the number of blockchain networks is growing too. Each of them has its own isolated ecosystem, specific rules, and its own consensus mechanism, so they cannot interact with each other. As the upward trend in their numbers is likely to continue in the future, the problem of interoperability is becoming more acute. One solution is cross-chain bridges, allowing assets to be transferred from one blockchain to another.
Cross-chain bridges are a decentralized protocol designed to transfer assets and information between different blockchains. Such solutions are capable of sending tokens of almost any type, including NFT.
Types of cross-chain bridges and their functionalities
Although the number of cross-chain bridges is increasing every day, they can be conditionally divided into the following types:
Degree of centralization
Interconnect solutions are centralized and decentralized. In the first case, we are talking about full control over the transfer by the controlling body, which in some cases requires confirmation of identity.
As a rule, such services are used either by large asset holders or by token creators who want to transfer their products to another network. They mainly apply the Lock and Mint principle.
Decentralized bridges exclude intermediaries, so they can be used without restrictions.
Transfer direction
If the protocol involves sending an asset in one direction without the possibility of reverse transfer, then it is one-way. In the case of work in both directions – bilateral.
Supported networks
Bridges can also be divided into individual and multichain. The first option is decentralized applications that offer to send assets exclusively to one network. For example, in sidechain. Accordingly, multichain bridges support a larger number of blockchains.
The functioning of blockchain bridges directly depends on their principle of operation. So, at the time of writing, there are three options:
For convenience, two terms will be used below: network X (where the assets are sent from) and network Y (where they are sent).
Lock and mint
In this configuration, the user blocks a certain number of funds in the smart contract of the X network. After the oracle confirms the transaction, the cross-chain bridge releases an equivalent asset on the Y network, which is also called wrapping. That is, a copy of the original token is created.
Moreover, in many cases, the wrapped version can be exchanged back. To do this, you need to send it to the address of the smart contract on the Y network, which will burn funds and thereby unlock the original tokens on the X network.
Burn and Mint
This method is the exact opposite of the previous one. Using a smart contract, the user burns assets on network X, and then the protocol reissues them on network Y. As a result, instead of a wrapped version, original tokens are sent to him, but on a different blockchain. This option can work in both directions.
Lock and Unlock
In this case, we are not talking about any burning. The user blocks a specific token in the smart contract of network X, which is sent to a special liquidity pool. After confirmation, funds from the same pool are unlocked for him, but already on network Y. As a result, he will receive the original version of the asset.
Such work is provided at the expense of liquidity providers, whose funds are used to carry out transfers, for which they receive financial incentives from the cross-chain bridge. This is very similar to the activities of decentralized exchanges based on an automatic market maker.
Benefits of cross-chain bridges
In general, you cannot do without bridges. However, we decided to highlight the most important benefits of using them:
- Cost reduction and efficiency. Bridges allow you to use different blockchains and still have a choice, for example, for the cost of a transaction. It only improves the user experience.
- Improving the liquidity and accessibility of ecosystems. Cross-chain bridges increase liquidity and asset availability for users, allowing them to move between different blockchains. This opens up new investment horizons, enabling interaction with a wider range of assets across different platforms and fostering portfolio diversification.Bridges also strengthens the infrastructure of decentralized applications, facilitating their widespread adoption.
- Scalability and efficiency. Distributed networks regularly face difficulties due to bandwidth and processing speed limitations. Cross-chain protocols are used to solve these problems by dispersing transactions across numerous chains.This improves overall network scalability and efficiency. Blockchain ecosystems are able to meet the growing needs of users and applications without compromising overall performance.
- Fostering innovation. Cross-chain bridges create an enabling environment for collaboration where developers can take advantage of different blockchains for innovative solutions.
By stimulating the development of projects related to the compatibility of distributed systems, the evolution of decentralized technologies is accelerated. Developers are able to easily implement the functionality of various blockchains, which opens up new scenarios for using dApps.
Cross-chain bridges are complex mechanisms that work with different ecosystems that can use completely different programming languages. They also assume the concentration of assets in a single smart contract on a specific blockchain. In the peculiarities of the implementation of such solutions, there are wide opportunities for hackers.
Ensuring that data stays the same when blockchains interact is also a challenge. Differences in consensus mechanisms and network management models create potential inconsistencies and vulnerabilities. To maintain the integrity and security of shared data in decentralized systems, robust solutions, and interoperability standards are required.
Different blockchains work with different trust models and protection protocols.
This complicates the interaction because you need to integrate disparate systems without reducing security and the level of decentralization.
Scammers skillfully use these “imperfections” and find loopholes and bring down their attacks. In this regard, such large media personalities as Vitalik Buterin see the future of blockchains without bridges, as they put platforms at risk.
Tech journalist Tomio Geron also expressed the opinion that cross-chain bridges hinder the development of blockchain due to the increased level of risk of using a smart contract.
Another challenge is legislative norms and their observance. Regulatory uncertainty, and the need to comply with the rules of various jurisdictions – all serve as an obstacle to the introduction of bridges.
Conclusion
Still, the development and utilization of cross-chain bridges are essential for advancing blockchain technology and fostering a more interconnected and efficient ecosystem. While regulatory challenges exist, there is optimism in the ongoing efforts by companies to enhance the architecture of bridges and ensure their reliability. These initiatives aim to streamline cross-chain interoperability and enhance the user experience, ultimately driving innovation and growth in the blockchain space.
Also, despite the uncertainties surrounding the regulatory environment and potential risks associated with attacks on blockchains through bridges, the continued development and adoption of cross-chain interoperability solutions hold promising prospects for the future of blockchain technology. By addressing regulatory challenges and enhancing the resilience of cross-chain bridges, the industry is poised to unlock new opportunities for decentralized finance, asset transfer, and other transformative applications in the blockchain ecosystem.
