Cross-Chain Bridges Explained: How They Work and Why Security Is Critical

tl;dr

• Cross-chain bridges enable the transfer of assets, data, or information between isolated blockchain networks, fostering interoperability.
  
• Interoperability is crucial to unify isolated blockchain ecosystems and improve user experiences.
  
• Cross-chain bridges support multi-chain strategies for dApps and tokens, increasing trading volume, liquidity, and profitability.
  
• Users benefit from access to diverse opportunities, lower fees, and enhanced asset accessibility.

Understanding Cross-Chain Bridges

A cross-chain bridge is a technology that enables the transfer of assets, data, or information between different blockchain networks. It allows users to interact with multiple blockchains, unlocking interoperability by facilitating communication and transactions between otherwise isolated ecosystems. Bridges are especially useful for transferring tokens, using dApps across chains, and optimizing blockchain functionalities.

What Types of Cross-Chain Bridges Are There?

Different bridges in the web3 space serve unique functionalities and needs. As these bridges serve different purposes, they operate in different ways. Here is a brief rundown of various types of bridges:

Trust-based bridges

Trust-based bridges depend on a centralized authority or custodian to facilitate cross-chain asset transfers. While trust-based bridges tend to be less prone to hacks, they require trust in that authority. Trust-based bridges can support any asset, and all cross-chain bridges tend to fall between the category of trust-based bridges or trustless bridges.

Trustless Bridges

As its name suggests, trustless bridges operate without a central authority. Instead, trustless bridges work only via nodes or smart contracts depending on the specified bridge.

Wrapped Asset and Altcoin Bridges

Some bridges focus on transferring wrapped assets and altcoins cross-chain. The assets tend to be wrapped versions of popular cryptocurrencies such as Wrapped Bitcoin (WBTC) or less popular altcoins and tokens. Bridging these assets cross-chain opens up trading and arbitrage opportunities, as well as a higher trading volume on DEXs for the asset.

Stablecoin Bridges

Other bridges focus on various stablecoins such as USDT, USDC, and DAI. Some stablecoin bridges have integrated different bridging protocols, such as Circle’s CCTP for USDC or Chainlink’s CCIP to facilitate the movement of these assets.

NFT Bridges

While NFTs may have lost a bit of their glamour, some bridges focus on transferring digital collectibles or NFTs cross-chain. NFT bridges tend to be a bit rare, as market interest in digital collectibles has waned, and meme coins are the recent craze.

How do Cross-Chain Bridges Work?

There are several types of bridging methods used in cross-chain bridges, depending on the specific bridge. Here are a few common methods:

Lock and Mint

One of the most common ways cross-chain bridges work is by using a lock and mint functionality. In this method, tokens are locked on one chain and an equivalent number of tokens is minted on another. Should the user want to bridge assets back to their original chain, the newly minted version of the tokens are burnt and the locked tokens are released.

Burn and Mint

As its name suggests, with burn and mint, tokens are burned (destroyed) on the source chain, and equivalent native tokens are minted on the destination chain. This method tends to be popular for one-directional token bridging, as the source tokens are removed from circulation.

Liquidity Pool Bridging

With liquidity pool bridging, a token that exists on multiple blockchains is deposited into a large multi-chain digital pool of liquidity. This liquidity pool allows users to swap the token between supported blockchains easily and liquidity providers earn a small fee every time a user bridges tokens. This approach eliminates the need for complex minting or burning processes, as tokens are exchanged directly from the liquidity pool.

Atomic Swap Bridging

In atomic swap bridging, users swap assets on the source chain for assets on the destination chain. Two users agree on the token swap terms, such as the amount and blockchain networks involved. The process relies on hash time-locked contracts (HTLCs), to ensure the transaction is secure and happens simultaneously on both chains or not at all.

The Importance of Interoperability in Web3

Blockchains are like isolated islands, each with its unique ecosystem but with limited interaction. The isolation of blockchains creates a massive problem for the end user, which bridges help solve by transferring information and assets, essentially unifying these islands.

As blockchain and web3 grow as an industry, so too will the importance of interoperability.

The Need for Cross-Chain Asset Transfer

For many top dApps and tokens, a multi-chain strategy is essential to stay competitive and maximize profits, avoiding the limitations of operating on a single, isolated chain. Smaller tokens and dApps also benefit by increasing trading volume through listings on multiple DEXs across different chains.

From a user’s perspective, cross-chain asset transfers allow access to diverse opportunities, such as lower fees or unique features.

Key Benefits of Cross-Chain Bridges

There are a handful of different benefits to using cross-chain bridges, both for dApps and tokenized web3 projects as well as for the average user. For dApps, cross-chain bridges can help grow their ecosystem. Bridging tokens can increase their trading volume and liquidity by getting listed on multiple DEXs.

Users, on the other hand, can benefit from a better user experience and easier access to assets.

Challenges and Risks

The greatest risk with cross-chain bridges is their security. As the popularity of cross-chain bridges continues to grow, so does the risk of attacks. Hackers are constantly seeking vulnerabilities in these protocols, making it essential to stay secure.

Most hacks occurred due to flaws in smart contracts. Other hacks occurred due to insufficient validation schemes, social engineering, and as we’ve seen with Harmony Horizon Bridge, private key compromises.

Notable Bridge Hacks

Ronin Network (March 2022): $540-625 Million Stolen

Attackers exploited five out of nine validator nodes through social engineering, taking advantage of a weak 2-of-5 validation scheme to approve malicious transactions. Stolen funds were later moved to the Bitcoin blockchain using RenBridge to avoid detection.

Poly Network (August 2021): $611 Million Stolen (Later Returned)

This remains the largest crypto hack in history. The attacker exploited vulnerabilities in Poly Network's smart contract code. Remarkably, the stolen funds were eventually returned by the attacker, earning widespread attention.

Wormhole Bridge (February 2022): $325 Million Stolen

The attacker exploited an insecure and outdated function in the bridge’s code, minting 120,000 Wrapped ETH on Solana. Parent company Jump Crypto covered the loss, ensuring the network's stability.

Nomad Bridge (August 2022): $190 Million Stolen

A flaw in Nomad Bridge’s functionality allowed multiple actors to drain funds. Despite the chaotic nature of the attack, $36-37 million of the stolen assets were eventually recovered.

Harmony Horizon Bridge (June 2022): $100 Million Stolen

Attackers compromised the private keys of two validators, leveraging Harmony Horizon Bridge’s 2-of-5 validation scheme. The exact method used to compromise the keys remains unknown, highlighting critical vulnerabilities in the bridge's security model.

The Future of Cross-Chain Bridges

The future of cross-chain bridges lies in enhanced security and enjoyable user experiences. With past hacks highlighting vulnerabilities, bridges are prioritizing robust safeguards and will likely explore internal and external insurance protocols, to protect user funds. ChainPort, for example, utilizes fund segregation in their lock and mint bridging method with 98% of funds kept in multi-sig cold storage, and is planning on integrating an insurance protocol.

As technology advances, users may no longer notice the blockchain they’re interacting with, focusing instead on the tokens in their wallets. Cross-chain bridges will enable effortless asset transfers, making blockchain ecosystems more interconnected and user-friendly.