What is a bridge? The meaning of the bridge for the crypto ecosystem

June 6, 2022 - Around 5 mins mins to read

After years of research and development, the cryptocurrency ecosystem is gradually taking shape into a multi-chain structure. There are over 100 active community blockchains, each with its own unique application, security, and user base.

Such a market structure requires the interconnection of disparate networks. Many people realize this led to an explosion of a separate type of project called a bridge. So what is a bridge and what is its role in the cryptocurrency market?

What is a blockchain bridge?

Simply explained, it is a system for exchanging information between two or more blockchain systems. The information here can be property, contract, or transactional information. The design typically includes the following components:

Monitor: There is usually an actor, be it an oracle, a validator, or a relayer, that monitors the state of the source chain.

Message Passing / Forwarding: After an agent receives a message, it needs to pass information from the source chain to the destination chain (destination chain).

Consensus: In some models, a consensus is required between the parties monitoring the source chain to forward that information to the destination chain.

Signature: Actors need to cryptographically sign the information sent to the destination chain.

There are about 4 different types of bridges, each with its own strengths and weaknesses:

By Asset: Created for the purpose of providing access to an asset class from another chain. These properties are often fully mortgaged “wrapped” properties. Example: Bitcoin converted to wBTC for use on Ethereum. These bridges are easy to implement but very limited in functionality.

On-chain: A bridge between two blockchains typically supports simple operations around locking & unlocking tokens on the source chain and creating “wrapped” assets on the destination chain. These are typically low in complexity but are not more extensible either.

An example is Polygon’s PoS bridge, which allows users to transfer assets from Ethereum to Polygon and vice versa, but is limited to those two chains.

By application: An application that provides access to two or more blockchains, but only for use within that application. The application itself benefits: instead of having separate versions of the entire application on each blockchain, it often has lighter conversion modules per blockchain. A blockchain implementing the application’s connection modules has access to all other connected blockchains, creating a connection effect.

The downside is that it’s hard to extend that functionality to other applications (e.g. from lending to exchange). Examples include Compound Chain and Thorchain, which are building separate blockchains specifically for lending and exchanging between chains.

Overview: a protocol specifically designed to transfer information across multiple blockchains. This design has a strong connection effect because of its complexity – a single integration for a project gives it access to the entire ecosystem.

The drawback is that some designs often trade off security and decentralization for this scalability effect, which can have undesired complex consequences for the ecosystem.

Why bridges are important?

As individual ecosystems evolve, they develop their own unique strengths, such as higher security, faster throughput, cheaper transactions, better privacy, and home communities developers and users separately.

Bridges are important because they give users access to new platforms, protocols to interact with, and developers to collaborate on building new products. More specifically, they allow:

Enhance the efficiency of existing crypto assets

A bridge allows crypto assets to be moved more places and more efficiently, for example:

Send DAI to Terra to buy composite assets from Mirror or farm on Anchor

Use DOT or ATOM as collateral to withdraw DAI on Maker

Enhance product capabilities across protocols

A bridge extends the design capabilities of existing interfaces, for example:

Yearn’s liquidity pools on Solana or Avalance

Trade NFT on Rarible via Ethereum and Flow

Unlock new features for users and developers

A bridge gives users and developers more options, for example:

SUSHI arbitrage trading between DEXs on Optimism, Arbitrum, and Polygon

Pay Arweave Storage in BTC

Current affairs of Bridge

Building robust cross-chain bridges is an extremely difficult problem in decentralized systems. Existing problems include:

What happens when assets are sent between chains over a bridge and either a hard fork or a state rollback occurs?

How does the bridge keep the origin of the NFT sent over different chains?

How will the different bridge designs behave during system congestion due to transaction volume or system attack?

Future

While bridges open up innovation to the blockchain ecosystem, they also pose serious risks if teams cut back on research and development. The Poly Network attack demonstrated the potential economic seriousness of vulnerabilities and attacks.

Even though this is a highly fragmented and competitive environment, projects should remain disciplined in prioritizing security over time to market.

While the ideal state would be a uniform bridge for everything, there will likely not be a “best” design and different types will be best suited for specific applications (e.g.: transfer of assets, contracts, minting tokens).

Furthermore, the best bridges will be the most secure, interconnected, fast, capital-saving, cost-effective, and censorship-resistant. These are attributes that need to be maximized if we are to realize the vision of the “internet of blockchains”.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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