Every blockchain has an independent ecosystem, but through “cross-chain bridges,” different blockchains can be connected to achieve the transfer of assets and information. This article will comprehensively analyze the functions, types, transaction methods, popular projects, and potential risks of cross-chain bridges.
Table of Contents:
Main Functions of Cross-chain Bridges
Types of Cross-chain Bridges
1. Trusted Cross-chain Bridges
2. Trustless Cross-chain Bridges
Transaction Methods of Cross-chain Bridges
1. Locking and Minting
2. Burning and Minting
3. Cross-chain Liquidity
Popular Cross-chain Bridge Projects
Potential Risks of Cross-chain Bridges
Popular Cross-chain Bridge Projects
Cross-chain Bridge Hacking Incidents
Cross-chain Bridge Security Issues
A Cross-chain Bridge is a tool born to promote wider road movement in the cryptocurrency ecosystem, similar to bridges connecting roads and places in real life, allowing different Layer 2 projects and blockchains to transfer messages, data, and encrypted assets to one another.
Originally, many blockchains had their unique mechanisms, making it impossible to communicate with each other. However, through cross-chain bridge technology, users can transfer assets from one blockchain to another, facilitating asset integration and promoting the development of a multi-chain ecosystem.
Asset Transfers: Through cross-chain bridges, users can transfer cryptocurrencies and assets between different blockchains. For example, moving Bitcoin (BTC) from the Bitcoin blockchain to the Ethereum blockchain and then using it in a wrapped form (like WBTC, Wrapped Bitcoin) on the Ethereum blockchain.
Data Interoperability: The data structures and formats of different blockchain networks are not the same, making it difficult to share data between different blockchains. However, through cross-chain bridges, smart contracts and applications on different blockchains can communicate and share data with each other. For example, a smart contract on one blockchain can trigger another smart contract on a different blockchain.
Protocol Compatibility: Through cross-chain bridges, different blockchain protocols can achieve compatibility, allowing developers to create decentralized applications (dApps) that span multiple blockchains.
Cross-chain bridges are mainly divided into two categories: Trusted Bridges and Trustless Bridges, each with its own trust process and pros and cons.
Trusted Bridges are controlled by centralized entities or operators to achieve interoperability. Users need to trust centralized entities or operators, which has its advantages and disadvantages. Compared to Trustless Bridges, Trusted Bridges are usually faster, cheaper, more accessible, more developer-friendly, and can be deployed on different blockchains, making them suitable for beginners.
However, because users need to transfer control of their assets to these entities, centralized risks arise, threatening users’ assets and data. Well-known Trusted Bridges include Ronin Bridge, Avalanche Bridge, Harmony Bridge, and BN Bridge, among others.
On the other hand, Trustless Bridges are completely decentralized, where users do not need to trust any third party but execute cross-chain transactions and data transfers through smart contracts and cryptographic algorithms, relying on code and the underlying chain for security. Through Trustless Bridges, users can have full control over their funds without trusting specific entities or central authorities.
However, Trustless Bridges require more capital and time to operate, and users need to have deeper technical knowledge, increasing the entry barrier. Well-known Trustless Bridges include Connext Network, Rainbow Bridge, and Hop Protocol.
Cross-chain bridges lock native tokens in smart contracts on the original chain and issue an equal amount of wrapped tokens to users on the target chain. Wrapped tokens act as receipts and can be redeemed for the original tokens on the original chain once they are burned.
Cross-chain bridges have advantages in collateral efficiency as they do not require additional collateral or liquidity, but they disperse liquidity on the target chain, resulting in multiple wrapped versions of assets, which can pose systemic risks to the target chain if attacked.
Cross-chain bridges burn native tokens on the original chain and mint an equal amount of tokens on the target chain. Since they do not wrap tokens or use automated market makers (AMMs), they do not disperse liquidity or introduce slippage. However, cross-chain bridges must have the authority to mint native tokens on multiple chains, which usually applies only to real-world assets (RWA).
Cross-chain bridges can increase liquidity in the blockchain ecosystem, allowing more assets to flow between different blockchains, helping to improve market efficiency and reduce transaction costs.