Cross-chain bridges play a crucial role in the blockchain industry as they facilitate interoperability and inter-blockchain communication. Notably, in the early days of cryptocurrency, each blockchain platform operated as an independent entity, with limited capacity to interact with one another.
This lack of interoperability between different blockchain networks posed a significant challenge to the growth of the blockchain ecosystem. For this reason and more, cross-chain bridges were created to overcome this limitation and enable the transfer of data and value across different blockchain networks.
If you are interested in learning more about cross-chain bridges and how they can benefit the blockchain ecosystem, then you have come to the right place.
Here, you will have a better understanding of what cross-chain bridges are and why they are essential in the blockchain space. You will also be equipped with the knowledge to explore cross-chain bridges and their potential for the future of the blockchain. The article goes further to discuss their pros and cons.
What Are Cross-chain Bridges?
Cross-chain bridges are a new technology that lets different blockchains communicate with one another, enabling smart contracts to read and write data to and from other blockchains via cross-chain communication.
As the name implies, cross-chain bridges are a type of decentralized application or software that allow you to move cryptocurrencies or non-fungible tokens (NFTs) from one blockchain network to another.
Let’s say you have an ERC-20 TetherUSD (USDT) but you want to use it for a transaction on a Binance Smart Chain (BSC) or Solana platform. What facilitates the movement of the ERC-20 USDT to either of these blockchain networks is called a cross-chain bridge.
Therefore, cross-chain bridges help solve the problem of interoperability, which has been a challenge in the blockchain space in the early days. That is, they allow different blockchains to connect and share information, making it easier for people to carry out transactions. Bridges are especially important for decentralized applications (dApps).
Importantly, blockchain bridges increase token utility by facilitating cross-chain liquidity between distinct blockchains.
How do cross-chain bridges work?
To understand how cross-chain bridges work, we must first understand the concept of inter-blockchain communication. Inter-blockchain communication is a term used to describe the transfer of data or assets between different blockchain networks.
The operation of cross-chain bridges involves several key steps. First, a user or a smart contract initiates a transaction on one blockchain (source chain). The transaction is then validated by the network’s validators.
Next, the transaction is locked on the original network, which prevents it from being spent or altered. The locked transaction data is then passed through a bridge that processes it, giving it the properties of the destination blockchain network. Afterwards, the transaction appears on the destination platform.
From the explanation above, it becomes clear that cross-chain bridges involve the locking of tokens on a source chain using a smart contract and unlocking the same token(s) through another smart contract on a destination chain. These bridges adopt a cross-chain messaging protocol to facilitate the movement of tokens between blockchains.
To enable cross-chain communication, cross-chain bridges rely on two key components—oracles and validators.
An oracle is a multi-model relational database management system. It is designed to allow smart contracts to access data from off-chain sources such as APIs and real-world databases. Chainlink is a typical oracle-based blockchain platform. On the other hand, validators are responsible for verifying transactions.
Particularly, cross-chain bridges adopt three main mechanisms to function including— lock and mint, burn and mint, and lock and unlock
As the name implies, the lock and mint mechanism first entails locking tokens in a smart contract on the source chain and then minting the wrapped versions of those locked tokens on the destination blockchain.
The term burn and mint is used to describe a mechanism that enables the burning of coins on a source chain to mint (or unlock) the same coins on the destination blockchain.
On the other hand, the lock and unlock concept involves locking tokens on the source chain and unlocking the same token from a liquidity pool on the destination blockchain.
Types of cross-chain bridges
It might interest you to know that numerous cross-chain bridges exist and they are classified based on their use cases and designs. Below are the popular types of cross-chain bridges we have and how they are classified:
Centralized or Trusted Bridges: Centralized cross-chain bridges are those that depend on a central entity to facilitate and process the transfer of tokens between two blockchains. Usually, trusted cross-chain bridges require users to pass mandatory identification processes.
Decentralized or Trustless Bridges: This is another type of cross-chain bridge that makes use of smart contracts to automate the transfer of assets. Being automated, decentralized or trusted bridges eliminate the need for a central party or intermediary structure.
Sidechain Bridges: A sidechain is any blockchain that runs independently of another blockchain (called the main or parent chain) but is still connected to the main chain. The connecting system linking a side chain with a mainnet is known as a sidechain bridge.
Multichain Bridge: This is a type of cross-chain bridge that facilitates the exchange of coins between multiple blockchain networks.
Other types of cross-chain bridges include escrow bridges, custodial bridges, and non-custodial bridges. Blockchain bridges are added into these categories based on how they handle users’ funds during the transfer process.
Read also: What is Smart Contract and Its Use Cases?
Pros and Cons of Cross-chain Bridges
Cross-chain bridges have gained popularity in the crypto world as they facilitate the transfer of digital assets between different blockchains. They offer benefits such as increased liquidity (with the help of token bridges) and improved interoperability, allowing for the efficient trading of a wide range of assets and the development of decentralized applications that can operate across multiple networks.
By enabling assets to be traded between different blockchains, cross-chain bridges help to reduce low liquidity problems. This makes it easier for investors to access a wider range of assets. Also, the increased liquidity solution offered by blockchain bridges helps to increase the overall crypto-market efficiency.
Another notable advantage of cross-chain bridges is improved interoperability. By enabling different blockchain networks to communicate and safely exchange value, cross-chain bridges contribute greatly to the growth of decentralized applications.
But cross-chain bridges are not without drawbacks. Poor security issues remain a major deficiency of this technology as countless breaches and hack incidents have been reported over the years. Consequently, a good number of users have suffered huge losses.
The problem of centralization cannot be ignored as some cross-chain bridges require a central party or intermediary to facilitate operations, leading to issues of transparency, censorship, and the risk of a single point of failure.
Additionally, users always have to pay high fees when using cross-chain bridges. Paying these fees can be quite cumbersome for many users. High gas fees are typically due to the complex and resource-intensive nature of the transfer process.
Undeniably, the significance of cross-chain bridges in the blockchain industry is tremendous. It is also true that the decentralized finance (DeFi) innovation is one whose relevance in the blockchain industry would perpetually remain intact.
But the drawbacks and risks associated with cross-chain bridges should not be ignored by users and developers alike. Cross-chain bridges will continue to be vulnerable to hacks. Users should therefore endeavor to be extremely cautious when utilizing these bridges for inter-blockchain or multi-chain transfers to avoid being prey to bad actors.
Read also: What is Solana?
Credit: Ndianabasi Tom
A crypto journalist and content writer who has been talking about cryptocurrency and blockchain technology since 2018, Ndianabasi is a Writer at Crypto Asset Buyer (CAB).