Understanding Cross Chain Bridges: The Key to Interoperability

Thanks to Cosmos' Inter-Blockchain Communication (IBC) protocol, some very important initial attempts to enable cross-chain communication started in 2017. Times have since changed, and since 2021, there has been an explosion of DeFi projects that require cross-chain communication. To make this happen, many new web3 bridges have been developed with one singular goal in mind: supporting interoperability among blockchains.

Today's article is all about understanding cross-chain bridges and exactly how they work. Without further ado, let's get started:

What Are Cross-Chain Bridges?

If you are asking yourself what are cross-chain bridges, let us explain.

A cross-chain bridge is a technology that allows blockchain networks to interact with each other to transfer assets or data. Since blockchain, and the very essence of defi, is to offer independent secure networks, blockchains are natively not compatible with one another. So, when you need to trade your assets across two networks, these cross-chain bridges act as a communication link and offer a smooth interaction experience.

How Do Cross-Chain Bridges Work?

Now let’s discuss how do cross-chain bridges work. Cross-chain bridges operate through a series of steps that ensure secure and smooth asset transfers between blockchains.

Basic Mechanism:

The process typically involves locking, verification, minting, and reversing the transaction as needed.

1. Locking the Asset on Source Chain: Start by initiating a transfer of tokens from source chain to the destination chain.
2. Verification: Your assets and the bridge protocol are then verified by validators.  
3. Minting: Once the asset on the source chain is verified, the bridge mints its corresponding token to the destination chain. The minted token represents your original token and is now used in the destination chain’s ecosystem.
4. Reversal: Once you have carried out the desired process, you can initiate the reverse process. For this purpose, the minted token is burnt on the destination chain and the relevant original asset is unlocked on source chain.

This process guarantees that the overall token supply remains consistent across chains, preventing duplication or loss of assets.

Types of Cross-Chain Bridges:

There are five main types of cross-chain bridges that offer cross-chain interoperability, each providing centralized and decentralized solutions, with different benefits. These include:  

Federated Bridges:  

Federated bridges are operated by a group of selected, trusted parties who act as validators. These bridges require users to trust the specific group to manage their asset transfers.

Trusted Bridges

Centralized platforms operate using trusted bridges. This means you need to rely on a third party to manage the transfer of your assets. Although these web3 bridges are usually quick and user-friendly, they come with a drawback of centralization.  

Trustless Bridges

Contrary to trusted bridges, trustless bridges are completely decentralized. They do not need a central authority. Instead, they use smart contracts and blockchain to perform transactions. As the process is transparent, independent, and secure, you don’t have to trust a third party to execute transactions.  

Unidirectional Bridges

As the name suggests, unidirectional bridges are used to perform transactions only in one direction. They are usually used in blockchains to convert tokens into their wrapped forms.  

Bidirectional Bridges

These bridges allow you to perform transactions in both directions. Users can move their tokens back and forth between two blockchains.

Benefits of Cross-Chain Bridges

Apart from interoperability and cost-efficiency, some of the best cross-chain bridges offers a multitude of benefits. Let’s take a closer look at the most significant ones:

Enhanced Liquidity:  

A cross-chain bridge creates a more unified marketplace which fragments liquidity pools. So, traders can benefit from a wider range of assets, and better execution, without being limited to one blockchain.

DApps' Expansion:  

Cross-chain bridges offer developers the opportunity to access a larger audience, across multiple chains, and build dApps for the same.

Increased Interoperability:  

Since cross-chain bridges break blockchain siloes, they allow blockchain networks to communicate with one another and share data efficiently. This enhanced interoperability opens up a multitude of possibilities for new multi-chain applications and asset transfers.  

Cost Efficiency:  

Unlike CEX, cross-chain bridges facilitate asset transfer without the involvement of an intermediatory. This enables cross-chain bridges to help reduce delays and transaction fees making blockchain transactions a whole lot more cost-effective.

Challenges and Risks Associated with Cross-Chain Bridges

While cross-chain solutions offer a multitude of benefits for the DeFi ecosystem, they come with their own problems. Some of the major cross-chain challenges that we are still facing include the following:

Technical Barriers

Lack of Standardization

The first and foremost challenge arises because each blockchain operates on its own set of rules for validating the transactions. These rules, also known as consensus mechanisms, vary from blockchain to blockchain. Some common consensus mechanisms include Proof of Work, Proof of Stake, and Delegated Proof of Stake.

If you are swapping assets across blockchains that use different consensus mechanisms, compatibility issues can arise, causing delays or even failures in transaction processing. This lack of standardization complicates the design and implementation of the best cross-chain bridges because developers are required to accommodate diverse protocols and mechanisms to ensure smooth interoperability.

Transaction Finality

Another technical barrier that can be a challenge in cross-chain transactions is transaction finality. Transaction finality is basically the point at which a transaction is considered irreversible.  

The problem is that different blockchains have different speeds so ultimately the speed of cross-chain swapping is impacted. Bitcoin, for instance, takes around 10 minutes per block but Ethereum gets the job done in a few minutes.  

Security Concerns

In 2022, the Rorin Bridge was hacked which resulted in a historic $625 million loss. Similarly, Poly Network lost $610 million a year before that. Both security breaches occurred because hackers were able to exploit smart contract bugs. This history makes security concerns an even more pressing matter in cross-chain transactions.

Not only are there smart contract exploits but some also poorly designed web3 bridges even allow attackers to trick the system into releasing funds on one chain while keeping the original tokens on the other, hence generating a double-spending situation.  

User Experience Issues

Unlike traditional crypto swaps that occur within a single blockchain, cross-chain swaps require additional steps such as:

1. Selecting a cross-bridge or DEX.  
2. Connecting your wallet to different blockchains.  
3. Paying for gas fees on both ends.  
4. Waiting for confirmation times in transaction across blockchain networks.  

All these steps increase the risk of mistakes and can turn into a pretty complicated process for non-technical users. Thus, making user experience issues another among the major cross-chain challenges.

The Future of Cross-Chain Bridges and Blockchain Interoperability

As the blockchain technology continues to evolve, cross-chain bridges are set to become an integral part of the multi-chain ecosystem. With the increasing adoption of decentralized finance (DeFi), the need for seamless and efficient interoperability between blockchains is more critical than ever.  

Defi platforms, like ARMswap are leading the way to bring you cutting-edge cross-chain bridge technology that will not only enable platforms to support a broader range of assets but also improve user experience by reducing transaction costs and delays.  

So, what are you waiting for? Join the defi movement and become a part of a more interconnected blockchain landscape with ARMswap.