Deep Dive Interoperability (Cross-Chain Bridges)

In the blockchain context, interoperability is the blockchain’s ability to exchange information and digital assets with other (blockchain and non-blockchain) networks. Interoperability allows blockchains to communicate with each other even if they are designed differently.

A less technical example of interoperability is email. Anyone can transmit an electronic message to any email address provider, be it Gmail, Yahoo, Proton, or Hotmail. Achieving this level of interoperability across blockchains is more challenging. However, tools like bridges, sidechains, and oracles make blockchains somewhat interoperable today.

This guide will mainly focus on blockchain bridges, how they work, and their use cases.

Why Blockchain Bridges?

A blockchain bridge, or cross-chain bridge, is a decentralized application that connects blockchains, permitting the transfer of assets from one blockchain network to another. It seeks to bring interoperability to blockchains, which cannot inherently communicate with each other as they are designed with a unique set of rules. Think of blockchains as the 195 countries in the world that differ in language, culture, and governance. Without the Internet, transoceanic shipping routes, or airplanes, the world would not be as interconnected as it is today. Also, as we know it, the global economy would be non-existent.

Source: DeCommas

Similarly, blockchains use different programming languages, distinct consensus mechanisms, and unique economic models, limiting the level of interconnected economic activity in the Web3 space. Therefore, bridges and other interoperability infrastructures are necessary to help blockchains benefit from interconnectedness. An interconnected Web3 ecosystem can propel adoption, facilitate collaboration across diverse industries, and promote the creation of new and innovative products and services.

Importantly, while many blockchain interoperability solutions exist today, most of them still represent a security risk.  According to Chainalysis, attacks on bridges accounted for 69% of total funds stolen in 2022 so far, with approximately $2 billion in cryptocurrency stolen across 13 separate cross-chain bridge hacks. This goes to show that a lot of iteration is still needed to make bridges a safe place to use in order to move assets from one chain to another. 

Source: Cointelegraph

How do Blockchain Bridges work?

Blockchain bridges leverage cross-chain messaging protocols to transfer digital assets across blockchains. They also boost token utility by enabling liquidity between bridges.

There are three key types of bridges categorized by the different ways they move assets across chains.

Lock and mint blockchain bridges

These bridges lock a user’s tokens in a smart contract on the source blockchain. An equal amount of the locked tokens is then minted on the destination blockchain in a wrapped version. Conversely, the wrapped tokens are burned, and the original tokens are unlocked when transferring tokens back to the source chain.

Burn and mint blockchain bridges

Burn and mint bridges burn tokens on the source chain and then mint the same tokens on the destination blockchain.

Lock and unlock blockchain bridges

These bridges leverage liquidity pools. They lock a user’s tokens on the source chain and then unlock the same tokens from a liquidity pool on the other blockchain. Lock and unlock bridges attract liquidity on the two chains through revenue sharing and other economic incentives.

Why Are There Different Types Of Bridges?

One of the reasons for different types of bridges is what they connect. The Web3 ecosystem consists of bridges connecting Layer-1 (L1) networks to other Layer-1s, linking Layer-1 blockchains to Layer-2 (L2) protocols, and connecting Layer-2 networks. For instance, the Avalanche bridge connects Ethereum and Avalanche, two L1 blockchains, while the Polygon bridge links Ethereum to Polygon, an L2 scaling solution. Hop protocol bridges various Ethereum Layer-2 networks with each other as well as connecting them to Ethereum.

Furthermore, blockchain bridges are distinct based on whether they are trustless (rather trust-minimized) or trusted. For two-way communication to occur between blockchains, trust must first be established through the use of “middlemen” called off-chain actors. Off-chain actors act as verifiers, enabling seamless communication across blockchains and removing trust boundaries. Therefore, bridges differ based on the type of off-chain actor they use.

Trusted bridges rely on trusted and centralized third parties to help users move assets from one blockchain to another. These trusted parties also hold users’ funds.

Source: LI.Fi

In contrast, trustless bridges replace the role of third parties with smart contracts and algorithms. These bridges do not require a central authority to function. Additionally, they allow users to hold their own funds.

Source: LI.FI

The trust model that a bridge uses is extremely crucial. If not properly implemented, it can put users’ funds at risk. Unfortunately, bridge hacks aren’t uncommon in the Web3 space. To date, the total value of funds stolen from bridges is $2.66 billion.

Source: DefiLlama

Bridges can also differ based on the two of three interoperability trilemma properties they choose to focus on. These properties are extensibility (it can be used on any domain), generalizability (it can handle arbitrary cross-domain data), and trustlessness (it is as safe as the underlying blockchain). Unfortunately, it’s difficult for bridges to boast all three properties, forcing developers to build bridges with the two properties of their choice while forgoing the third.

The function of a bridge also separates it from other bridges. As a result, the categories of bridges based on function include chain-to-chain bridges, data-specific bridges, multichain bridges, and wrapped asset bridges (only transfer non-native digital assets).

Blockchain Bridges and their use cases

Transferring Tokens Across Chains

The most common use of bridges is transferring tokens from one chain to another. Users can do this to take advantage of low transaction costs on an L2 network. For example, when gas fees are high on Ethereum, users can move their ETH to an Ethereum L2 solution that’s cheaper. As a result, they can interact with dApps without needing to pay high gas fees.

Cross-Chain Arbitrage

Bridges can support cross-chain arbitrage trading by fetching market prices and executing orders across blockchains. Such bridges can allow traders to profit from price differences of assets trading on DEXs built on separate chains.

Acquiring Native Digital Assets

If users only have ETH but want to acquire BTC, they can use their ether to buy WBTC, a wrapped version of bitcoin on Ethereum. They can then use an Ethereum-Bitcoin bridge, converting their WBTC to the native crypto asset, BTC.

Using NFTs as Identities Across Chains

Bridges are handy when users want to utilize NFTs as identities on multichain metaverses. In this use case, bridges would verify NFT ownership before making it available for use on another blockchain.

Blockchain Bridges in Practice

More and more blockchain bridges are being launched each year as the demand for interoperability in Web3 rises and as each project strives to roll out more secure and efficient iterations.

Here are several notable protocols that are changing the blockchain bridge landscape today:

Chainlink’s Cross-Chain Interoperability Protocol (CCIP)

Chainlink’s CCIP is a secure infrastructure that other projects can build on to transfer tokens and send messages across chains. It uses smart contracts instead of wrapping mechanisms to transfer value across blockchains. The protocol aims to bring high security to blockchain interoperability by leveraging an Active Risk Management (ARM) Network that consistently monitors bridge activity, checking for potential errors. Besides token and message transfers, CCIP enables various other use cases like cross-chain gaming, lending, liquid staking, and Web3 usernames.

Chainlink launched CCIP on the mainnet in July 2023. The protocol is currently being tested on Ethereum, Arbitrum, Polygon, Optimism, and Avalanche.

LayerZero

LayerZero is a trustless protocol for transferring lightweight messages between blockchains via non-upgradable and gas-efficient smart contracts. The protocol uses relayers and oracles to transfer messages across chains without depending on wrapped assets. LayerZero aims to put developers first. Therefore, building on it is easy and fast.

On June 25, 2023, LayerZero exceeded 50 million messages three months after raising $120 million in a funding round.

xCall/BTP

xCall is an interface for building cross-chain decentralized applications. It uses smart contracts for cross-chain messaging. xCall seeks to make blockchain interoperability simple and efficient by leveraging a single standard for all cross-chain communication. It currently supports Blockchain Transmission Protocol (BTP), a cross-chain messaging protocol developers need to build applications on xCall.

As of this writing, pre-registration for the xCall testnet program is ongoing. The program will kick off on July 31, 2023.

Synapse Protocol

Synapse protocol is a cross-chain protocol that links EVM and non-EVM blockchains, allowing them to communicate efficiently. Its purpose is to offer a home for developers to build cross-chain applications via the upcoming Synapse Chain based on Optimistic rollups and an easy-to-use SDK. Synapse supports token transfer, NFTs, and smart contract calls. It uses an Optimistic model to secure and facilitate cross-chain activities.

Synapse is presently used by DeFi Kingdom NFTs, Jewel, and GMX to help their applications, NFTs, and tokens to operate efficiently across chains. Moreover, the protocol has experienced higher bridge inflows into Layer-2s than Polygon, BSC, and Avalanche since Q3/2022. Transaction rates on Synapse have also increased two-fold since the start of 2023.

Multichain

Multichain, formerly Anyswap, is a non-custodial cross-chain router protocol that enables users to swap native and non-native tokens across chains. Also, users can transfer tokens from one blockchain to another using the lock and mint model. Multichain aspires to be the primary router for Web3. Interestingly, the protocol suffered an attack in July 2023, where funds worth almost $130 million were drained from numerous bridges.