A cryptocurrency bridge is a tool that allows the transfer of assets between two different blockchains. This transfer is carried out without the need for a central exchange or any third-party involvement.
Bridges are built on the same principles that underlie atomic exchanges. Atomic swaps are a type of smart contract that allows the exchange of one cryptocurrency for another without the need for a central exchange.
Cryptocurrency bridges take this concept a step further by allowing the value of digital assets to be transferred between two different blockchains.
This is done by creating a two-way peg between the two chains.
A two-way peg is a smart contract that locks an asset on one blockchain in exchange for an equivalent amount of the same asset on the other blockchain. You can think of a two-way smart contract as a treasure or check that stores the value of assets from the first blockchain and in return distributes an equivalent value of tokens that are usable on the second blockchain.
Once assets are locked, they can be transferred between the two blockchains without any third-party involvement.
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The Benefits of Using a Cryptocurrency Bridge
There are many scenarios where it would be useful for chains to interact with each other across a bridge. For example, a user may want to move their assets from one chain to another to take advantage of different features or avoid volatility, or simply access a wider range of services on the second blockchain.
Bridges also have the potential to help chains that are struggling to climb. Ethereum, for example, has struggled to scale due to its popularity. Using a bridge, Ethereum could offload some of its transactions to another blockchain that is better equipped to handle them.
Bridges also have the potential to help new blockchains get off the ground. Using a bridge, a new blockchain can offer its users access to the assets and services of an already established chain.
Risks associated with cryptocurrency bridges
While cryptocurrency bridges have great potential, there are also some risks associated with them.
For starters, because bridges rely on smart contracts, they’re only as good as the code that powers them. If there is a bug in the smart contract code, it could allow hackers to exploit the system and steal funds. For example, a recent hack on the Meter.io bridge is said to have been caused by the hacker injecting malicious code into a Bridge.deposit() function thus allowing the hacker to exploit the protocol’s inability to block direct interaction with gas tokens. In the end, $4.3 million worth of money was stolen. Bridges have been the target of numerous hacks over the years.
Another risk is that because cryptocurrency bridges connect two different chains, they can be used to attack one of the chains. For example, if a hacker were able to take control of the bridge’s smart contract, they could use it for DDoS one of the chains and flood it with transactions.
Finally, because bridges are based on smart contracts, they are subject to the same limitations as other smart contracts. For example, if a chain decides to change its consent protocol, it may not be possible to update the bridge smart contract to reflect the change, as smart contracts are immutable. This could lead to a situation where the bridge becomes unusable and funds are stuck on one or both chains. Either way, funds on an on-chain bridge are vulnerable to attack, thus leading to insurmountable losses.
If you’re interested in using a cryptocurrency bridge, there are a few things you need to keep in mind. First, you need to make sure that the bridge you are using is reliable and trustworthy. Second, you need to be aware of the risks associated with using a bridge and take steps to mitigate them. Finally, you need to make sure that the blockchain you’re connecting to is compatible with the one you’re currently on.
In some cases, funds are not lost due to vulnerabilities of the smart contract, but due to user negligence. For example, the recent hack on the Ronin Bridge was caused by a social engineering tactic that hackers used to trick access to private encryption keys used to verify transactions on the network. In addition, the developers of the Ronin Bridge did not use strict security measures when setting the keys, thus allowing hackers to maliciously withdraw $540 million worth of Ethereum and USDC stablecoins.
How to use a cryptocurrency bridge
Despite the risks, cryptocurrency bridges have great potential and could play an important role in the future of blockchain technology. If you’re interested in using a bridge, there are a few things you need to keep in mind.
First, you need to make sure that the bridge you are using is reliable and trustworthy. Second, you need to be aware of the risks associated with using a bridge and take steps to mitigate them. Finally, you need to make sure that the blockchain you’re connecting to is compatible with the one you’re currently on.
The process of using a cryptocurrency bridge is pretty simple. First, you need to send your funds to the smart contract address associated with the bridge. Once the transaction is confirmed, the tokens will be locked on the original chain and an equal number of tokens “wrapped” on the destination chain will be issued.
You can now use your “wrapped” tokens on the target chain without having to worry about volatility or security concerns. When you’re ready to move your funds to the original chain, you can simply use the bridge to send tokens. Your “wrapped” tokens will be burned in the process.
Examples of popular cryptocurrency bridges
Finally, it is worth taking a look at some examples of famous crypto bridges currently in operation. Here’s a look at some of the most popular bridges by volume:
Kyber Network
The first is the Kyber network. Kyber Network is a decentralized exchange that allows users to trade a variety of digital assets. Kyber Network uses a protocol called “atomic swaps” to facilitate these operations. Atomic swaps are a type of smart contract that allows two different parties to trade digital assets without the need for a third party.
Kyber Network also has a bridge that allows users to trade between Ethereum and other ERC20 tokens. The Kyber Network bridge is designed to be simple and easy to use.
Harmony Bridge
At the moment, Harmony Bridge is the only bridge that allows users to exchange between ERC20 tokens and BEP2 tokens. The Harmony Bridge is a non-custodial bridge that uses atomic swaps to facilitate these exchanges. This is a cross-chain bridge between Ethereum, Binance Smart Chain, and Harmony Blockchains. Users can connect assets like the BUSD stablecoin, LINK, and any ERC20 token like USDT, WBTC, and WETH to name a few.
Arbitrum Bridge
Built as a suite of Ethereum scaling solutions, this bridge features high-throughput, low-cost smart contracts that ensure security in a trustless decentralized ecosystem. The Arbitrum Bridge is built on Arbitrum’s roll-up blockchain that enables fast and cheap transactions. The Arbitrum Bridge is compatible with any ERC20 token.
This bridge is currently used by the decentralized lending platform, Compound, to scale its Ethereum-based lending products.
Polygon Bridge
The Polygon Bridge is a bridge that allows users to trade between Ethereum and Binance Smart Chain. The Polygon Bridge is built on the Plasma protocol that allows fast and cheap transactions. The Polygon Bridge is compatible with any ERC20 token and boasts a 28.8% share of TVL across Ethereum bridges.
