Blockchain Bridges and the Future of Cross-Chain Interoperability
Today, the large majority of blockchains exist as independent, walled gardens of sorts, whereby the activities that occur on one blockchain, cannot be communicated to another chain. This is down to the heterogeneous nature of sovereign blockchains and the fact that they each maintain their own consensus systems and ledger.
As a crucial component of modern DeFi infrastructure, blockchain bridges are being used to unite the otherwise siloed blockchain landscape, unlock an array of new use cases that were previously not possible, and accelerate the development of the cross-chain application landscape.
With Ethereum now pushing its limits (until its 2023 sharding upgrade) and a whole host of new blockchains seeing explosive growth in their DApp ecosystems, bridges are helping to ease the burden on older chains, while unlocking a great deal of utility for users.
Here’s how bridges form the glue between blockchain platforms:
How do Bridges Work?
As simple tools that allow users to move their assets from one blockchain to another, bridges need a way to first lock the assets on the original chain, before minting or releasing the same number of an equivalent asset on the target chain. This is generally performed using smart contracts.
In general, users send their tokens to a smart contract on the origin chain. Once the smart contract has custody of the user assets, the protocol automatically communicates this to a smart contract on the destination chain, which then releases the equivalent amount of funds. In some cases, the released funds may be freshly minted, whereas in other cases they are derived from user-contributed liquidity pools.
As you might have noticed, the assets aren’t genuinely moved from chain to chain, they’re simply locked up on one chain, and an equivalent is released on the second chain. In some cases, bridges burn the asset on the original chain, and mint it on the second — this avoids the problem of maintaining 1:1 backing, but generally increases gas fees and complexity.
Bridges can be divided into two categories: one-way and two-way. One-way bridges are unidirectional, meaning you can only send your assets in one direction, e.g. from chain A to chain B, but not from chain B to chain A. Wrapped Bitcoin (WBTC) is a good example of this, since you can use the bridge to send BTC from the Bitcoin blockchain to the Ethereum one, but you can’t send ETH from Ethereum to the Bitcoin blockchain.
They can also be decentralized (trustless) or centralized (federated), which describes how the protocol carries out its functions. If the platform doesn’t require centralized intermediaries and simply relies on smart contracts and decentralized code to carry out its functions, then it’s considered trustless. In this case, the liquidity is usually provided by the users who earn a fee for their participation. On the flip side, centralized bridges are a service provided by a business entity and generally have some trust-based components, such as centralized wallets or manual processing.
What Are The Main Bridge Platforms?
As the number of cross-chain opportunities has swelled, people are increasingly turning to bridges as a way to extract the most utility from their assets, and access opportunities that are not available on their native chain.
To help accommodate this, a huge number of bridge platforms have been launched, many of which offer bidirectional exchanges between multiple different blockchains. Some of the most popular include:
- Connext Bridge (formerly XPollinate): Supports a wide variety of layer 1 and layer 2 platforms, as well as several different stablecoins (inc USDT and USDC) and native assets (ETH and WBTC). The platform makes use of NXTP (Noncustodial Xdomain Transfer Protocol) to enable generalized cross chain transfers.
- Multichain (formerly Anyswap): Arguably the most feature-complete bridge, Multichain supports a vast array of blockchains and assets and benefits from large maximum bridge amounts. The platform has been hacked before, but the team behind the project restored liquidity to the protocol to mitigate the breach.
- Celer cBridge: Celer’s cBridge V2 platform features user-contributed liquidity and support for well over a dozen different blockchains and two dozen different assets. It is one of the few bridges to support the Celo and Aurora platforms.
- Allbridge: Allbridge is a simple cross-chain routing platform that supports a rapidly growing list of assets and just over a dozen blockchains (including Harmony, Near, Terra, and Huobi ECO Chain). The platform is designed to keep fees to a minimum.
- Portal: Primarily built to bridge Solana assets to and from other chains, Portal allows users to swap Wormhole-wrapped tokens with low fees. The platform currently supports 9 different blockchains and is one of the few bridges to support NFT transfers. It should be noted that the Wormhole protocol was hacked in February 2022, but the funds were later replaced by an outside source.
For those that don’t mind using centralized services, many cryptocurrency exchange platforms allow users to deposit their assets on one chain and withdraw it on a different chain without charging a fee. This can be more cost-effective but comes with the drawback of using custodial platforms and potential verification requirements.
There is also a range of powerful generalized bridge solutions in development, which have the broader goal of facilitating communication between essentially any type of blockchain. Two of the most promising include:
- Polkadot Bridges: Polkadot wants to allow heterogeneous and economically independent blockchains to communicate with one another (and the entire Polkadot network) through the use of bridges. This will include bridge pallets (for Substrate-based chains), smart contract-based bridges, and higher-order protocols for non-smart contract-capable chains (e.g. Bitcoin).
Cosmos IBC: Cosmos is creating a complete standard for blockchain interoperability, known as the Inter-Blockchain Communication Protocol (IBC). This is designed to allow any blockchain, regardless of its architecture to easily share and receive assets and data between one another with few to no protocol-level modifications needed.
How Are Bridges Being Used?
Bridges are quickly becoming a staple tool for many cryptocurrency users due to their rapidly growing utility as well as the meteoric growth of the DeFi landscape on many blockchain — resulting in increased opportunities for users.
They’re now being used to facilitate a range of different purposes, including:
Boosting scalability:
Several major blockchain platforms suffer from severe scalability issues, which limits their overall throughput and potentially leads to transaction delays. Blockchain bridges allow users to port their assets from so-called non-scaling chains like Bitcoin and Ethereum to faster, more scalable chains like BNB Chain, Solana, and Avalanche, as well as several layer-2 platforms — including Optimism and Arbitrum. These layer-2 platforms generally provide their own bridge, allowing users to move their assets back and forth between the native layer-1 and the high-speed layer-2 platform.
Cross-chain collateralization:
Bridges enable cross-chain assets to be used for a variety of purposes throughout the blockchain landscape, dramatically expanding on their utility and yield-bearing potential. For example, Bitcoin has an extremely limited native DeFi ecosystem, but Wrapped-BTC (WBTC) can be used on a variety of cross-chain DeFi products, such as on Curve, where it can be paired with renBTC (rBTC) to earn liquidity provider rewards.
Moreover, it allows borrowers to take out loans at potentially more favorable rates, by leveraging open lending protocols on whichever chain they choose — rather than being limited to the options available on the native chain.
Reducing fees:
Owed to their rampant popularity, several first-generation blockchains have struggled with almost perpetually high fees, including both Bitcoin and Ethereum — which have seen their transaction fees surge to over $50 at peak times. Comparatively, several newer-generation platforms have fees that are orders of magnitude lower, including BNB Chain and Polygon, which currently boast average fees of $0.3 and less than $0.5 respectively.
This can have significant cost savings for regular traders and DApp users, who want to put their assets to use but have been limited by transaction fees.
The Interoperable Future
The blockchain bridge landscape is evolving rapidly and the list of blockchains and assets that are now supported by at least one bridge is growing by the day. These platforms help close the gaps between independent chains, paving the way for an industry that grows together, rather than apart.
By integrating both application-specific and general-purpose blockchains into one cohesive ecosystem, bridges allow users to access the best of both worlds and streamline their investments. It also allows different chains to take over a specific function within the cross-chain landscape, drawing on their individual strengths and capabilities, while leaving some tasks to better-suited chains.
With technologies like optimistic rollups and zk-snarks coming into their own, and scalability becoming an increasing concern alongside growing enterprise and retail adoption, blockchain bridges could play a crucial role in maximizing the value provided by blockchain networks.
Many DApps are now deploying on multiple chains, giving users a consistent experience irrespective of their platform of choice, while also boosting opportunities for those that bridge their assets. Likewise, with many layer-1 chains actively working on their own bridge solutions or incorporating third-party solutions, there may come a time where the underlying blockchain is of little relevance to users — who will soon be able to move seamlessly between platforms without friction.
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About Master Ventures
Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.
Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.
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