What Are Blockchain Bridges: A Complete Guide

Decentralization and transparency are the hallmarks of blockchain technology and cryptocurrencies at large. Anyone who has spent any time on the subject of decentralized systems will admit that blockchain technology or decentralized ledgers are the most efficient and secure networks for deploying decentralized applications of any kind. What’s more, the past few months have seen an explosive uptake of decentralized finance platforms.

However, despite the utility of blockchain networks, their inherent infrastructure is designed to operate as a  siloed, self-contained system. Blockchains are designed to be closed systems and for a good reason. Not only does this design maintain consensus and security of the network but it also enables the accuracy of communication among the network nodes as well as consistency of the ledger. To continue accurately producing the series of blocks that make up a blockchain, miners, and validators on the network need to communicate while meticulously following a set of rules designed to facilitate a consensus among anonymous participants.

Unfortunately, this design limits interoperability as digital assets in one blockchain network cannot change their intrinsic design to operate according to the rules built into a second blockchain.

At a time when DeFi is booming, the need to have digital assets that can be deployed on several blockchain networks has never been greater. Today’s DeFi enthusiasts are looking for platforms that will enable them to mint digital assets on one blockchain and deploy them on a second blockchain for higher APYs. At the moment, this level of flexibility and interoperability can only be achieved with Blockchain Bridges.

What is a Blockchain Bridge?

A Blockchain Bridge is a tool that enables interoperability among vastly different blockchain networks. Interoperability among blockchains is one of the biggest challenges DeFi projects face today.

Simply put, mainstream adoption of decentralized ledger technologies will remain a pipe dream as long as each blockchain system operates in an isolated siloed system.

Blockchain bridges attempt to introduce interoperability through the help of APIs and smart contracts that bridge the communication gap between blockchains using various mechanisms including locking tokens on one network and minting new ones on a second network.

This thus facilitates the transfer of equivalent value from one blockchain network to the other. Such mechanisms ensure that the supply of tokens remains constant and consistent across both blockchain networks and once the user wants to redeem their original tokens, the minted tokens are destroyed.

How do they operate

To further illustrate the inner working mechanisms of a typical Blockchain Bridge,  consider an example where Alice wants to move her Bitcoins to Ethereum’s network to benefit from the high APY offered on a DeFi platform such as Uniswap.

Alice will therefore have no other choice but to use a Blockchain bridge that will act as an exchange that locks her Bitcoins on the Bitcoin network while minting a new ERC20 token pegged to the value of BTC.

This newly minted ERC20 token is called a Wrapped Bitcoin token (WBTC) as its value is pegged to BTC.

With WBTC, Alice can use an ERC20 token whose value is pegged on a ratio of 1:1 with that of BTC. This enables Alice to access the same functionality on Ethereum that is only accessible to ERC20 tokens.

Types of Blockchain Bridges

Blockchain Bridges can be categorized into the following:

Trust-Based Centralized Bridges:  These are centralized Blockchain bridges that enable users to enjoy the use of tokens from one blockchain to a different blockchain network. However, these types of bridges are enabled by centralized entities called merchants who work closely with a trusted custodian to hold the tokens of one blockchain and mint new ones in a different blockchain. 

Examples include BitGo which provides institutional-grade custody of digital assets thus facilitating the transfer of Bitcoin to wBTC on Ethereum’s network. With a trust-based centralized bridge, it is up to the custodian to ensure that the newly mint tokens are pegged on a ratio of 1:1 with tokens or cryptocurrencies from the former blockchain.

Decentralized Bridges: Unlike centralized bridges, decentralized bridges operate on a trustless framework where there is no intermediary to facilitate the movement of digital assets from one blockchain to the other. With this type of bridge, smart contracts and other mechanisms are deployed with institutions that ensure tokens from Blockchain A are locked and new tokens for Blockchain B are minted. Once the user is ready to redeem their original tokens, the smart contract will initiate a token burn process while unlocking the previously locked tokens. The smart contract, in this case, acts as the custodian and prevents misuse of the assets on both chains. 

Sidechain Bridges: Blockchain ecosystems such as Ethereum and Polkadot that have blockchain networks within blockchain networks, i.e., parent chains and side chains, need Sidechain Bridges to enable interoperability.  While decentralized and trust-based bridges work between two different blockchains, Sidechain Bridges operate within blockchain networks in the same ecosystem but with different consensus protocols. For instance, network congestion on Ehtereum’s mainnet has pushed blockchain gaming platforms such as Axie Infinity to seek the help of an Ethereum linked sidechain called Ronin to scale their platform.

By making it possible for digital assets to be moved from Ethereum’s congested mainnet to a much more scalable Ronin sidechain, Axie Infinity can reduce gas fees, simplify the process of onboarding new users and increase transactional speed on its platform.

Examples of Blockchain bridges

OmniBridge

OmniBridge operates both as a sidechain bridge as well as a decentralized bridge between disparate blockchains. With OmniBridge, users can bridge any ERC20 token with the xDai sidechain. This blockchain bridge also enables interoperability between the Binance Smart Chain blockchain and xDai. xDai is a stable coin blockchain on the Ethereum network designed for fast and inexpensive transactions. Ethereum users can use the OmniBridge to exchange their ERC-20 tokens for a decentralized stablecoin that is xDai. 

Axie Infinity Ronin

As discussed, Ronin is a sidechain blockchain bridge designed by the Axie Infinity team to enables a cheaper, faster, and scalable alternative to Ethereum’s mainnet. Axie Infinity players can therefore use the Ronin Bridge to scale up the usability of Axie Infinity on an independent sidechain. Even though Ethereum’s network is in the process of scaling to a more energy-efficient and high-performance ETH2.0, Axie Infinity’s move ensures that the platform achieves a bespoke solution that caters to the specific needs of its community.

Binance Bridge

The Binance Smart Chain blockchain is growing fast and with a plethora of DeFi projects hosted on its network comes the need for interoperability. The Binance Bridge solves the problem of interoperability on BSC by providing a tool that allows anyone to convert their crypto assets back and forth into the BSC ecosystem. Wrapping a token or coin into a version acceptable on the BSC network is straightforward. Users can convert several Ethereum’s ERC20 tokens as well as Tron’s TRC-20 tokens into wrapped versions of BEP20 tokens.  USDT is also supported for conversion on the Binance Bridge.

Wanchain 

Wanchain  (Wide Area Network Chain) boasts of being the world‘s first decentralized interoperability solution in the blockchain industry. With the Wanchain bridge, you can access decentralized bridges that connect the following supported blockchains:

• Ethereum
• Litecoin
• Bitcoin
• EOS
• XRP ledger
• Wanchain
• Binance Smart chain 
• Avalanche C-chain 
• Moonriver

Wanchain’s Storeman Group maintains all the unified collateral pools on the Wanchain Bridge. The Storeman Group is a group of validator nodes that verify cross-chain transactions during conversions.

Syscoin Ethereum Bridge

This Blockchain Bridge is designed to enabled token portability between the Syscoin blockchain and Ehtereum’s blockchain. With the Syscoin Ethereum bridge, assets on Syscoin’s network can be moved back and forth from the Ethereum network using cryptographic proof between the two blockchains. Using the Syscoin Bridge proof of burn protocol, new tokens from one chain can be minted with a 1:1 representation of those tokens in the adjacent chain. This allows any ERC20 token to be deployed on Syscoin’s blockchain and vice versa. The mechanism of this bridge operates on a decentralized framework that utilizes a concept called Superblock Contracts. These are contracts that anchor the Syscoin chain to Ethereum’s network, thus creating a side chain of sorts on Ethereum’s network. The data within this sidechain is then used to mint and burn tokens accordingly.

RSK-Ethereum Blockchain  Bridge

This bridge enables interoperability between the Bitcoin blockchain and Ethereum’s ecosystem. RSK is a bitcoin-centric smart contract platform that features a token bridge joining Ethereum and Bitcoin. The bridge locks tokens from the first blockchain in a smart contract on the original chain. Then, an event governed by an off-chain federation of nodes triggers a token minting process on the second chain. This event is only triggered once more than half of the federates have validated the move in a vote.  Only then are ERC777 tokens pegged to the originally locked tokens are created.  

Benefits of a Blockchain bridges

Ledger Consistency

Given that different blockchain networks operate under different rules, Blockchain Bridges help maintain ledger consistency throughout the asset movement process. A blockchain bridge maintains the consistency of the ledgers it connects by translating information from one ledger to the next without necessitating a change of rules in either of the networks. This adds to the consistency of security and accuracy of the ledgers on both sides.

Interoperability

For a long time, interoperability has remained to be an unachievable dream for most blockchain projects. While it is easy to create decentralized applications capable of a variety of functions, achieving interoperability ensures sustainable decentralization while opening doors to mainstream adoption yet it is not easy. Blockchain Bridges are designed to help different and disparate blockchains communicate and share value on a decentralized framework thus achieving interoperability.

Scalability

Decentralized applications designed for high-frequency asset exchange or computation require sufficient bandwidth that is often hard to come by especially on large blockchain ecosystems such as Ethereum. Blockchain Bridges add a layer of scalability without forcing developers to abandon the network effects or liquidity achieved on the original blockchain. Also, Blockchain Bridges make it possible for Bitcoin users, for instance, to enjoy the capabilities of Ethereum’s smart contracts, thus allowing new unprecedented possibilities. 

Regulatory Policy Enforcement

Thanks to blockchain bridges, a cryptocurrency can be transformed to become compliant with a set of rules and regulations. For instance, the move of a virtual asset from one blockchain to the other can be designed such the newly minted tokens can comply with the rules of a given jurisdiction. This can make virtual assets that are prohibited in certain areas automatically become compliant with local laws. 

Network Efficiency

Blockchain bridges also facilitate network efficiency such that users can send and receive token transactions at a much faster rate than on original networks. They also add an element of cost-efficiency since users can escape the high transactional fees of a bloated network by jumping onto a sidechain or a scalable blockchain network as is the case with Axie Infinity among other examples.

Cross-chain Collateral and Liquidity

Liquidity is one of the major challenges in the DeFi space as most of the time it is fragmented and isolated within different DeFi protocols. By enabling the transfer of value from one network to the other, Blockchain Bridges facilitate cross-chain collateral for various financial products as well as the availability of liquidity across the DeFi landscape. 

Disadvantages of Blockchain Bridges

One of the main disadvantages of using a blockchain bridge is the risk involved with faulty smart contracts. A faulty smart contract protocol can expose the funds to vulnerabilities such as a cyberattack, a denial of service (DOS) attack, or gas limit attacks.  Even with a centralized custodian, the risk of locking funds for a given time can introduce volatility issues that might lead to the liquidation of the locked funds.

Enabling Interoperability

While the idea of a blockchain bridge has proven to solve the problem of interoperability, most blockchain bridges that currently exist are largely untested. 

Even so, they still promise to be a viable solution especially for stablecoins that are constantly in demand across multiple networks. Interoperability solutions such as Blockchain Bridges make it possible for DeFi enthusiasts to operate between different blockchains while enjoying the best there is to offers across the entire DeFi landscape. 

This makes it possible for dApp (decentralized app) developers to cater to the needs of a broader user base, thus accelerating blockchain’s mainstream adoption. As scalability issues across multiple blockchain networks continue, the need for blockchain bridges will only increase.