More and more blockchains are being developed. Each has advantages and disadvantages. While possessing the most disruptive technologies, most current blockchains have a closed design and cannot interact with each other. Cross-chain Bridge appeared to solve this problem.
What is a cross-chain bridge?
A cross-chain bridge is a bridge connecting multiple independent blockchains. You can think of a Cross-chain bridge as a 'middleman' that connects two blockchains and allows users to transfer tokens, use smart contracts, exchange data, and use other functions.
Why is Cross-chain bridge inevitable?
The Silk Road has been an important trade route for humanity throughout history. Thanks to the Silk Road, new lands and cultures were discovered and were the driving force for developing Asia and Europe in many fields.
The role of commerce is paramount, and the same is true of blockchain. Especially in the present time when blockchains have developed to a certain extent, and each blockchain owns a certain amount of assets and users, not the dominant of Bitcoin and Ethereum as before.
As a user, having a cross-chain bridge will help us:
- Join the search for opportunities more quickly.
- Develop cross-chain apps.
- And much more potential is waiting to be discovered.
How does it work?
Cross-chain bridges operate by one of the following three mechanisms:
- Lock and mint: When tokens are sent from Chain A to chain B., Users lock tokens in a smart contract on chain A, then wrapped versions of those locked tokens are minted on chain B as IOUs. In the opposite direction, the tokens wrapped on chain B are burned to unlock the original tokens on chain A.
- Burn and mint: When tokens are sent from Chain A to chain B, users burn tokens on chain A, then the same native tokens are minted on chain B.
- Lock and unlock: When tokens are sent from Chain A to chain B, users lock tokens on chain A, then unlock the same native token from the liquidity pool on chain B. These types of cross-chain bridges often attract liquidity. So the Liquidity on both sides of demand through economic incentives such as revenue sharing.
Types of Cross-chain bridges
Although there are many different designs, we can generally divide Cross-chain bridges into two main types: Centralized Cross-chain bridges and Decentralized Cross-chain bridges.
Centralized Cross-chain bridge
A centralized Cross-chain Bridge requires users to trust third parties. These parties will act as brokers between chains. They receive assets from users in one chain and mint-wrapped tokens in another.
- Pros: Simple, convenient, and suitable for new users.
- Cons: Users are dependent on third parties. They have full rights to use the sender's assets.
Decentralized Cross-chain bridge
A decentralized Cross-chain Bridge is a pool of assets managed by a group of validators. The larger the number of validators, the more decentralized the bridge is. The user deposits assets from this chain into the pool. The validators verify the transaction, and the pool will mint wrapped tokens in another chain. The Decentralized Cross-chain Bridge does not require users to put their trust in a third party.
- Pros: Transparent because everything is verifiable on-chain.
- Cons: There must be a solution to keep validators working correctly and prevent lousy behavior when verifying transactions.
The risks of cross-chain bridge projects
Steal user money
The project operator can cheat and steal users' funds for a centralized bridge. Some bridge projects have introduced solutions to control and prevent managers when they detect that they have bad behavior that affects users.
Attacked by hackers
Decentralized bridges are developed to reduce trust assumptions and provide users with greater security. Blockchain trustless bridges use oracle and smart contracts to manage assets.
However, a smart contract can always be exploited of the ten biggest hacks of the cryptocurrency industry in 2022, four related to cross-chain bridges, such as Ronin Network, Wormhole, Nomad, and Harmony, with a total loss of more than 1.2 billion USD.
Hopefully, the above article has provided you with the necessary knowledge about Cross-chain bridges and some support in investing. Here are a few key points to keep in mind:
- Cross-chain bridge is an inevitable trend in the development of Crypto.
- The ever-evolving blockchains, the growing number of bridges, and the growing number of users demonstrate the absolute need for cross-chain bridges.
- Cross-chain bridge has many limitations: Liquidity fragmentation, poor user experience, and low security.
- Cross-chain bridge is the way to go to the next Crypto boom and will undoubtedly open up new opportunities for those who know how to seize them.