Cross-Chain Bridge

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21 Aug, 2024

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A cross-chain bridge is a decentralized tool that links two blockchains and enables users to make seamless transfers. The prime purpose of this bridge is to exchange information and assets from one network to another. They are also referred to as blockchain bridges.

The crypto cross-chain bridge allows users to access and utilize tokens across different networks. They can conduct inter-network transactions between the blockchains. Likewise, it provides enough liquidity and trading opportunities to crypto investors for trade. However, there are various security risks associated with these bridges.

What Is Cross-Chain Bridge?

A cross-chain bridge is a DeFi application that creates a bridge or link between blockchains. So, users can quickly transfer crypto assets from one chain to another.
This bridge first sends crypto tokens to smart contracts, where Oracle verifies the transaction details. Then, these tokens are locked and wrapped by smart contracts.
There are various privacy and theft issues associated with these bridges. Between January and August 2022, 70% of the total funds were targeted by bridge hackers.

Cross-Chain Bridge Explained

A cross-chain bridge is a software protocol with an inherent mechanism that facilitates the seamless transfer of data and assets across distinct blockchain networks. It aims to establish a conduit for executing cross-chain transactions within the ecosystem, enabling users holding various crypto tokens to transfer them effortlessly between disparate networks. Prominent examples of cross-chain bridge development include the Binance Bridge, Polygon Cross Chain Bridge, and Avalanche Bridge.

Blockchain bridges function like secure third-party exchanges or intermediaries, which is crucial in facilitating fund transfers. They ensure the safeguarding of tokens and subsequently deliver them to the intended recipient. In this process, the transfer of crypto tokens to the recipient's address occurs through smart contracts. These smart contracts then engage in the locking of these assets and notify an oracle about the transaction. The oracle, in turn, serves as a validator to authenticate the transaction details. Once verified, it signals the smart contracts to proceed with the transaction process.

Subsequently, the smart contracts generate (or "mint") a copy of the tokens. These tokens are then enveloped or "wrapped" and dispatched to the recipient's wallet. These wrapped cross-chain bridge tokens serve as a protective layer over the original tokens. This layer conceals transaction details to prevent detection by potential hackers or malicious actors. Upon the eventual migration of the process to another blockchain, these wrapped tokens are irreversibly destroyed (burnt). Following the oracle's confirmation of this destruction, the original coins are unlocked and sent to the user's wallet. This multi-step process is called "lock and mint" or "burn and release."

Examples

Let us look at the real-time examples to comprehend the concept better.

Example #1

Suppose Alfred, an experienced trader holding various tokens, faced a challenge transferring ethereum (ETH) to Kevin on a different blockchain. After entering the cross-chain bridge, Alfred initiated the process by entering details. Smart contracts secured his original ETH, wrapping them in a cross-chain bridge token, essentially converting them into wETH.

An oracle validated this and forwarded the wrapped tokens to Kevin's wallet. After recognizing the tokens, they were intentionally burned, paving the way for the original ETH to be safely transferred. Despite the secure process, recent malicious attempts and scams have highlighted the need to bolster bridge security.

Example #2

In August 2023, the Exactly Protocol, a decentralized credit market, fell victim to a bridge exploit, resulting in a loss of $12 million. The attacker's method involved leveraging an exploiter contract to draw funds from Ethereum, channeling them through the Optimum network, and then back to Ethereum. This maneuver led to the loss of nearly 7160 ETH and a subsequent 12% drop in the value of the native token EXA. This incident highlights cross-chain bridges' ongoing vulnerability and susceptibility to exploitation.

Benefits

With the influence in the crypto market, there are additional benefits of the cross-chain bridge to the market participants. Let us look at them:

#1 - Increased interoperability

It provides a greater incentive for the users to have higher interoperability. It means they can quickly transfer data and tokens from one network to another. Plus, the blockchains can interact and leverage data among themselves. Moreover, easy access to various crypto assets also increases liquidity across different networks.

#2 - Easy transfers

In the traditional protocols, there were various intermediaries in the transfer process. It added extra time and cost to the trades executed. However, crypto traders can quickly send assets within the blockchain ecosystem via these bridges.

#3 - Enhances asset security

Along with the transfers, the cross-chain bridge development also focuses on security. It ensures that the assets sent pass through a safe pathway. As a result, the lock, mint, and burn method is applied. No errors or malicious actors can hamper the transfer process with this bridge.

#4 - Cost-effective

As there are no intermediaries involved, the middleman charges vanish. Thus, these bridges allow users to conduct endless transfers in less time.

#5 - User-friendly interface

The blockchain application provides a user-friendly interface to enable a seemingly easy transfer. So, if users wish to port funds, they can experience the features of multiple blockchains.

Risks

Besides the various incentives, cross-chain bridges have certain limitations and associated risks. Let us look at them:

#1 - Privacy and data theft

One of the significant issues faced by bridges is privacy theft. The hackers have quickly adjusted themselves and developed hacking strategies per this protocol. As a result, the number of bridge exploits and scams has also increased. For example, In 2022, almost 69% of the funds were stolen between January and August. Likewise, the Ronin Bridge hack resulted in a loss of $625 million. Again, even the Polygon cross-chain bridge suffered a loss of $4 billion after hackers exploited the smart contract function.

#2 - Scalability issues

With increasing crypto users, scaling the network may take work. It increased the load on the single bridge in the later stages. As a result, the speed and efficiency of the bridge were also interrupted.

#3 - Regulatory challenges

Although users can easily transmit data across blockchains, some might conduct illegal activities like fake transfers, defrauding, and others. It will hamper the customer's trust and lead to regulatory issues, which bridges may face in the upcoming years.

#4 - Cloned bridges

As the DeFi (decentralized finance) platforms boom, it provides space for cloned bridges. Hackers create cloned bridges that allow users to transfer funds to another blockchain. However, these hackers steal all the funds midway, defrauding the investors. Likewise, even a centralized authority can unanimously steal user's funds.

Frequently Asked Questions (FAQs)

1. How are cross-chain bridges hacked?

Hackers can use enormous ways to hack blockchain bridges. They are as follows:
● False Deposit Events - (Creates a false deposit event, sends valueless tokens, and collects high value from the other end.
● Fake Deposit - Tracks the deposits, creates a fake deposit, and validates a real one. Hackers defeat the validation process.
● Validation Control - hacking the nodes of majority validators and approving transactions.

2. What are the types of cross-chain bridges?

The types of cross-chain bridges include trust-based and trust-less bridges. While the former has a centralized authority, the trust-less bridges work in a decentralized format. Other types include federated and relay bridges. In a federated bridge, a group of entities approves the transactions. However, the network relies on a particular blockchain in a relay bridge.

3. Are cross-chain bridges the same as sidechains?

Although they sound similar, both have different functions in a blockchain network. The sidechain is a parallel chain to the parent blockchain. A cross-chain bridge is a protocol used to transfer assets between them or across blockchains.