Why do we need interoperability?
Bitcoin, the first ever blockchain launched, had its first block created in 2009. Then came Ethereum and exponential growth of layer 1 blockchains and layer 2 solutions. As their ecosystems grew, the need for communication between the protocols and the ability to move assets across chains has brought about the need for interoperability, which requires blockchains to be compatible. However, because most chains have their code and consensus mechanism, they do not communicate, which is where bridges come in. They provide a connection between non-compatible protocols and chains.
What do bridges connect?
Bridges can connect:
- A blockchain to a blockchain (e.g., Avalanche Bridge connects Avalanche to Ethereum)
- A blockchain to a layer two solution (e.g., Across connects Ethereum to Arbitrum)
- A layer 2 solution to a layer 2 solution (e.g., Hop Protocol connects different layer 2s)
What do bridges permit?
- The transfer of assets and information from one chain to the other. For example, a user with assets on Ethereum can try Solend on Solana by transferring the Ethereum to Solana.
- Users enjoy cheaper and faster transactions by, for example, moving assets from Ethereum to an L2 like Arbitrum.
- Users enjoy better interest rates. For example, interest rates on Aave to lend USDT on Polygon are higher than on Ethereum.
- Exposure to different protocols and chains. For example, Orca is only available on Solana but supports a wrapped version of Ethereum (WETH). When tokens are wrapped, they can function in different ecosystems.
- Collaboration between developers from different ecosystems.
Two main categories of bridges
Trust-based: These are centralized bridges. They depend on a central entity or system of operations. For example, Wrapped BTC can be used on the Ethereum blockchain because a centralized entity takes BTC and wraps it in an ERC-20 contract to make it function like an Ethereum token. These bridges are cheaper and quicker. Multichain, and chain-specific bridges like the Binance-Ethereum bridge, are known bridges that fall in this category.
Trustless bridges are decentralized and operate via smart contracts and algorithms, removing the need for third parties. The validators process transactions if the service is freelance-based but doesn’t intervene if problems are encountered. The same happens if the bridge utilizes a set of external validators. Connect, and Hop are examples that fall in this category.
Despite the necessity and convenience of bridges, it remains a challenging endeavor. Arjun Buptani, the founder of Connext, explains the situation’s complexity. Security in crypto economics comes from increasing the number and diversity of verifiers (validators, minors, etc.), and ideally, Ethereum’s validator set is used. He then uses switching funds from Ethereum to Optimism as an example. He says that if the bridge uses its set of external verifiers, the funds are no longer secured by Ethereum, even though Optimism relies on the security of Ethereum. The bridge is where the funds are at risk, as it all boils down to who is verifying the system.
Hacked bridges news is ample and frequent. The most notable hacks have had millions drained, such as the Ronin network attack (over $625 million) and the Polynetwork hack ($600 million). The user’s funds are at risk if:
- A bug is discovered in the smart contract
- The user makes a mistake
- The underlying chain is hacked
- The operators of the bridge are malicious
- If the bridge gets hacked
Chains like Polkadot and Cosmos offer a network of interoperable chains that can be very useful for particular use cases. However, the present is already multi-chain, and reducing the future to a uni-chain is probably not in the best interest of innovation and creativity. This is why interoperability remains a fascinating challenge one hopes can be overcome for the well-being of Web3.
Vitalik Buterin has recently voiced concerns over the possibility of losing funds when using cross-chain bridges, which does not exist if chain native assets remain on their native chains. He is much more optimistic about multi-chain blockchain ecosystems and the possibility of layer 3s. Yet, is it not too early to dismiss a nascent solution like bridges? What if it is a learning curve that can inspire better solutions for the future?