What is a crypto bridge?

Brief summary

• Crypto bridges let different blockchains "talk" to each other.

• They act as a kind of currency exchange for your digital coins.

• They help reduce crowding and high costs on networks like Ethereum.

• But beware: they can be targets for hackers.

• You have "trusted" and "trustless" bridges, depending on how much you want to rely on them.

What is a crypto bridge?

A crypto bridge is a service that enables the transfer of value between blockchains. They are almost always built to bring speed up and transaction costs down on a layer1 blockchain. Bridges were mainly built in the DeFi heyday to make the Ethereum network faster and cheaper via this workaround. Later, several more were built for other blockchains.

What does the term crypto bridge mean?

Literally, cryptocurrency means bridge. A bridge is a connection between two places. So the crypto bridge connects two places, in this case two blockchains.

The blockchain bridge is also often called a cross chain bridge. This terminology depicts the entire core. A bridge connects different blockchains, which would not be able to communicate with each other without a bridge.

In general, we talk about the bridge between layer1 and layer2 blockchains.

By the way, a bridge is quite different from a sidechain, which is usually created to offload the main blockchain or main chain.

How does a crypto bridge work?

Each blockchain has its own system of variables such as consensus, cryptocurrency, transaction costs, smart contracts, speed, security and so on. You could think of this as a language spoken only on this one blockchain.

So if you want to do something on that blockchain, you have to speak the "language." So anyone who wants to trade on Ethereum must be able to communicate on that blockchain. You won't be able to do that with Bitcoin or BNB coins. Those work with a completely different system.

A bridge can solve this problem. It acts as a kind of exchange office. Anyone who wants to start trading on Ethereum, but has currency from another network, must first exchange them to currency from the Ethereum network. A bridge can do this for you. It can also transfer an NFT from the current blockchain to another blockchain. This is also called interoperability. If you are going to exchange, you usually do so through the bridge's smart contract.

For example, if you have a popular coin on one network, which of course is also widely traded on the other network, you can convert your Polygon Tether to Ethereum Tether, for example, so that you can start trading on Ethereum, which would not be possible without a bridge. Then you would have to pay the expensive trading fees of the Ethereum network. The bridge indicates the transaction fees and deducts them from the total sum. Sometimes fees are added, such as additional gas fees or slippage fees.

So a bridge can send any popular coin it supports to the relevant networks. When it comes to less popular and liquid coins, you may have to switch these coins to a popular one first, before you can send the value to another blockchain via a bridge. Coins that are little traded on the various networks often face high slippage because there are few providers and little liquidity in the coin. Sometimes you don't even get them exchanged at all.

This is what a Polygon Tether contract looks like:

0xc2132D05D31c914a87C6611C10748AEb04B58e8F

Ethereum Tether's contract looks like this:

0xdAC17F958D2ee523a2206206994597C13D831ec7

The bridge, after deducting transaction fees, provides you with coins that are covered by the Ethereum contract and thus you can use on Ethereum's blockchain to, for example, buy other tokens or coins or pay for transaction fees on the Ethereum platform. Without that, you would not be able to use the Polygon Tether on Ethereum because the language of the contract is not used on Ethereum.

Wrapped tokens

You often see bridges using wrapped tokens. For example, a wrapped Bitcoin is worth as much as a BTC, but converted into the "language" of the blockchain it is sent to. You then first send funds to the bridge, which are used as collateral. A bridge wrapped token is created on the blockchain you want to go to with your funds from the source as collateral. Validators or multisigs should then protect your funds in the exchange pool, this is the intermediate step that bridges can make a target for an attack. After settlement, the funds disappeared on the source blockchain and appeared on the target blockchain.

Another way to exchange is a liquidity pool, where the cross chain bridge maintains a pool of popular coins that can then be exchanged from those funds and where the liquidity providers receive a reward per transaction for filling the pool.

Why are there crypto bridges in the first place?

For that, we actually have to go back to the heyday of DeFi. There was an awful lot of trading on DeFi platforms back then. A lot of trading took place on Ethereum's blockchain. This was no accident. A lot of new applications and tokens were created with ERC-20, a simple technique of standardizing smart contracts, which made creating a token very easy. With its increasing popularity, a bridge was needed to dampen congestion.

Almost all new tokens appeared through DeFi protocols and on platforms where ETH had to be paid for transaction fees, because an ERC-20 token only works on Ethereum's blockchain. UniSwap and SushiSwap were the best-known representatives of such platforms, decentralized exchanges where you could trade in well-known as well as new and obscure tokens and coins.

This was very good news for Ethereum miners, who were earning themselves fat on transaction fees for each trade. Because there was so much traffic on Ethereum and the transaction speed there left something to be desired, miners, who had to validate transactions, could charge sky-high fees, even for the most minute transfer of value. Paying 50 euros to send 1 Tether (or 1 million) over the Ethereum network was perfectly normal.

It worked like this: in every period, there were traders who wanted to make a transaction. There was not enough speed on the Ethereum platform to handle the demand. Miners prioritized the traders who offered the highest transaction fees, and so you got higher and higher transaction fees, because traders who offered less couldn't even trade, because it took forever for your trade to be completed, if ever.

This was a typical case of becoming a victim of your own success. With rising transaction costs and queues on the Ethereum platform in particular, the need for a solution arose.

The terminology "Ethereum killer" was also coined during this time. The reason was obvious. Everyone was annoyed by the slowness and prohibitively expensive transaction fees on the Ethereum network, except the miners. However, this never materialized. Moreover, Ethereum now works with proof of stake, so this is much less of an issue now.

The solution came during the DeFi hype. Actually, two came. One solution was competition for the Ethereum platform. For example, that was Binance's platform, the Binance Smart Chain, which worked with BNB and Cake as its base cryptocurrency and had PancakeSwap as its home base.

The other solution was called a bridge.

Benefits of bridge

So you can transfer coins and tokens from one platform to another. So what? Well, the main reasons for bridge builders joining the crypto world are cost reduction and time savings. Interoperability is another important addition.

At the time, anyone on an Ethereum network who saw how much transaction fee he had to pay had a couple of options. He could become furious, having to pay 50 euros to buy or sell 5 euros worth of value. These traders quickly gave up.

The second option was to then pay morosely and almost always suffer fairly large losses, purely because of transaction costs.

The third option was to bet big money, which made the transaction costs matter relatively less. This third option was actually the reason the small trader was squeezed out of the market by the big bags.

With the advent of the bridge, the smaller trader could also join the more expensive networks. You put your money in on a bridge, it exchanges your currency for currency from the expensive and slow network at significantly lower transaction costs and at a much higher speed, and you can also join the party on the Ethereum network. That is, you can do all sorts of things on the Ethereum blockchain that were previously out of your reach.

You can also use dApps between blockchains, making them interoperable with bridges.

As people gain access to multiple blockchains, the amount of potential users for each connected blockchain is greater. Adaptation by the masses is then much more obvious. For example, with Bitcoin, you can do much more than just hold it as a store of value if it is connected to bridges.

Through collaboration and innovation, platforms can become more sophisticated and user-friendly. This makes it increasingly easy to create applications that are important to users and blockchains.

Bridges gained popularity very quickly in DeFi's heyday because they filled a huge need. Without bridges, DeFi would have been much less popular. Unburdening the most popular networks allowed the show to go on.

Disadvantages of a bridge

Bridge security is a key issue. Smart contracts must be tightly sealed before you launch a bridge. Especially early bridges from the DeFi heyday failed because they spent a lot of money on promotion, but a lot less on security.

For example, at Harmony, the buffer where virtual money was stored was looted, to the tune of $100 million. Ronin lost $600 million and Wormhole $320 million; Polygon, BNB and Nomad also suffered attacks. Billions have been stolen from bridges over time. Cross-chain bridges therefore move tens of billions back and forth between blockchains.

Cross chain bridges should actually go through enough audits before putting their bridge down. If you are going to use bridges, it would be helpful to use only those that have been online for a while and have not suffered from hacks and the like. Bridges are popular targets for attackers, because there is often a lot of money in the buffers and many of them do not have the security fully closed.

A bridge can be robbed in many ways, if only you are smart enough to see through the vulnerabilities of the smart contract or engineering of a bridge.

Since smart contracts are very prone to fraud in popular and rich bridges, a lot of time and money must be put into preventing theft and a stopping protocol in case it does happen. The pitfalls of smart contracts are too many to mention and thus a big point of concern at bridges.

Even when using cross-chain messaging protocols, the code and design of the protocol must be constantly monitored. Even a simple forgotten update can provoke an attack.

Double spending can be a problem if the same transaction is broadcast on both connected blockchains and there are no decent parties to check it.

When a third party is involved you are always dependent on their reliability. An unreliable and new bridge can be set up to perform a rug pull just like that.

Trusted bridges and trustless bridges

A trusted bridge is a bridge between blockchains that works through a third party. This party must guarantee the security of the bridge and the user must trust this party.

A trustless bridge uses blockchain technology to connect networks. The trust in this bridge is based on the correct encryption and reliable validation by consensus.

Trusted bridges are usually easier to use and faster, but they are centralized. Moreover, you depend on a single party for the security of your funds, unlike trustless bridges, where transactions are validated by many nodes and handled through a publicly viewable smart contract.

The trustless bridge is often less user-friendly and slower, but is most commonly used because of its decentralized nature.

Interoperability of blockchains

The world of blockchain never stands still. More and more important protocols are being added that are necessary for other blockchains. To work with these other blockchains, bridges are needed for interoperability.

Some blockchains solve this by creating built-in bridges, like Cardano connected to Ethereum or something. Most blockchains can't do this or don't have the money to do so and so will have to use a bridge to import techniques like oracles, dApps or smart contracts into their blockchain.

Eventually a somewhat more convenient solution will be found, but until then, a bridge is essential to generate interoperability between blockchains.

The future of cross chain bridges

Bridges have served an important function in the world of blockchains for a relatively long time. They were essential to allow blockchains to "talk" to each other.

They also made sure that the speed of Ethereum transactions in particular and their cost became a lot more acceptable to the average user. This gave DeFi an extra boost that was necessary to give everyone the opportunity to join.

Bridges will probably remain a part of the crypto world for a long time, but their importance is declining. This is because new things are being invented all the time to address bottlenecks. For example, Ethereum is pushing hard to bring down transaction costs firmly by using roll ups.

Another problem is excessive network traffic. This is where Ethereum is again taking the lead by significantly reducing the amount of data that reaches the Ethereum Virtual Machine via a transaction with their Proto-Thanksharding.

Other networks are also already making good use of sharding to reduce the workload. So it is clear that the crypto world has a very good grasp of where the shoe pinches.

As the problem of overcrowding and high transaction costs continues to be addressed, the bridge will increasingly begin to act as a "translator." We would not be surprised, therefore, if at some point a new technology comes along that will focus purely on making it interoperable.

Whether that will still be called a bridge remains to be seen. So the bridge may have had its day, or it may continue as a one trick pony in a new guise. Either way, the bridge served a very important function during the heyday of DeFi and many merchants have a statue on their desktop in the form of a bridge.