Blockchain technology has come a long way since its inception with the creation of the Bitcoin network and later Ethereum. Since then, a huge amount of blockchain networks have been created, with a variety of designs and functionalities envisioned for different purposes. One of the key value propositions of blockchain technology revolves around decentralization: the ability for networks to be managed by multiple stakeholders, rather than the traditional governance model. What are blockchain bridges?
As we discussed in our blockchain scalability article, the fact that networks cannot interconnect with each other means that much information cannot be shared. The isolated nature of today’s blockchain networks works against this principle of decentralization. For example, if a developer wants to create a dApp on a particular blockchain network, he is generally locked into that platform and cannot take advantage of the benefits of other blockchain networks or interact with them. Or to take another example, many users simply want to move digital assets from one blockchain to another and take advantage of its services more efficiently.
This is where building “bridges” between networks comes into play as a solution to this problem. The shift to a world where blockchain networks and systems are interoperable will allow applications to build on each other’s services and strengths. This is likely to have a major impact on a wide range of services, with a new decentralized and interoperable Internet taking shape. Applications such as decentralized finance (DeFi) will benefit from the ability to build a network of interacting services across communities, expanding their available resources and increasing their user base. What are blockchain bridges?
What are blockchain bridges and how do they work?
A blockchain bridge is a connection that allows the transfer of arbitrary tokens and/or data from one blockchain to the other, including smart contract instructions. The two blockchains may have completely different protocols, rules and governance models (such as Bitcoin and Ethereum, or a main chain and its secondary chain or sidechain), but the bridge provides a compatible way for them to operate with each other securely on both sides. This interoperability allows users to make fast, low-cost transactions of tokens hosted on otherwise less scalable blockchains and run Dapps on more than one platform. While some blockchain bridges are centralized, others retain the important decentralization that helps ensure the security of DeFi protocols.
Which types of bridges are they?
There are various bridge designs, but they can generally be divided into two categories: more centralized bridges, which rely on trust, and decentralized bridges.
Centralized bridges rely on some sort of central system or authority to operate; this implies that users must trust a mediator to use a particular application or service. In contrast, decentralized bridges are those that do not require users to place their trust in an external authority or entity. In this case, the trust is placed in the mathematical algorithm embedded in the code. In a decentralized blockchain system, this is achieved by nodes reaching a consensus in common agreement with the rules established in the software. This eliminates many of the problems of centralized systems, which are open to abuse of power or corruption, through transparency and the incentive of widespread participation.
Which is the purpose of blockchain bridges?
Bridges can be created to suit various purposes and objectives. Not only are they capable of allowing a token from one network to be used on another, but also to exchange any type of data, decentralized identifiers, off-chain oracle information and much more. Bridges allow applications to be even more decentralized by not being limited by their home network.
Why do we need blockchain bridges?
Most blockchain networks are based on technologies for consensus, functionality and execution of smart contracts. For an ecosystem that positions itself as distributed and decentralized for transactions, the lack of interoperability between networks hinders its development. To put this in perspective, let’s imagine two blockchain networks: Ethereum and Avalanche . Ethereum users today experience slow transaction speeds and rather expensive gas fees at times of high traffic and congestion on that network.
With a bridge in between, the user can send their token (ERC-20 or ERC-721) to Avalanche to take advantage of its fast transaction times and lower costs, resulting in better performance. In this situation, both blockchains benefit from the use of the bridge by users. On the one hand, network traffic on Ethereum is reduced, distributing it to other, less congested networks, thus solving some of Ethereum’s scalability issues. On the other hand, the Avalanche network gains visibility with the Ethereum community. Once a bridge links separate blockchain ecosystems, it allows users to take advantage of the virtues of each and thus reap their benefits.
The benefits of blockchain bridges for DeFi users
Interoperability between blockchains, including between a mainchain and a sidechain, allows users to access the benefits of each without sacrificing the advantages of the mainchain.
This gives users several benefits:
- Cross-chain collateral: bridges allow digital assets to be transferred from a blockchain that has significant value but few Dapps of its own – such as Bitcoin – to one that has a developed DeFi ecosystem – such as Ethereum – and a need for additional liquidity.
- Scalability: bridges designed for large transaction volumes allow for greater scalability, without forcing developers and users to give up the liquidity and network effect of the original chains. This is important as congestion issues persist in Ethereum before the full release of Ethereum 2.0.
- Efficiency: users can make and receive microtransfers quickly and without paying high transaction fees.
Interoperability: the future of blockchain technology?
Polkadot, for example, recently announced the launch of its blockchain connection bridges to link its decentralized ecosystems with other external networks. ChainX, a cryptoasset gateway, is planning bridges to various networks. Bifrost has developed an EOS network bridge that enables decentralized asset transfer. Centrifuge collaborated with ChainSafe to develop an asset-independent, multi-directional bridge between Ethereum and Substrate-based blockchains.
Building the future of an open and decentralized web (Web 3.0) requires a spirit of interoperability and collaboration, with teams from across the blockchain ecosystem working together to generate a new paradigm. Blockchain bridges provide a promising way to go further, in an effort to promote greater innovation, technological relevance and user adoption. By enabling different blockchain protocols to work together, bridges can help us move towards the next generation decentralized web, putting an end to the relevance of power-centralizing agents that do not prioritize user interests.