Understand Blockchain Bridges For Amazing Crypto Benefits
What? Why? How? Of Blockchain bridges
What: It’s a tool that allows you to move assets from one blockchain to another.
Why: Asset incompatibility between blockchain networks
How: Blockchain bridges are used to generate synthetic derivatives representing other blockchains’ assets. The original item is ‘wrapped’ in a digital vault, and a new token is created that may be used to transact on other platforms. This method is known as the “Burn and Mint” method.
This ’mint and burn’ method draws on the quantity theory of money described in monetary economics in order to avoid inflation and changes in currency valuation based on the movements in the total supply. The theory states that MV=PT where:
M= Money supply
V= Velocity of money
— 🆇🅱🆄🅱🅱🅻🅴🅱🅾🅱🅱🅻🅴 (@bubblebobble123) October 17, 2018
Other blockchain bridges to look into: Users can utilize blockchain bridges to participate in DeFi protocols on different blockchain networks. It enables developers from various blockchain networks to work together to create new products. It increases the rate of innovation across all networks. When a network’s goal is to grow its user base, it has little choice but to innovate. Benefits are available to users across platforms.
dApps: Decentralized applications (dApps) can exist on various blockchain networks. Allows dApps to take advantage of the advantages of many networks, accelerating their growth.
Higher speed and reduced transaction fees: Transferring to a different network has advantages in terms of fewer transaction fees, higher rates, and improved functionality as a result of wrapping. Allows users to make use of the benefits of other chains.
For instance, it was bridging ETH to Polygon to reduce transaction fees. Sandbox, an Ethereum-based metaverse platform, shifted to Polygon to reduce transaction fees and network congestion.
Blockchain Bridges of Various Types
- Trusted or centralized
- Users must relinquish control of their assets and place their trust in the bridge operators’ reputations.
- Users must have faith in the caretaker.
- Decentralized or untrustworthy?
- Smart contracts and algorithms are used to run the system.
- Users retain ownership of their possessions.
- Users must have faith in the code.
Apart from bridge control, there is a difference in the way bridges allow users to transfer and receive assets.
One-way/unidirectional: This allows assets to be transferred from one blockchain to another, but not the other way around. Wrapped BTC will enable users to send BTC to ETH in the form of an ERC-20 token but not back to the BTC network.
Assets have transferred both ways in a bidirectional port. Solana’s Wormhole allows users can move their digital assets across the SPL and ERC-2 blockchains.
Bridges with the most extensive spans
Wrapped Bitcoin: accounts for about half of the bridge market, with a total value of $10.2 billion locked in (TVL). BitGo holds all wrapped bitcoin in its control, making it a centralized bridge.
wBTC connects the BTC and ETH networks.
A Decentralised autonomous organization (DAO) with 17 members is in charge of wBTC. Each member has a key to the system’s multi-signature wallet, which keeps it safe. When it comes to adding/removing members and making modifications to the smart contract, voting is required. As a result, the DAO and its 17 members are responsible for the safety in this case.
- $6 Billion in Multichain
- $3.6 Billion TVL Wormhole
Defi Llama Risks keeps track of Bridge TVL rankings.
- There’s a chance there’ll be a problem in the coding, which might lead to exploits.
- DeFi protocols must communicate with oracles that provide data from the outside.
- Human mistakes, spam, and software failure are all technological risks.
- Bridge operators misusing customer payments pose a custody risk.
Hackers can use exploits to target vulnerabilities.
On March 23rd, the Ronin Network, an Ethereum-based sidechain that enables axle infinite, was hacked, resulting in approximately $600 million in losses.
The cost of a bridge attack is $320 million. In early February 2022, wrapped Ethereum (wETH) was hacked over the wormhole bridge. Jump Trading Group was brought in to replace the money. The attackers introduced faked data, circumvented verification, and withdrew the matching tokens on the target chain, according to CertiK.
Interoperability has been a limiting factor in the range of blockchain applications that can be investigated. Lower transaction prices and faster speeds are required for the widespread adoption of DeFi, metaverse, and NFTs. As evidenced by previous attacks, Blockchain Bridges have a long way to go in terms of security, but they are currently the most excellent answer for interoperability.