Cross Chain Bridges: What Are They, and Why Are They Important in DeFi?

Blockchains are primarily made to operate as standalone systems that offer an unchanging digital ledger used to record transactions across many computers so that the record cannot be altered, including other features, such as support for smart contracts.

However, innovation in blockchain technology has gone further to provide a system where users can easily transfer their assets between blockchains to take advantage of each one’s unique benefits, underlining the essence of cross-chain bridges today.

The growth of cross-chain bridges allows users to not just move assets between blockchains but also increases liquidity and the ability to leverage tokens for DeFi-related activities. For instance, Bitcoin gives investors a more stable and secure environment for storing cryptocurrency, but transferring value to the Ethereum blockchain lets investors take advantage of the smart contracts deployed within that environment.

Despite the many great advantages cross-chain bridges offer, they have caught the eye of hackers and money launderers marching upon the crypto sector. Since July 2021, over 9 large cross-chain bridge attacks have occurred, involving more than $2 billion.

In this piece, we’ll uncover what cross-chain bridges are, how they work, and just how safe they are for new and veteran investors. Let’s get to it!

What Are Cross-Chain Bridges?

Cross-chain bridges, often referred to as blockchain bridges or network bridges, are protocols that allow different independent blockchains to connect to one another. It’s like real-life bridges that connect one road to another for free vehicular movements. You get the drift.

However, in the case of cross-chain bridges, they connect separate blockchains, allowing users to transfer assets, tokens, smart contract information, and other forms of data across platforms. Basically, if you have bitcoin but want to spend it like Ethereum, you can do that through the cross-chain bridges.

You might be wondering how these bridges came into play. Well, one of blockchain’s biggest problems was the lack of interoperability – the inability to work together. Usually, blockchains cannot interact with each other because they have different rules that govern them. More often than not, this can lead to high transaction costs and congestion.

But cross-chain bridges operate as neutral zones, so users can easily go back and forth between one another. With users having access to multiple blockchains through the same network, the crypto experience is smooth and highly beneficial.

How Do Cross-Chain Bridges Work?

Cross-Chain Bridges work by allowing users to move crypto from the native blockchain to a different blockchain with the intent of using it on the new blockchain.

Understanding how cross-chain bridges work makes them easier to use and ensures investors know what they are doing. Basically, you can’t actually send BTC to an address on the Ethereum network. If you try to, your transaction will fail, or worse; you’ll lose your funds.

If you’ve heard of wrapped tokens somewhere, it’s definitely about cross-chain bridges. Cross-chain bridges work by wrapping tokens in a smart contract and issuing native assets you can use on another chain. For example, wrapped BTC (wBTC) is an ERC-20 token that uses BTC as collateral. You must deposit BTC on the Bitcoin blockchain before receiving wBTC tokens on the Ethereum network.

One can say that cross-chain bridges are quite complex to manage, but they are getting more popular by the day. Given their increasing adoption, they must offer some benefits to investors and the blockchain space. Let’s find out about those.

Benefits of Cross-Chain Bridges

Cross-Chain bridges offer various functions and have numerous benefits for DeFi users.

1. Interoperability

The most important thing cross-chain bridges solve is the problem of interoperability within the blockchain ecosystem. This essentially allows blockchain networks to connect or interact with one another. In other words, cross-chain bridges let different blockchain networks exchange and leverage data between one another and move unique types of digital assets between the networks’ respective blockchains.

That being said, a network’s interoperability allows for the creation of powerful new products and services that simultaneously leverage the benefits of multiple blockchain networks.

2. Cross-Chain Collateral

This feature allows DeFi users to transfer assets or data from a blockchain with few or no dApps (such as Bitcoin) to another with a more robust ecosystem (like Ethereum, Cardano, or others).

3. Scalability

Blockchain bridges are designed to handle high transaction volumes to ensure greater scalability. The scalability makes it possible for DeFi developers to deploy their applications and users to enjoy such services without giving up the original blockchain’s liquidity and network effect.

4. Better User Experience

Each platform has different benefits within the blockchain ecosystem—better security, cheaper gas fees, faster transaction finality, and more. A cross-chain bridge provides access to alternative platforms, allowing users to harness features that the origin blockchain might lack. Moreover, DeFi users can make and receive micro-transfers faster with cross-chain bridges without paying high transaction fees. This is particularly vital for the blockchain gaming and ecommerce experience.

Are Cross-Chain Bridges Safe?

Cross-Chain bridges undoubtedly provide many benefits, but they are not flawless, as they also have drawbacks, including theft/hacking and centralization. Let’s dive deep into some of the vulnerabilities inherent in a cross-chain bridge a bit.

Now, as it is with every innovation in crypto, cross-chain bridges are not 100% safe. Non-custodial bridges are exposed to attackers. Blockchain bridges have increasingly become the target of thefts, which have long plagued the crypto sector. Over $1 billion has been stolen from bridges so far in 2022, according to London-based blockchain analytics firm Elliptic. The recent Binance hack, where a total of 2 million of the BNB cryptocurrency – worth around $570 million – was withdrawn by the hacker, compounds the fears of crypto investors in cross-chain bridges.

Other blockchain bridge hacks, such as the Portal Token Bridge (Wormhole) saw hackers steal 120,000 wETH, accounting for about $321 million at that time. In June 2022, Harmony was hacked to the tune of around $100 million in various crypto assets, which were sent to the hacker’s Ethereum address.

Vitalik Buterin, the co-founder of Ethereum, has also expressed concern about the risk of hacked cross-chain bridges. For Buterin, cross-chain bridges are not ideal because they increase the security risks in the process of transferring assets. Buterin posits that the tradeoff to security occurs because the attack vectors of the assets are increased across a wider network surface area as it is moved across an increasing number of chains and decentralized applications with different security principles.

Another problem is single points of failure/centralization. Chainalysis holds that bridges are an attractive target because they often feature a central storage point of funds that back the bridged assets on the receiving blockchain. Regardless of how those funds are stored – locked up in a smart contract or with a centralized custodian – that storage point becomes a target. The centralization of the validators has made it much easier to compromise security.

Effective cross-chain bridge design is still an unresolved technical challenge, with many new models being developed and tested. The varying designs present novel attack vectors that bad actors may exploit as best practices are refined over time.

What Can Be Done To Stop Cross-Chain Bridge Exploits?

Well, stakeholders in the Defi sector need to work together to enhance security measures in cross-chain bridges alongside a couple of other things:

1. Strengthening Cross-Chain Security Protocols: Perhaps the most crucial thing developers can do is strengthen their cross-chain bridges’ security protocols. This includes implementing better authentication and authorization mechanisms and more robust encryption protocols.

2. Smart Contracts Audits: Cross-chain bridges often link blockchains together through smart contracts. This makes smart contract audits a vital component of the bridge security process. Identifying and remediating vulnerabilities before code is released onto the blockchain, a smart contract security audit could have prevented many of the largest hacks of cross-chain bridges, as discussed earlier.

3. Promoting Awareness and Education: Stakeholders should promote awareness and education on cross-chain exploits among all users of blockchain ecosystems. This move will help them to be more vigilant about potential threats and take steps to protect their funds and data.

4. Better Communication: Smooth communication among stakeholders is an important move that will help them share information about new threats and vulnerabilities so that they can be addressed quickly. By doing so, they can cooperate in developing standardized security measures for the DeFi Sector.

Why You Should Care

Cross-chain bridges are fundamental in building an interoperable, open, and decentralized blockchain space. They have numerous advantages that allow users to quickly and efficiently transfer their assets between multiple networks.

However, we cannot deny the need for cross-chain bridges to work on their drawbacks and end the string of hacks; some ways to achieve this include smart contract audits and strengthening cross-chain security protocols, among others. Ultimately, cross-chain bridges are still a work in progress in the fast-evolving blockchain space, so there’ll surely be more improvements as time goes on.

Find out more about Harmony’s cross-chain bridge exploit:
Harmony’s Cross-Chain Horizon Bridge Suffers $100 Million Exploit

Read more about how Binance wants to prevent future cross-chain bridge hacks:
Binance-Backed BNB Smart Chain Completes Hard Fork to Prevent Future Cross-Chain Bridge Hacks

Text source: DailyCoin.com

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