Written by Lisa Gibbons and Said Habou Adi
Blockchain bridges are the next big advancement in the world of decentralized finance. More and more, bridges are used to easily move tokens from one blockchain to another. A blockchain bridge, also known as a cross-chain bridge, connects two separate blockchains and ensures the rightful flow of cryptocurrencies between them. Basically, bridges easily allow you to convert one cryptocurrency to another without the need for an exchange. However, using bridges is risky. In March, some pirates hacked Ronin bridge and stole $600 million to everybody's surprise.
Increased access to blockchain services
Alongside the increased popularity of cryptocurrencies, there has been a massive increase in the volume of cross-bridge transactions involving a wide range of tokens. There are now thousands of blockchains offering a range of services and each has different advantages. A user may use one blockchain for lending, one blockchain for NFTs and another for saving. The rise in the number of Layer-1 blockchains being used has brought attention to the need for bridges.
Flare Network has recently received a Supagrant from Algorand to build a Bitcoin bridge. Glitter Finance has launched a bridge from Solana to Algorand and received a grant to establish a cross-chain bridge between five ecosystems. Rainbow bridge connects the NEAR ecosystem with Ethereum. These bridges allow the end-user to seamlessly migrate assets from one ecosystem to another.
“The blockchain world would greatly benefit from fast, decentralized and fully-insured bridges to connect all the siloed chains and their tokens. Flare is the cross-chain technology that delivers this solution and is helping to scale Web3 by connecting everything,” says Hugo Philion, Co-founder of Flare Network.
Let’s take a closer look at the types of bridges, the benefits of bridges and the risk of using bridges for DeFi users.
How Do Blockchain Bridges work?
If you want to convert one cryptocurrency to another, you will need to use an exchange and convert your crypto assets on their trading platform. For example, if you want to convert your SOL to ETH or a target cryptocurrency on a trading platform, you will use an exchange that manages your crypto assets for you and requires you to prove your identification. This compromises not only the complete ownership of your assets but also the anonymity promised by Web3.
With Blockchain bridges, you will not need an exchange as they enable you to transfer tokens and also convert smart contracts and send data. Through a blockchain bridge, owners of a cryptocurrency can transfer that crypto to and from another chain.
In order to convert your specific crypto assets to another set of crypto assets, cross-chain bridges work by exchanging information remotely or locally. They communicate and share value with other networks. These are known as unidirectional bridges. Bi-directional bridges allow users to freely convert assets to and from blockchains. With the Rainbow bridge between NEAR and Ethereum any developer working on NEAR has access to all the assets on Ethereum, and developers who build on Ethereum can move performance or gas-fee critical parts to NEAR while keeping their Ethereum user base.
The benefits of cross-chain bridges for DeFi users
Blockchain bridges provide various functions and have numerous benefits for DeFi users. Cross-chain bridges solve various problems within the DeFi ecosystem by allowing communication between blockchains. They have numerous advantages that allow users to quickly and efficiently transfer their assets between multiple networks.
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Glitter Finance has been awarded a grant by the Algorand foundation to develop a cross-chain bridge between five blockchain ecosystems: Algorand, Solana, Cudos, Terra, and Polygon. Glitter Finance will first create a bidirectional bridge between Algorand and Solana.
"Creating ease of movement is central to the core of the technology we create at Glitter. In a circular economy, where everyone is interconnected, technology cannot be isolated. Bridges allow all users to take advantage of all complimentary ecosystems" says David Dobrovitsky, Founder and CEO of Glitter Finance.
The core benefits of blockchain bridges include allowing users to easily transfer assets, enabling cross-chain collateral, ensuring greater scalability and making the transaction process between blockchains more efficient which is particularly important for gaming and eCommerce in blockchains.
Though cross-chain bridges provide you with a lot of benefits, they also entail risks as discussed in the next section.
Risk of Using Bridges
Although cross-chain bridges are important: to enable capital to flow freely across blockchains without the need for centralized institutions, bridges are also in the early stages of development. Interacting with any type of bridge carries risks. A number of these bridges lack security and are open to exploitation.
Flare is building a bridge network that can provide insurance on assets in transit across chains, that uses consensus and risk mitigation to manage bridging rather than a custodial multi-signature approach. This innovative approach to development from the outset is needed as we begin to see bridges being used across all ecosystems.
"Ensuring the security of bridges will be a top priority for all blockchains in the future. As more and more ecosystems become intertwined, using a hybrid of Defi products and services across various ecosystems having an ultra-intuitive approach to potential bridge hacks will be paramount" says Dmitry Fedotov as Chief Strategy Officer from GBC.AI.
Other risks include bugs in the code, technical families, malicious attacks, censorship risks and custodial risks from bridge operators.
Cross-chain bridges are very important as they help users convert their crypto assets without using exchanges that compromise anonymity. Most blockchains are allowing networks to communicate with each other without the need for intermediaries.
Decentralization and anonymity have always been defining factors of the blockchain space. Giving users the possibility to convert their assets without sending their personal data such as ID, is a big step toward cryptocurrency normalization despite the numerous risks that cross-chain bridges carry.