The interchain / cross-chain space is still relatively new and I’ve been following the space since its infancy. It’s an area I’m both intrigued and interested in and will breakdown my thoughts below on why interoperability between blockchains will continue to see growth and further development.
I will keep this post as simple as possible and just touch on the fundamentals without going too much into protocol architecture and other technical details. Just like the majority in the space I wouldn’t consider myself very technical and I won’t pretend to be.
Background
In the earlier 2017 bull market, there were only a few blockchains with even fewer usable dApps for users. As more Layer-1 blockchains were introduced with more to do on-chain over time, the need to be able to move liquidity from one blockchain to another was important for users to be able to utilize the dApps that resided on these alternate blockchains and one way to capture total value locked (TVL) by allowing the bridging of bitcoin and ether.
With the “DeFi Summer” explosion of 2020, the demand for cross-chain bridging gained greater traction as the more degen in the space began utilizing DeFi protocols across different blockchains in a constant APY chase.
While there was an increase in demand for bridging, the overall volume bridged between different blockchains had yet to reach a significant volume. There was a noticeable change post the bearish phase mid-2021. At the time, more users were chasing yields on protocols such as Anchor on Terra, Olympus DAO on Ethereum and the Frog Nation with Abracadara Money, Wonderland and Popsicle Finance which were on primarily Fantom and Ethereum.
What Are Bridges?
Before we go any further, lets get into the details of what a blockchain bridge does and what makes them important. I’ll just discuss some key information about cross-chain bridges for those unfamiliar and cover some key aspects.
Historically, blockchains are by design silos. They exist within their own environment and are disconnected from anything else. If you’re engaged within one blockchain, your assets on that specific blockchain exists only within that specific environment. Tokens available cannot be utilized anywhere else except within the blockchain they were created and were not interoperable.
For example; USDC on Ethereum would not enable you to obtain USDC on BNB Chain. Your USDC is only valid on the Ethereum blockchain and if you needed USDC on BNB Chain you would have to obtain it on the blockchain itself or purchase then transfer the tokens via an exchange that is connected to BNB Chain (as in this example).
Bridges simplified the process of moving tokens and liquidity from one blockchain to another. For a time they were seen as a means to an end of growing alternate L1 blockchains by allowing the bridging of tokens from Ethereum. Bridges are however capable of more and recently there has been a rise of bridge and interoperability projects that are building additional capabilities. These include:
- Token Bridges
Main thing to remember here is that there are two different models to bridge tokens. One is liquidity pool based and the other a mint and burn model. Some projects may utilize a mix of both depending on the tokens being bridged by their protocol.
- Cross-Chain Messaging
Also known as Generalized Message Passing, these bridges can transfer messages and data across chains as well as tokens. This model allows for more bridging capabilities beyond just tokens. NFT bridging would fall under this bridge model.
The above is just a simplified explanation of the types of bridges you would come across as you explore different protocols. Different protocols would have their own unique architecture on how they achieve bridging and security.
A key part of a protocol’s security and a key consideration is the trust assumptions designed into the protocol’s system architecture. I know most are unfamiliar or just plain don’t care but trust assumptions are important and you’ll see why.
- Trusted
Bridges build based on a Trusted model externally verify their transactions. What this means is that the protocol has their own muti-sig validator set or oracle network or any other method that verify’s the transactions off the blockchains involved.
- Trustless
Trustless bridges does not mean you should trust them less. These bridges rely on the blockchains they are connecting to and the validators on those blockchains directly. In comparison with Trusted Bridges that adds an additional layer which you are required to “trust”, trustless bridges do not add anything additional between the blockchains connected.
Why Are Bridges Important?
Now that we’ve looked at some key design aspects of bridge protocols, its not difficult to see how this helps enable a more connected crypto space, with the dApp layer coming more to the foreground while the blockchain layer is minimized from view.
While the bridging space may not seem an important infrastructure component of the blockchain industry, it is my opinion that this will change. The majority of blockchains today are built with a general one-size-fits-all structure. This is changing as we see from both the blockchain and dApp perspective that this is a necessary move.
Imagine in the future where DeFi is heavily concentrated on Ethereum for security; the Flow Blockchain for NFT’s projects due to its flexibility and adaptability specific to NFT’s, or Immutable allowing for greater TPS and onboarding of large user bases for Gaming, etc… without interoperability between these different blockchains, the experience for users would be not only poor but also a royal pain.
What Are The Risks?
Any new space is not without its risks and bridges presents a big but necessary risk to achieve mass adoption. In February 2022, Vitalik Buterin posted on his Twitter account that it was his opinion that the future would be a multichain rather than cross-chain. You can read his tweet here or the earlier reddit thread here.
The Ethereum Foundation in their document on Bridges listed the following as key risk areas for cross-chain bridges.
- Smart Contract Risk
Where the smart contract of the bridge is exploited. While the majority of bridge projects have undergone audits, this is however no gurantee that the bridge would not suffer a future exploit.
- Systemic Financial Risk
Because bridges for some part utilize wrapped assets for bridging to a chain where the asset is non-native (example $ETH on Ethereum is wrapped to $WETH on Polygon when bridged). In the event of an exploit on the destination chain, the bridged asset would not retain the same value as the original asset bridged holds.
- Counterparty Risk
This is where you trust the bridge validators that are verifying transactions not to gang up (collude) and steal user funds. This is true to Trusted Bridge model only.
- Other Issues
Considering that bridges are still in their infancy, there is uncertainty in terms of how bridges would perform when faced with issues that have never been encountered before such as network-level attacks or state rollbacks.
While the above are from a more theoretical point of view, its good to compare how theory stacks up against actual incidences. In a MakerDAO forum post by their developers and other knowledge contributors, they analyzed past exploits and found the following to be the key causes.
- Smart Contract Bug
This corresponds with the Ethereum Foundation’s assumptions where a bug in the smart contract which was supposedly transparent and audited was the primary cause of the exploit.
- Underlying Blockchain Implementation Bug
The target of the exploit in this scenario is not the bridge itself but it’s implementation on a connected blockchain. So far only one incident of this type reported and it involved the Wormhole / Solana exploit which you can read about here.
- Offchain Infrastructure Bug
This could include commits on a public github that allows a potential blackhat to find points for attacking the bridge or even processes for deploying and checking codes released to production environment.
- Crypto Key Exploit
This happens when some keys for a multi-sig validator setup is compromised. The most known case with this type of exploit involved the Ronin Bridge. You can read more about it here.
- Key Security Risk Assumption Failure
When teams are under pressure to deliver sometimes they make ad hoc changes or fast track through internal review and approval processes (such as skipping audits for changes) or pushing through ad hoc changes in procedure.
You can read more about the hack review on the MakerDAO forum here. To date there has been over $2 billion in funds lost due to hacks & exploits of bridges. While it may seem like Vitalik was prescient to the continued exploiting of bridges, in my opinion this infrastructure sector of the blockchain industry is still very much in its infancy with teams testing interoperability models to determine the most secure and efficient methods to achieve a more connected and interoperable blockchain space.
While most crypto maxis would have you believe that you need only trust a single blockchain, I differ in my opinion. I see a future with interconnected blockchains, each purpose built running beneath specific dApp layers and empowering different sets of features and functions. We could also very well see dApps leveraging on different blockchains to power the various functionality offered. This to me is the dream and while it may not happen in the near future, we’re definitely headed in that direction.
Why A Multi-Blockchain Future?
We can already see the beginnings of this with application specific chains (AppChain) being launched with Ethereum sidechains (ex. Axie Infinity), Avalanche subnets (ex. Crabada), BNB Application Sidechains (ex. Ape Chain) and even projects launching their own L1 utilizing Cosmos SDK (ex. dYdX).
The reason is quite simple, the developers are able to build the AppChain according to the performance requirements of their dApps, have greater levels of customizability and are in full control of the value capture mechanisms deployed on their chain. This allows them to avoid situations like the one faced by Polygon in January 2022 where a Web3 game called Sunflower Farmers not only caused network congestion but lead to a spike in gas fees making Polygon extremely expensive to use during that timeframe.
There are also challenges with the AppChain direction but that would however require an entirely separate post to run through in detail. There is a post by Dimitry Berenzon of 1kx which I found has similar observations as mine; you can check his post out here.
Liquidity Provisioning & Challenges
One key challenge I would however like to point out is liquidity provisioning across the various chains. The lack thereof which makes bridging (in the case of tokens) agonizing. Imagine you’ve moved your tokens to a new chain you want to explore just to realize that you’re unable to swap your bridged tokens on a DEX due to a lack of liquidity. You would have no other choice but to bridge your tokens backcausing you to lose time and gain some mental anguish.
While not a problem originating from the bridges themselves, it is still a hindrance to the overall user experience when moving cross-chain especially to blockchains which are newer or have lower liquidity levels.
Funding and seeding of liquidity pools across different blockchains would not be financially viable for bridges long term (most are already actively incentivizing liquidity pools on their own bridges) and liquidity providers would not be keen to provide liquidity if there isn’t sufficient volume to generate earnings.
For those unfamiliar with liquidity pools, the diagram below provides a simplified graphical explanation.
One cause for this situation, is that the newer blockchains are responding in order to minimize risk that bridge exploits have on their network by requiring bridge specific tokens (ex. ceUSDT, USDT.multi, USDT.wh, etc…). This allows the impact of an exploit to be confined to the tokens minted by the specific bridge or interoperability protocol rather than causing a widespread impact to the overall liquidity of the chain.
Alex Smirnnov in a recent guest post wrote about this and touched on some aspects that need to be addressed and considered. You can read his post here. While it is admirable that options are being considered; a solution to this deadlock of liquidity provisioning vs. risk minimizing doesn’t yet have an effective working solution but I am sure one will be introduced before long as this is a critical point for a smoother user cross-chain experience.
What Are The Projects In The Space?
There are currently a few different segements within the cross-chain bridging and interoperability space. This is regardless of whether it is with regards to tokens, data or NFT’s that are being transmitted between different chains. The main segments I’ve personally come across at the moment are Bridges, Aggregators and Cross-Chain Swaps.
Do note that I am disregarding the cross-chain approaches by blockchain projects the likes of Moonbeam and Octopus Network as I feel their direction is a mixed approach with greater focus on blockchain development before its cross-chain and interoperability capability. There is still a reliance on bridges and interoperability protocols by these blockchains currently.
The team at Li.Fi also creates some great content around specific bridges and interoperability projects within the space. You can find project deep-dive’s and more in their Knowledge Hub.
In Summary
The cross-chain bridging and interoperability space today is very much in its infancy and is a nascent area within blockchain infrastructure. There are of course headwinds to be faced in the space. A lot of people in crypto are generally more cautious of bridging and interoperability projects in part due to all the recent exploits. But it is still a tool that people will continue to use as it eases how they move between blockchains.
Even with its challenges, this sector of the architecture development for the overall blockchain is one that we will continue to see development and innovation produced. There are projects that have already been involved in research & development and building in earnest their solutions for the sector. These include the likes of Axelar, Celer, LayerZero, Multichain, Synapse and Wormhole; they are the largest bridges and interoperability protocols building in the sector.
The journey towards an interoperable blockchain future will no doubt be fraught with challenges. But the result will be an overall blockchain space that is better prepared for the mass adoption of its technology.
There are more and more bridges and interoperability protocols that are building in stealth or just recently launched. The Cross-Chain Coalition currently tracks a total of 85 different projects that are already active or in development, you can find the project directory here. This is a big increase from the number of projects in this sector; guess I am definitely not alone in my thinking that an interoperable future is more a certainty than it is a passing fad.
But as with all things, time will tell how it plays out and I for one am looking forward to it.
Sources
Ethereum Foundation: Bridges – LINK
Vitalik Buterin Tweet on Why a Multi-chain Future – LINK
Vitalik’s Reddit discussion on Multi-chain Future – LINK
Solana’s Wormhole Hack Post-Mortem Analysis – LINK
Biggest Crypto Hack of All Time: A Breakdown of the Ronin Network Hack – LINK
BlockSec on over $2 Billion Exploited from Bridges – LINK
Application-Specific Blockchains: The Past, Present, and Future by Dimitri Berenzon – LINK
Top 11 DeFi Cross-Chain Bridge Attacks of 2022: Hackers Bag Over $2 Billion – LINK
Op-ed: Reimagining cross-chain bridges: Let’s stop trying to be liquidity protocols by Alex Smirnov – LINK
This NFT Farming Game Is Clogging Up Ethereum Scaling Solution Polygon – LINK
What are liquidity pools and how do they work? – LINK
Uniswap Pools – LINK
Li.Fi Knowledge Hub – LINK
Cross-Chain Protocols Directory by Cross-Chain Coalition – LINK