Blockchain Bridges: Custodial Vs Non-Custodial
Exploring how both types of bridges work, as well as their trade-offs, and what they mean for the security of your digital assets. Fasten your seatbelts.
Blockchain bridges are cross-chain infrastructures that enable crypto holders to transfer cryptocurrencies from one blockchain to another without having to rely on third-party intermediaries.
They are important for creating interoperability among DeFi applications built on different blockchain networks since blockchains are siloed data environments that can’t communicate with one another.
In a way similar to blockchains, bridges are built differently, with varying degrees of security, efficiency, and decentralization.
There are two main types of blockchain bridges: custodial, centralized bridges and non-custodial, decentralized bridges.
On this article, will explore how both types of bridges work, as well as their trade-offs, and what they mean for the security of your digital assets.
Fasten your seatbelts.
Custodial Vs Non-Custodial Bridges — What’s the Difference?
When using centralized bridges for cross-chain asset swaps, users have to trust their tokens in the custody of a central party, appropriately termed custodial bridges. Using Wrapped Bitcoin, one of the most popular custodial bridges, as an example, here’s how they work.
First, users who want to use the bridge have to perform KYC (know your customer) verification. Once it’s approved, users request WBTC from a merchant while transferring BTC to their, the merchants, address. The merchant locks the BTC with a central custodian and initiates the minting of WBTC on the Ethereum network before the user receives his WBTC. For Wrapped Bitcoin, BitGo is the sole custodian of all the assets, whom users have to trust with their tokens.
Since assets on centralized bridges are held by a central custodian, this creates a single point of failure that endangers the cryptocurrencies of investors. Not to mention that relying on a central custodian defeats the purpose of blockchain and decentralization, among creating other vulnerabilities.
The security issues of custodial bridges have been highlighted in 2021, as THORChain, Chainlink, MultiChain, and PolyNetwork have all been hacked.
And what do these cross-chain solutions have in common? They’re all centralized blockchain bridges.
Conversely, users of decentralized bridges don’t have to rely on a central custodian when performing cross-chain asset swaps. Instead, these assets are held by a smart contract or a decentralized protocol, without ever being in the control of a central party. Moreover, smart contract algorithms operate these bridges, instead of a central entity.
While not all decentralized bridges or smart contracts are bullet-proof, blockchain advocates generally agree that non-custodial, or decentralized, bridges offer a safer environment for digital assets since they are built on top of a blockchain protocol and are usually as secure as the underlying protocol.
Undoubtedly, non-custodial bridges are more censorship-resistant since no single party can control or freeze your assets. In contrast, centralized bridges have the ability to withhold your assets held by a central custodian, say if a government orders them to freeze all cryptocurrencies.
In summary, while both types of bridges come with their own risk profiles, decentralized bridges are considered safer and more censorship-resistant.
With custodial bridges, users assume custodial and censorship risk, as well as the vulnerabilities of a single point of failure. While users of non-custodial bridges only face smart contract risks or bugs in the underlying technology.
Cross-Chain Bridges Need True Decentralization
Part of the reason why cross-chain bridges have been so exploitable — besides smart contracts being in their infancy — is the fact that existing blockchain bridges have yet to reach true decentralization. As with most a central entity is somehow involved in its operations, causing multiple social engineering schemes and cyber threats have occurred in the past.
Enter Magpie, the first truly-decentralized, chain-agnostic bridge, built to improve upon the vulnerabilities of previous solutions. Magpie offers a fast, efficient, secure, and non-custodial way for users to perform multi-chain asset swaps, while they remain in full control of their digital assets.
To make your digital assets more secure, Magpie ditches the complex locking and minting mechanism used by standard solutions. Instead, we only use cross-chain bridges as a messaging layer, while we transfer your assets directly from our safe, chain-specific stablecoin pool.
As a result, you’ll get your cross-chain assets in a faster and safer manner.
Magpie’s chain-agnostic protocol is here to bring true decentralization to the world of cross-chain bridges and unlock the full potential of an interoperable blockchain ecosystem.
