Cross-Chain Bridges Explored

TL;DR

• Bridges allow us to access yield and trading opportunities on many chains.
• Bridges come in several forms, each with its own mix of security, speed, and reliability.
• New tools are being developed that can solve the “bridging trilemma”.
• The future will be multi-chain.

Intro

Bridges that allow us to transfer tokens between blockchains have become an indispensable utility for most DeFi users. Demand for these tools has exploded in the last couple of years as new blockchains with new DeFi protocols and yield opportunities have continued to spring up. If you’re interested in chasing the highest yields on your capital, you’ll soon send assets across a bridge. They come in several flavors, each with its pros and cons regarding safety, custody, speed, and cost. Here we will attempt to explain and clarify the differences.

Why would you want to bridge?

Three common reasons:

• To chase yield. DeFi allows anyone to put their assets to work and generate some yield. DeFi protocols on every chain want your business and often offer incentives to lure you in and encourage you to stay.
• To escape high fees on a congested network. If you only have a few hundred dollars worth of an asset, but every transaction costs $20, it’ll be hard to make it out alive. If you can bridge this asset to a cheaper chain, you can transact much more cheaply and stand a better chance of survival.
• To wrap or unwrap a native asset. Some exchanges might sell you an ERC20 version of the native token you just bought. If you want to take possession of the actual native token, you may first need to bridge your wrapped version to the native network.

DeFi protocols compete for our assets by offering us better yields than their competitors. Suppose the best on the Ethereum Network provide a measly 1% APY yield on $ETH, but wrapped Ether ($wETH) on Avalanche Network is earning 4%. In that case, everyone will want to wrap their $ETH and get it onto Avalanche. Since every DeFi platform that expects to succeed has introduced liquidity mining incentives to attract users and capital, the demand for functional and reliable bridges has exploded.

The other obvious need for good bridges is network congestion. Ethereum has been too successful for its own good and is still catching up in its efforts to scale. During the worst periods of network congestion, a simple swap on Uniswap was fetching a $300-$500 gas fee. Several alternative Layer 1 chains have popped up to satisfy this need for affordable blockspace. If too many crypto-degens start clogging up the latest EVM copy-chain, someone spins up a new one. As long as these high yield opportunities exist, the demand for tools that make it easier to chase them will continue to grow. Cheap Alt L1 chains satisfy some of this market while the much cheaper Layer 2 chains are being built and brought online. If yield exists anywhere, we want to know how to get there.

How bridges work

There are three common constructions:

1. Lock and mint

Lock assets on your source chain and mint synthetic tokens on your destination chain. This is the most common bridge type at the moment. ERC20 tokens are a great example. ERC20s can represent any asset on Ethereum. Bitcoin becomes $wBTC; even Ethereum itself can be wrapped to become $wETH.

Every network has a native token, and any network can issue its own version of another chain’s native token by “bridging” the asset. This is accomplished by locking the native asset on the source chain and providing proof on the destination chain that the assets are, in fact, locked. This allows the destination chain to confidently issue a wrapped version of the asset backed by the native assets locked in a vault on the source chain. The security of this system is dependent on the bridge and network of validators that validate transfers. Although it’s the most popular, concerns surrounding centralization, trusted custody, and collusion must be addressed to make this model more resilient. There’s also an inherent inefficiency that’s still being worked out. These bridges typically require a 2-step process to make synthetic assets available on the destination chain. Swap $ETH for a bridge token, then burn the bridge token to mint the synthetic asset. This presents an obvious opportunity for increased efficiency.

2. Atomic swaps

This is arguably the most secure and trust-minimized method of transferring native assets to other chains, but this too has some drawbacks. Both chains must share the same hashing algorithm to ensure the blocks containing the transfer can be validated on both chains.

3. Liquidity Providers

Pools are created on both chains and facilitate transfers for a fee. This system works fine when it’s adequately decentralized, efficiently re-balanced, and LPs have enough incentives to keep ample liquidity available on both sides of the bridge. Cross-chain swaps on this type of bridge are validated on both the source and destination chains. Assets are transferred from vaults typically managed by the LPs and validators.

It’s a big technical mess happening behind the scenes to make it easy for us to bounce around all these different chains, and whenever there’s money involved there’s potential for hacks and exploits. Vitalik warned us about some real challenges he sees with poor bridge architectures, potentially creating systemic risks. Colluding validators, compromised oracles, centralized relayers, and other dangers must be avoided when designing the way these tools function. In an interview discussing Celestia, Co-founder Mustafa Al-Bassam responds briefly to Vitalik’s assertion, saying he agrees with Vitalik for the most part. He has expressed these same concerns in the past. However, Vitalik’s argument is that every chain must use the same settlement layer to have shared security because you can’t do bridges safely. Mustafa believes this may still be possible with the right tools and that committee-based bridges can be an effective solution.

Here’s an example of a cross-chain transaction on Layer Zero that demonstrates the level of complexity involved:

Issues with bridges

Centralization — If only three people control a wallet or contract worth billions, the most likely outcome is those three people conspire to rob the bridge and ride off into the sunset.

Speed — It can take hours or days. If adequate liquidity isn’t present, you can find yourself waiting around a day or 2 for someone to bridge funds in the opposite direction or for destination side liquidity to be replenished.

Liquidity concerns — Bridges maintained by liquidity providers can run out of funds on one side of the bridge. This means users trying to bridge assets will have to wait for liquidity replenishment before seeing their assets show up on the other side of the bridge.

Smart contract risk — The assets that are locked on the source chain make the corresponding asset available on the destination chain. If the tokens locked in a vault on the source chain are stolen, the value of the wrapped assets on the destination chain goes to zero since there’s nothing to redeem them.

Security concerns

The recent hack of Axie Infinity’s Ronin chain demonstrates why bridge security is essential. Their bridge was exploited for 173K $ETH and a relatively measly $25M in USDC. How was this possible? The vault containing the wrapped assets was controlled by a 5/9 multisig wallet that is managed by Ronin chain validators. 5 of those signers’ keys were compromised. The hacker that took control was able to just send all the $wETH to themself.

This particular event is a case of the bridge being too centralized with rather poor trust assumptions, and little oversight. A signer was given temporary approval power during a period of high network congestion, and that approval power wasn’t revoked immediately after. This was the final piece the attacker needed to move funds after taking over 4 of the 9 signers that controlled the bridge funds.

The more common bridge exploits usually involve exploitable code in smart contracts. The $wETH you get on Ronin is reliably used as a currency because the asset represents native $ETH locked in a vault somewhere. If you can find a way to mint an infinite amount of $wETH and use the bridge to exchange it for real $ETH, congrats, you just robbed a bridge. Now the $wETH remaining (on Ronin chain in this example) is basically worthless because all the $ETH that was locked up as collateral for its wrapped version has already been claimed. A hack this size also has the potential to dramatically disrupt the entire crypto market. If a bridge robber can make off with a big score like this and then just starts market dumping $500M worth of $ETH, it’s (at least temporarily) bad news for long-term $ETH holders. Hopefully an amount this big will be easy to catch and we can just bust these fools and put everything back where it should be, but it’s a valuable lesson about how carefully we need to consider the construction and mechanics of these cross-chain bridges to limit massive systemic risks.

Maybe there’s a better way. There are several interesting cross-chain interoperability projects that are introducing new bridging methods and strategies. We find them fascinating. Here are some interesting ones:

Most interesting bridge projects right now

Chainlink CCIP

Chainlink built a programmable token bridge. It uses Chainlink’s Off-Chain Reporting Protocol (OCR2.0), a network of hundreds of independent oracle nodes, and its Cross-Chain Interoperability Protocol. CCIP provides an interface for all cross-chain communications and enables easy integration into any smart contract application. It supports any generalized message and has re-org protections. Their programmable token bridge is also compute-enabled and allows developers to transfer tokens across blockchain networks and initiate programmable actions on the destination chain. By using Chainlink’s Decentralized Oracle Networks and Messaging Routers, a smart contract can securely send a message to the destination chain and have it validated by another messaging router, which then sends the message to a smart contract on the destination chain. By leveraging their oracles and interoperability infrastructure, and independent Anti-Fraud Network to monitor the network for unusual activity, they’ve introduced a strategy and collection of tools that dramatically reduce the amount of trust and custody required to move assets between blockchains securely.

Stargate

Stargate is a fully composable cross-chain bridge protocol built on LayerZero That allows users to transfer native tokens across various blockchains.

LayerZero is an Omnichain Interoperability Protocol designed for lightweight message passing across chains. LayerZero provides authentic and guaranteed message delivery with configurable trustlessness. The protocol is implemented as a set of gas-efficient, non-upgradable smart contracts.

Most existing bridges can not send native tokens from one chain to another and rely on intermediate or ‘wrapped’ tokens to complete the bridging process. This approach creates a user experience that is slow and highly inefficient. Stargate is built around unified liquidity pools shared among many chains, ensuring that there is always adequate liquidity available and fast finality. The ultimate goal is to make cross-chain bridging seamless through a single transaction.

How Stargate solves the Bridging Trilemma:

Instant Guaranteed Finality. Stargate assures users and dApps that any transfer requests they make on the source chain will arrive to the destination chain. However, liquidity must be there on the destination chain, or transactions will be reverted.

With Stargate’s bridge, there is no need to wrap tokens and users won’t need to swap the tokens manually on the receiving chain.

Cross-Chain Composability. The Stargate bridge can be composed of smart contracts from both the origin and destination chains. This will allow users to complete several swaps in a single cross-chain transaction. Imagine swapping $wBTC on Fantom for $JOE on Avalanche and entering an LP position in a single transaction without leaving Fantom.

Unified Liquidity. Most existing bridges require fragmentation of liquidity to function. Each chain integrated into the bridge needs a designated liquidity pool for each asset bridged. Users can also experience long delays or failed transactions if insufficient liquidity is available. A bridge that wants to add a new blockchain must also bootstrap a new pool to accommodate the new chain with sufficient liquidity on each existing chain.

Stargate presents a unified approach where all connections deposit and withdraw from a single liquidity pool, allowing Stargate to achieve scalability and efficiency that’s not possible on the lock-and-mint or burn-and-redeem bridges. Stargate also has efficient rebalancing and self-limiting mechanisms to manage spikes in withdrawal activity. Each chain on the protocol can maintain a single pool of liquidity that is “soft-partitioned” into different slices, where every slice corresponds to a specific chain in the network.

Gravity Bridge

Gravity Bridge is a bridge between EVM and Cosmos SDK-based blockchains. It’s being built by the awesome people at Althea. They created a non-upgradeable Solidity contract that allows users to lock assets on Ethereum and mint equivalent tokens on any Cosmos chain. They can be sent back or between other Cosmos chains. Different Cosmos chains can use this bridge to access ERC20 assets like $wETH, $DAI, $USDC, and $wBTC. Assets from Ethereum can flow into the Cosmos ecosystem and interact with various applications such as Akash Network, Sentinel, Regen, and Osmosis. Assets on the Cosmos ecosystem can flow to Ethereum and interact with Ethereum DeFi.

Why Gravity Bridge?

Non-custodial. You only need to trust Ethereum and Cosmos’ security when transferring your assets.

Credibly neutral. The bridge is not focused on capturing users for a particular blockchain or DEX. It is designed to enable traffic flow across the bridge. The neutral nature of this bridge lowers the barriers to access liquidity on the Ethereum ecosystem while at the same time allowing new and small blockchains on Cosmos Hub to participate.

Interoperable. Binance’s BNB was the only common asset between the Cosmos and Ethereum ecosystems for a long time. Defining irony, the only way to bridge from one decentralized ecosystem to another was via a centralized exchange token. DEXs on the Cosmos ecosystem were basically stranded on their own islands, unable to transact with the outside world. With Gravity Bridge, the Osmosis, Umee, or Gravity DEXs will be accessible to all market participants.

Secure. There is an active validator set on the Cosmos SDK-based chain. Validators must stake a hefty amount of tokens, and any misbehavior by validators is punished by slashing the validator’s stake. It is also permissionless and censorship-resistant. Representative tokens will be minted when at least ⅔ of the validator set attests a deposit. Withdrawals happen when the bridge batches multiple ‘SendToEth’ messages.

Interlay.io

Interlay launched Kintsugi, the first trustless Bitcoin bridge on Kusama, Polkadot’s canary network. Polkadot will have its own very soon. Interlay’s wrapped Bitcoin ($kBTC) is very similar to Maker’s $DAI. It’s algorithmically pegged to $BTC and secured by a decentralized network of vaults, a multi-collateral system, and cross-chain cryptography. This familiar collateral-backed vault leverages Polkadot’s shared security model and Bitcoin’s classic security model.

Nomad

Nomad is a new design for very cheap cross-chain communication that skips the need for header verification. Nomad draws a lot of inspiration from the Optimism team. Nomad itself is actually an implementation and extension of their Optics protocol (OPTimistic Interchain Communication). But Nomad only has a latency of thirty minutes (rather than an ORU’s one-week fraud-proof window). It works like a notary service. The source chain produces and sends some “documents” (messages), the “notary” (called The Updater) is contracted to sign the documents and is incentivized only to approve valid messages or risk being financially punished and losing their “notary license”. The secret sauce from their docs:

“Nomad creates an authenticated data structure on any home chain, and relays updates to that data structure on any number of replicas. As a result, the home chain and all replicas [contracts that maintain a queue of pending updates, accepts proofs, and dispatches messages] will agree on the state of the data structure. By embedding data (“messages”) in this data structure we can propagate it between chains with a high degree of confidence.”

The team’s close collaboration with the Optimism team and the Connext team speaks volumes for their reputation and qualifications, and they’re approaching cross-chain problems from very fresh perspectives.

I’ll cross that bridge when it comes to me

We’re all sick of the ‘Wild West’ and ‘New Frontier’ clichés, but they became cliché because they’re such apt analogies. Many people argue whether it’s too late to be early to crypto, but there’s no question that we’re all very early to all this cross-chain communication and bridging stuff. The progress made just this year is mind-blowing, and we expect this pace to continue. Here’s a list of some bridges we explored and experimented with while digging into this subject:

Multichain Bridges

• Connext (xpollinate) https://bridge.connext.network/
• Hop Protocol https://app.hop.exchange/
• Synapse https://synapseprotocol.com/
• Multichain (Anyswap) https://app.multichain.org/
• Stargate https://stargate.finance/
• Celer Network https://cbridge.celer.network/
• Allbridge https://app.allbridge.io/
• Wormhole https://www.wormholebridge.com/
• RenBridge https://bridge.renproject.io/mint
• OrbitBridge https://bridge.orbitchain.io/
• Nomad https://app.nomad.xyz/

Native bridges

• Matic https://wallet.polygon.technology/bridge
• Avalanche https://bridge.avax.network/
• Rainbow bridge (NEAR) https://rainbowbridge.app/
• Metis Bridge https://bridge.metis.io/home
• Gravity Bridge (cosmos) Coming soon https://gravitybridge.persona.co/
• Cosmos IBC https://www.keplr.app/ transfer assets between any IBC compatible chain

Top 10 EVM bridges by volume

• AnySwap: Fantom $672M
• Avalanche $577M
• Wormhole $294M
• Polygon $131M
• Celer $86M
• Metis $84M
• Near: Rainbow $80M
• Synapse: ETH Bridge Proxy $72M
• Synapse: L1 Bridge Zap $63M
• THORChain $52M

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