What is Cross-chain Bridge? Open the way of trade between blockchains
What is Cross-chain Bridge? Why is Cross-chain bridge an inevitable trend? Learn about characteristics, types and investment opportunities with Cross-chain bridge!
Since its inception, Crypto in general and DeFi in particular have created many of the most groundbreaking applications of the decade.
More and more blockchains are being developed, each one of them has its own pros and cons and brings some value to the users.
While possessing the most disruptive technologies, most current blockchains have a closed design and cannot interact with each other. Cross-chain Bridge appeared to solve this problem.
Today, let’s learn more about Cross-chain Bridge with idolmeta.net:
- What is Cross-chain Bridge? How it works, types of cross-chain bridges
- Why is Cross-chain bridge an inevitable trend?
- Some of the outstanding projects in the Cross-chain bridge array, their advantages and disadvantages from which to seek investment opportunities.
What is a cross-chain bridge?
Cross-chain bridge is a Cross-chain bridge that allows the transfer of crypto assets, tokens or data from one Blockchain to another, including layers 1, layer 2, sidechain, childchain.
You can think of each blockchain as a country. To ensure their own security, each country will have different laws and people must obey the laws of that country. Almost every country has its own currency standard and it is very difficult for us to use the currency of one country after another.
Blockchain is similar, each blockchain has a different infrastructure and rules, to ensure security, nodes must comply with the rules of the blockchain when verifying transactions on the chain. Each blockchain has its own token standard (ERC, SPL, TRC,…).
Every blockchain like a country
The above design has proven effective, when blockchains such as Ethereum, Bitcoin, Solana, … all have high security and users can completely verify their transactions on the chain.
However, the segregated nature of each blockchain has reduced Crypto’s growth opportunities and limited users’ ability to capitalize on the opportunity.
And just like countries need to trade, blockchains also need a way to transfer value between each other and Cross-chain bridge was born to do this.
Why is Cross-chain bridge an inevitable trend?
The Silk Road has been an important trade route for mankind throughout history.
Thanks to the Silk Road, new lands and cultures were discovered and were the driving force for the development of Asia and Europe in many fields.
The role of commerce is paramount and the same is true for blockchain.
Especially in the current time when blockchains have developed to a certain extent, and each blockchain owns a certain amount of assets and users, not the dominance of Bitcoin and Ethereum as before.
Total DeFi Key Asset Value on Various Blockchains
As a user, having a cross-chain bridge will help us:
- Join the search for opportunities more easily. For example, if we want to transfer assets from BSC to Solana, we will not need to go through many steps from transferring assets from BSC to Binance and then to FTX and deposit to Solana, but can be by a transaction through the bridge.
- Develop cross-chain apps. For example, an Aggregator project helps users deposit tokens in one chain but farm in another ⇒ From there, optimize profits.
- And much more potential is waiting to be discovered.
How Cross-chain bridge works
At the present time, the number of projects working on cross-chain bridges is increasing day by day, demonstrating the real demand from users for the quick transfer of assets between chains.
Cross-chain bridges projects per ecosystem
Although the number of Cross-chain bridges is quite a lot, in general, projects are applying a model that is lock-mint-burn.
How Cross-chain bridges work.
The principle of operation of the lock-mint-burn model:
- Users deposit tokens in chain A to the bridge.
- Bridge when receiving the asset will mint the wrapped version of the token on chain B for the desired wallet address.
- When the asset needs to be withdrawn, the user sends back the wrapped token to the bridge.
- Those tokens will be burned and the bridge will unlock the tokens on chain A for the users.
The principle is quite simple, but when applied to bridge development, there are many different designs, each of them has its own advantages and disadvantages and we will learn about different types of Cross-chain bridges.
Types of Cross-chain bridges
Although there are many different designs, in general, we can divide Cross-chain bridges into two main types: Centralized Cross-chain bridge and Decentralized Cross-chain bridge.
Centralized Cross-chain bridge
Centralized Cross-chain Bridge requires users to trust third parties.
These parties will act as brokers between chains, they receive assets from users in one chain and mint wrapped tokens in another chain.
For example, you can deposit BTC into BitGo, they will mint ERC20 standard wBTC so you can use them on Ethereum dapps.
Or similar to if you want to transfer tokens to BSC, then choose to deposit assets to Binance.
- Advantages: Simple, convenient and suitable for new users.
- Cons: Users are dependent on third parties, they have full rights to use the sender’s assets.
Although the possibility of users’ asset scams is very low with big names like Binance, due to the reputational damage and users will be greater with what they get, but there are still many other problems related to Centralized Bridge.
There is a lot of doubt about whether Binance issues more wrapped tokens than the number of assets that users deposit, as it is currently difficult to track the number of assets deposited into the exchange.
Decentralized Cross-chain bridge
Decentralized Cross-chain Bridge does not require users to put their trust in a third party.
Basically, Decentralized Cross-chain Bridge is a pool of assets managed by a group of validators, the larger the number of validators, the more decentralized the bridge is. Users deposit assets from this chain into the pool, the validators verify the transaction and the pool will mint wrapped tokens in another chain.
- Pros: Transparent because everything is verifiable on-chain.
- Cons: Does not guarantee safety when current bridge models are very new. Pool containing assets of Decentralized Cross-chain Bridge is a good prey for attacks, Poly Network with hack costing $611 million is a prime example of cross-chain project being attacked.
Besides, the biggest difference between Decentralized Bridges and Centralized bridges lies in how the validator is motivated to ensure the correctness of the bridge.
In other words, how to keep validators working properly and prevent bad behavior when verifying transactions.
Since our opportunities lie mostly in Decentralized Cross-chain Bridge projects, I will take the example of Decentralized Cross-chain Bridge designs at the present time and how they solve the above problem. I will also list the most prominent bridges for each design.
Outstanding Decentralized cross-chain bridge projects
I will further decentralize Decentralized Cross-chain bridges into three types based on increasing security: Somewhat centralized, Decentralized, Untrusted.
Somewhat centralized bridge
This model will have a small group of validators controlling the minting and burning of wrapped tokens through a multisig mechanism (by majority consensus, the transaction is approved).
The validators will usually be verified accounts (KYC) and know each other in real life.
This model helps prevent bad behavior by identifying validators in advance, however this also does not guarantee that validators will not be “Rug-Pull”.
Only a few projects are applying this model such as Terra bridge, Chainswap and most have plans to decentralize more in the future.
Only 5 nodes secure Chainswap
These bridges are developed on the Proof of Stake network and allow anyone to be a validator.
This PoS network can be existing or newly built for cross-chain exchange.
Decentralized bridges often apply staking & slashing model, this model helps validators receive incentives when verifying transactions, otherwise their staked assets will be lost if bad behavior is performed.
- Development on available PoS network: Matic PoS bridge (Polygon), deBridge, Anyswap, Thorchain, Peggy,…
- Build from scratch: Axelar.
These bridges are directly connected between chains. At their core is the bridge’s compatibility with the network, the untrusted bridge as part of the network, and inheriting the security of the network. This is the most secure type of bridge, but it is difficult to develop and scale to chains.
Notable projects include: Near Rainbow bridge, Polkadot Snow Bridge, Wormhole by Solana, Gravity Bridge by Cosmos,…
In addition to the above projects, which has another name, Connext Network, Connext network can be understood as an untrusted bridge but supports connections to many chains.
Investment opportunity with Decentralized bridge
In this section, I will list investment opportunities in the Decentralized bridge segment:
Untrusted bridge – a tool to track the money flowing into the ecosystem
Many of you may think that bridges like Wormhole, Rainbow bridge, … are just a tool to help transfer assets to chains, not investment opportunities, but this is an effective indicator to help you. assess which ecosystem the money is pouring into.
For example, under the tracking tab, the number of assets that are locked in bridges from Ethereum to other chains, regularly monitoring the metrics will help you know where the money is going.
Tracking the number of assets locked in the Ethereum side bridge – Etherscan source
Update another tracking bridge tool for you guys
TVL of bridges – source: Dune Analytics
Note: The number of locked assets above is only partially reflective because users can also use Centralized bridges like Binance and it is quite difficult to track
Invest in the Cross-chain bridge project
Below is an overview of some current bridge projects:
Note: These are some of the projects I know in the Cross-chain bridge array, the table may have shortcomings and I hope you guys can share projects and opportunities in this area.
The table has filtered out untrusted bridge projects tied to the foundation of the network such as Wormhole, Rainbow bridge, … because it is almost certain that those projects will not issue tokens.
The number of projects building bridges is very large, but the number of projects with products is relatively small.
The amount of key assets is an important factor to evaluate a bridge, but one point to note is that the properties of each bridge are different and the TVL only partially reflects.
- With bridges from Ethereum to Optimism like Hop Protocol, because of the nature of Optimistic Roll Ups, the asset withdrawal time is up to 1-2 weeks Hop creates more pools to help users provide liquidity, support people Other users withdraw assets quickly, in return the liquidity provider will be entitled to a portion of the withdrawal fee.
- With Anyswap, users provide liquidity to further support the project’s swap array.
- With RenVM, the number of mint tokens is equal to the number of lock tokens.
Therefore, to summarize when looking for potential bridge projects, we will have to clearly understand:
- Is the project model effective?
- How many chains and assets does the project support?
- How does it capture value and experience and limitations in use?
Skin in the game
Another way to invest in the project is that we can skin in the game, similar to AMMs often have airdrops for those who provide liquidity, current bridges also often integrate pools, you can provide liquidity. account for a chance to receive an airdrop in the future.
Looking for a shovel in the gold rush
Instead of investing directly in the gold rush (investing in bridge projects), we can focus on shovels (projects that help solve the problem of bridges).
Current bridge limitations:
Too many bridges: Having too many bridges makes liquidity fragmented and makes it difficult for users to always search and learn how to use many different bridges. Therefore, there will be a need for tools that aggregate cross-chain bridges, helping users to use multiple bridges with the same operation on a single application.
Not really secure: The recent continuous hacks are a warning about the immaturity of bridges at the moment. Insurance projects can exploit this branch.
Poor user experience: Long wait times, limits on the amount of assets that can be transferred, limits on withdrawals, etc. Bridge projects will need to further improve and enhance the product to address these issues. current user problem.
The current game is not only on Ethereum but expanding to other chains has opened up many new opportunities and Cross-chain bridge is one of them.
The fact that bridges are developed more and more widely and widely used represents the need to join many different chains of users.
Current bridges are mostly still just for the purpose of pulling liquidity from the larger network, that’s why we only see chains like Avalanche, Solana, Terra, Near as bridges but not Ethereum as bridges.
n the future, instead of competing, bridges will support each other to help users have a seamless experience between chains.
It is not excluded that the 20% bridge will hold 80% of the assets locked, this is similar to what wrapped BTC versions are doing at the moment when the market share belongs to the top few names.
Market share of wrapped BTC on Ethereum – source: Debank
Hopefully, the above article has provided you with the necessary knowledge about Cross-chain bridge as well as some support in investing. Here are a few key points to keep in mind:
- Cross-chain bridge is an inevitable trend in the development of Crypto.
- The growing blockchains, the number of bridges and the increasing number of users demonstrate the real need for cross-chain bridges.
- Cross-chain bridge at the present time has many limitations: Liquidity fragmentation, poor user experience, low security.
- Cross-chain bridge is the way to go to the next Crypto boom, and will certainly open up many new opportunities for those who know to seize.
“We build too many walls and not enough bridges” – Isaac Newton
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