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Home » FinTech  »  What Are Blockchain Bridges and Why Do We Need Them?
What Are Blockchain Bridges and Why Do We Need Them?

The decentralized ecosystem and the layer-1 and layer-2 expansions of blockchain networks have shown rapid growth in recent years. Such developments emphasize that blockchain bridges are critical to the success and future of DeFi and provide numerous benefits to DeFi users. They help solve the lack of communication and collaboration in the decentralized finance ecosystem by connecting one blockchain network to another. This allows users to transfer their digital assets among blockchain technologies with ease.

LayerZero is a cross-chain interoperability protocol that reduces the problem of trustless communication between chains to one of independence between two entities—its oracle and its relayer. User applications are given the flexibility to use LayerZero’s default oracle and relayer or create and run their own. Blockchain technology has covered quite an extensive journey http://vseostroitelstve.ru/2008/10/page/10/ since its introduction to the world in 2008 with the Bitcoin whitepaper. The subsequent rise in the number of cryptocurrencies and development of blockchain networks with programmability, such as Ethereum, have created a completely new ecosystem. Blockchain promises the value of decentralization and freedom from the control of any individual or institution.

Risks of Blockchain Bridges

Examples of trustless bridges include the Arbitrum Bridge and the Polygon Bridge. Bridges which enable interoperability between different blockchains, rely on a messaging infrastructure that enables data transfer across chains. The type of bridge used can vary based on its purpose, such as token bridges, NFT bridges, governance bridges, lending bridges, and ENS bridges. Bridges have the potential to promote blockchain interoperability and increase liquidity in DeFi.

Solutions

Under the burn-and-mint protocol, the crypto tokens/ coins/ assets are not exactly transferred from one blockchain to another. Rather, the tokens are destroyed on the source blockchain and then get created on the destination blockchain. Blockchain bridges can enable interoperability between different blockchains, which allows users to access and explore the features and capabilities of another network.

While bridges have a great amount of utility, it's important to consider the potential risks that can arise from sending crypto assets between blockchains. Rather than holding wrapped tokens, users can simply bridge with another chain to acquire the native token version. Cross-chain bridges grant access to a wider variety of cryptocurrencies, and can accelerate the adoption of a crypto asset. Bridges streamline the process of moving digital assets from one blockchain to another. Without cross-chain bridges, exchanging assets between two chains requires the use of a centralized exchange, which can be an inefficient and expensive alternative.

How Cross-Chain Bridges Are Hacked

This occurs due to collusion formations where a centralized bridge's governing bodies steal the users' digital assets. Despite all the advantages of blockchain bridges, there are some risks and limitations that come with blockchain bridges. Some of the vulnerabilities of blockchain bridges have been attacked, which has led to massive amounts of embezzled crypto. Instead, the amount gets locked in a smart contract while users gain access to an equal amount of wrapped tokens. When users wish to convert back to the crypto they started from, the excess amount of wrapped tokens gets burned, and an equal amount is deposited back into their wallet. Along with the benefit of integration possibilities, blockchain bridges provide collaboration opportunities to developers from different blockchain communities.

  • Despite all the advantages of blockchain bridges, there are some risks and limitations that come with blockchain bridges.
  • Using proof-of-reserves ensures that funds are stored securely, and new tokens are minted at a 1-to-1 ratio.
  • Bridges have allowed more interoperability within the blockchain space and enable users to move funds and data across a variety of blockchains.
  • Users don’t have to trust any central authority with the responsibility for their assets.

Furthermore, a trustless bridge entrusts the responsibility of assets to the users, thereby implying possibility of a loss of funds due to user error. There are decentralized blockchain bridges, or trustless bridges, that intend to make users feel safer when transferring their coins. These solutions operate just like an actual blockchain with individual networks pitching in to validate transactions.

When you lock the crypto you want to move on a trust token bridge, the company in charge of the bridge is responsible for overseeing these digital assets. In fact, bridge attacks constitute some of the largest cryptocurrency hacks by value. When moving your LINK tokens or any asset across chains, understand the risks that you are taking with your assets.

Risks of Blockchain Bridges

Instead of manually monitoring crypto transfers, trustless bridges rely on autonomous smart contracts to fulfill transfer requests. These smart contracts can be better understood as digital contracts that are stored on a blockchain and automatically execute when predefined conditions are met. On the other hand, wrapped tokens represent the original crypto assets on a different blockchain. One of the major benefits of these bridges is that they increase the interoperability of blockchain technologies by enabling them to exchange and use information. Like all other technologies, blockchain bridges come with a few risks such as, risk of theft and exploitable vulnerabilities in digital contracts. Cross-chain bridges—applications allowing the exchange of value across parallel blockchains—present a challenge for blockchains since they need to be able to trust and validate external information.

Risks of Blockchain Bridges

Interestingly, a blockchain bridge offers the foundation for advancing interoperability within the dApps and crypto ecosystems. For example, trusted blockchain bridge presents the concerns of censorship due to centralized control. On top of it, the custodial risks of exposing assets to malicious bridge operators could also affect users. At the same time, a trustless bridge would also present risks in the form of malware or bug risks in the smart contract code.

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