What Are Blockchain Bridges, and Why are They Important for DeFi?

One of the problems that cryptocurrencies face today is that they are separated from each other. They exist on different blockchains, and projects based on them cannot directly interact. This leads to fragmentation of the crypto community.

To partially solve this problem, blockchain bridges were invented. They provide a way to quickly move tokens or other assets from one chain to another. In essence, they unite blockchains and allow cryptocurrencies to move between them — without the need for large intermediaries like exchanges that take commissions for their work. Tokens are now freely transferable from one platform to another. That allows the world of crypto to work together towards common goals.

But their existence is a risk: bridges often become a target for hackers. Blockchains themselves cannot be hacked, so hackers focus their efforts on bridges between them. For example, in March 2022, Ronin Bridge connecting the Axie Infinity network to Ethereum ecosystem was hacked through a fake LinkedIn job offer to one of the developers. As a result, $625 million was stolen from the project. This was the largest hack in DeFi history.

So why exactly are we using bridges?

What Are Blockchain Bridges

There are now tens of thousands of different blockchains, and most of them use their own token. Each successful chain has its own advantages. For example, one network can be popular for storing funds, another for buying NFTs, a third for convenient spot trading, and a fourth for staking and earning some extra money. But to use all of this people need a way to quickly move their tokens from one chain to the chain they want to use right now. In order to do that without hassle and intermediaries blockchain bridges were invented. In short, blockchain (or “crosschain”) bridges allow for the conversion of tokens, without the need for exchanges.

A few examples of such crosschain bridges:

• Aurora — linking Ethereum ecosystem with Aurora
• Bifrost — connecting ETH ecosystem with EOS network
• Darwinia network — connecting Polkadot and Ethereum
• Thundertoken — connecting Ethereum and BSC.

Overall there are now more than one hundred bridges now, sometimes with overlapping functions. For example, Moonbeam, Darwinia and Snowbridge all connect Polkadot to Ethereum. There are also multi chain bridge projects like Anyswap, Synapse or Glitter Finance which recently received a grant and aims to build a bridge between five networks. All of these systems ensure that a user can quickly and securely transfer their tokens across different successful projects in the crypto space and therefore connect disparate networks into one huge ecosystem. As a result, the audience of each of the connected platforms is expanded.

How Do Blockchain Bridges Work?

If you wish to turn one cryptocurrency into another, or transfer your funds between blockchains, you would usually have to register with an exchange and use their P2P or spot platform to trade. This entails high fees (up to 5% in some cases) and requires verification of your identity. Which, firstly, nullifies the anonymity that once became the basis for Web3, and secondly, gives someone else complete control over your funds. If something happens to the exchange, your assets will be lost, as has happened with various exchanges many times in the past.

Thanks to blockchain bridges, you can convert your funds without an exchange. And do it quickly and safely, because tokens are transferred directly, without being into anyone’s wallet. What’s more, bridges sometimes send other data and can even convert smart contracts. In short, bridges establish a way to exchange information between different networks.

There are two types of bridges:

• unidirectional
• bidirectional.

Unidirectional ones can work only one way, converting the tokens of one chain into tokens of another. Sometimes this is very useful — for example, when you need to transfer your project or all user assets to a new blockchain. Bidirectional bridges are more versatile. They allow you to transfer tokens in both directions, both from the first network to the second, and vice versa. This brings the user bases of the two networks together and allows them to enjoy the benefits and use the projects built on top of each chain.

The Main Advantages of Blockchain Bridges for DeFi

Network bridges at this stage are indispensable for the DeFi community. There are now some blockchains that were designed from the ground up to be able to communicate with each other — for example, parachains in the Polkadot ecosystem. But for users of all other ecosystems, bridges are the only way to quickly and without compromising their safety transfer assets between various networks.

Bridges also enable direct communication between layer 1 (the original blockchain) and layer 2 (various additional blockchains for projects built on top of it). Due to this, they ensure the capacity for scaling within the ecosystem. Such layer 2 protocols as Polygon and Avalanche provide an opportunity for the development of DeFi services and technologies for which gas fees of the layer 1 Ethereum chain are simply too high.

Bridges also remove barriers to transactions, which is important for the development of decentralized e-commerce. They also make it possible for projects to transfer data to other blockchains, allowing the development of services operating on several networks.

Risks When Using Blockchain Bridges

For bridges to function they need a liquidity pool. A large amount of tokens from all the networks connected by the bridge. When the user “crosses” the bridge, the system simply freezes some of the assets on one side and unfreezes them on the other. It is an easy and effective solution. However, this liquidity pool also becomes an excellent target for hackers.

Another potential problem comes from synthetic tokens. On the one hand, they help users from different ecosystems interact. For example, WBTC (wrapped Bitcoin) bridge users can hold Bitcoin, but spend their crypto on DeFi services and various dApps built on the Ethereum network. On the other hand, the original use case is lost, and the new “wrapped” token does not carry inherent value, performing only the role of a portable asset, while presenting new potential vulnerabilities.

That is the reason why one of the Ethereum founders Vitalik Buterin believes bridges shouldn’t be around much longer, since they have some fundamental limits and overall lack security. The unfortunate thing is that they are the best that we have in DeFi right now. The only existing alternative is XCM on the Polkadot blockchain, which was originally designed with interoperability in mind. But it cannot solve the issues of cryptocurrencies created before it.

So the rest are now forced to focus on their security and trying to prevent hacks and leakage of the liquidity pool. This is costly and difficult. But the opportunity to connect ecosystems together and develop hybrid products is worth it. Cryptocurrencies that can grant you access to a wide range of different services are much more valuable to users.

In Conclusion

Blockchain bridges help users transfer their cryptocurrencies without the need for exchanges or other large intermediaries. Therefore they are very important for our finances to remain free and decentralized. At the moment, most major blockchains already have bridges connecting them to each other. Despite all the associated risks, this is a much needed step towards normalizing the use of cryptocurrencies and strengthening the overall ecosystem.

We must remember that technologies should not be isolated, and only joint development can truly move the industry forward.