An overview of token bridges, how they work, why we need them and their risks

In the rapidly evolving multichain future of blockchain technology, token bridges have emerged as critical infrastructure components that enable interoperability between isolated blockchain networks. These protocols serve as essential connectors in an ecosystem where different blockchains operate independently with varying capabilities, security models, and performance characteristics. Understanding blockchain bridging is fundamental to navigating today's interconnected cryptocurrency landscape.

What is a crosschain bridge?

A crosschain bridge, also referred to as a blockchain bridge or DeFi bridge, is a sophisticated protocol designed to facilitate the transfer of data and assets between independent blockchain networks. These blockchain bridging solutions enable communication between what would otherwise be isolated ecosystems, allowing information native to one blockchain to be recognized and utilized on another.

The terminology used in bridge operations distinguishes between the source blockchain—where data or assets originate—and the target blockchain—where they are received. While users most commonly encounter token bridges that appear to move assets between chains, the underlying mechanism is more nuanced. Token bridges don't literally transport assets; instead, they create representations or wrapped versions of assets on the target chain, backed by locked assets on the source chain.

Advanced implementations extend beyond simple asset transfers. Crosschain decentralized platforms like various multi-network exchanges enable users to deposit one asset on a source blockchain and receive a different asset on the target blockchain. These platforms can aggregate liquidity across multiple networks, optimizing trades for cost efficiency even for users who don't intend to move assets between chains. Additionally, protocols facilitate crosschain lending, allowing users to deposit collateral on one blockchain while receiving loans on another, potentially leveraging the security of one chain while benefiting from the lower transaction costs of another.

Why are crosschain bridges useful?

The utility of blockchain bridging stems from the fundamental isolation of blockchain networks and the diverse characteristics they offer. Ethereum, as the pioneering smart contract platform, established a robust developer ecosystem and strong security guarantees. However, its security model has historically resulted in high transaction fees that can become prohibitive during periods of elevated network demand.

The evolution of alternative Layer-1 blockchain ecosystems has been driven by users seeking more affordable options. Various blockchain networks have experienced substantial growth in total value locked in DeFi applications, demonstrating the ongoing demand for diverse blockchain environments with varying performance and cost characteristics.

Despite this growth across multiple networks, these blockchains cannot natively communicate with each other. Without blockchain bridging solutions, holders of native assets like ETH cannot access opportunities in other flourishing DeFi ecosystems. Bridges address this limitation while providing additional benefits:

• Enabling users to deploy assets in applications unavailable on their native blockchain
• Allowing users to leverage lower transaction fees on alternative networks while maintaining exposure to their preferred chain's security model
• Aggregating liquidity distributed across multiple blockchain networks
• Facilitating portfolio diversification across different blockchain ecosystems

How do blockchain bridges work?

Crosschain bridges operate through smart contracts deployed on both source and target blockchains, typically employing a "mint and burn" mechanism. When a user bridges assets, the source chain's smart contract locks the original assets while the target chain's contract mints a wrapped version. For instance, blockchain bridging implementations may result in ETH being locked on Ethereum and a wrapped version being minted on alternative networks.

It's crucial to understand that wrapped assets are essentially IOUs—derivatives representing locked assets on another chain. These wrapped versions typically use different ticker symbols to distinguish them from their native counterparts. Their value derives entirely from one-to-one backing by assets on another blockchain, making this backing ratio critical to maintaining value parity.

Some protocols bridge assets that exist natively on multiple chains, such as centralized stablecoins like USDT or USDC. These implementations rely on liquidity pools on both sides of the bridge. When a user deposits tokens on one blockchain to receive them on another, they actually receive assets previously deposited by another user bridging in the opposite direction. If insufficient liquidity exists on the target chain, some protocols issue IOUs redeemable for non-wrapped assets when adequate liquidity becomes available.

The communication challenge between blockchains—since they cannot natively interact—is addressed through two primary approaches in blockchain bridging:

Centralized or Trusted Bridges: These implementations use trusted authorities or federations of nodes to monitor the source blockchain and relay messages to the target blockchain. While efficient, single-entity models present security risks including potential compromise or malicious behavior. Federated models distribute this responsibility across multiple trusted nodes, requiring a threshold of agreement before approving transactions. Though this reduces single points of failure, it introduces inefficiency and still requires trust in the selected node operators, who are typically established blockchain infrastructure providers.

Decentralized or Trust-Minimized Bridges: These implementations employ light clients that receive and verify source chain block headers on the target blockchain. When users deposit assets, the protocol generates cryptographic proof of the transaction's validity. A relayer communicates block headers to the target chain, where the light client verifies the proof against its complete block header history. This approach works particularly well with proof-of-work blockchains, where block headers alone can attest to valid proof-of-work. However, it faces challenges including potentially high costs for sending block headers and longer waiting times. Proof-of-stake systems require additional complexity to verify validator signatures, though recent implementations have improved gas efficiency for such scenarios.

Blockchain bridge risks

Blockchain bridging solutions, while essential for crosschain interoperability, introduce significant security risks that extend beyond their direct users. These vulnerabilities include:

Smart Contract Risk: Like all on-chain protocols, bridges are susceptible to code vulnerabilities that could compromise user funds. The complexity of blockchain bridging implementations increases the attack surface for potential exploits.

Network Risk: A bridge's security is constrained by the security of the blockchains it connects. A 51% attack enabling transaction reversals on the source blockchain could allow attackers to mint assets on the target chain while removing the backing from the source chain.

Intermediary Risk: Centralized or federated bridge implementations create vulnerability points where compromised entities could authorize fraudulent minting or directly steal funds.

The systemic nature of bridge risks amplifies their potential impact. When wrapped assets become interoperable with applications across an entire blockchain ecosystem, a bridge exploit affects more than just bridge users. For example, if wrapped assets are accepted as collateral in lending protocols and the backing assets are stolen through a bridge exploit, the wrapped assets become worthless. This triggers cascading failures including loan liquidations and potential insolvency at multiple applications across the network.

This systemic risk has led prominent blockchain developers to caution that holding native assets on their original blockchain is always safer than holding them as wrapped versions on different chains. This perspective highlights the fundamental security tradeoffs inherent in blockchain bridging.

Conclusion

Blockchain bridges represent both an essential innovation and a critical vulnerability point in the evolving multichain cryptocurrency landscape. As blockchain ecosystems continue to specialize and offer distinct value propositions—from Bitcoin's unparalleled security to high-throughput alternative networks—the demand for seamless interoperability continues to intensify. Blockchain bridging enables users to leverage assets across diverse ecosystems, access applications unavailable on native chains, and benefit from varying security-cost tradeoffs across networks.

However, the risks bridges introduce cannot be understated. Their security vulnerabilities threaten not only direct users but entire blockchain ecosystems that integrate wrapped assets. The challenge facing the industry is developing blockchain bridging implementations that maintain true decentralization and minimize trust assumptions while providing the efficiency and user experience necessary for mainstream adoption.

Considerable research continues toward improving existing bridge architectures and developing novel approaches that better align with cryptocurrency's foundational principles of decentralization and trustlessness. As the multichain future unfolds, the evolution of blockchain bridging technology will play a pivotal role in determining whether blockchain networks can achieve genuine interoperability without compromising the security and decentralization that make them valuable in the first place. Users must carefully evaluate the security models of bridges they use, understanding that convenience often comes with tradeoffs in security assumptions.

FAQ

What is blockchain bridging?

Blockchain bridging connects different blockchain networks, enabling asset and data transfer between them. It includes cross-chain, sidechain, and federated bridges, fostering interoperability across diverse blockchain ecosystems.

How does a cross-chain bridge work?

A cross-chain bridge transfers assets between blockchains using smart contracts. It locks tokens on one chain and mints equivalent tokens on another, enabling interoperability and greater liquidity across different networks.

Is bridging the same as swapping?

No, bridging and swapping are different. Bridging transfers assets between blockchains, while swapping exchanges one cryptocurrency for another on the same blockchain.

Is bridging crypto safe?

Bridging crypto isn't entirely safe. Even reputable bridges can be exploited. Always research and use trusted options. Stay updated on security practices.