Losing tokens while attempting to bridge has become a common event and millions of dollars have already perished in the process.
What is a crypto bridge?
As the name suggests, a crypto bridge or a cross-chain bridge is a virtual infrastructure connecting two or more blockchains allowing for the passage of tokens and arbitrary data across them. The connected blockchains can have varying rules, consensus mechanisms, and technological incongruity but these bridges still make cross-chain interaction possible safely and securely. It won’t be wrong to say that all crypto tokens derive their interoperability from one or more of these crypto bridges. For instance, Bitcoin($BTC) with a total supply of 21 million coins uses a proof-of-work consensus mechanism to validate its transactions and exists on its network which is very different from Polygon’s 10 billion max supply and proof-of-stake consensus mechanism. But a crypto bridge like — Ren makes it possible to use $BTC on the Polygon network despite their technological disparity.
Some popular crypto bridges are Ren bridge, xPollinate, Matic Bridge, Avalance Bridge, BSC Bridge, and Fantom Opera Bridge.
Why do we need a crypto bridge?
Imagine what would happen if you try to install an Android application on the iPhone? Since iPhone running on iOS will reject this attempt finding the android app incompatible. In the above case, both Android and iOS are operating software for mobile devices but they are built differently. Both have their underlying technology and hardware requirements. So, are the blockchains. The primary purpose of most blockchains is to provide a robust, scalable, and decentralized infrastructure for dApps to be built on. However, each comes with its own governance rule, consensus mechanism, and other network prerequisites. This is where crypto bridges come in handy as they provide the necessary infrastructure and network compatibility for the secure cross-chain transfer of data and tokens in return for a marginal transaction fee(generally between 0.3 — 0.5% of the total transaction value).
The demand for these cross-chain transfers is seeing rapid growth most of which is driven by the following factors:
- The Defi Gold Rush - With new defi protocols launching every day, the APYs being offered are insane. For example - The USDC/ETH liquidity pair on Uniswap(Ethereum based Automated Market Maker) will yield you an APY of 0.3% whereas if you bridge your ETH tokens as WETH(wrapped ETH) to Polygon and provide USDC/WETH as liquidity on its Sushiswap, your investment will accrue a 10% APY which is 33X of what you can earn on the Ethereum network. Hence, it makes sense to bridge $ETH from the Ethereum main net to $WETH on the Polygon network for a tiny transaction fee.
- Cheap transactions - No transaction goes untaxed on a blockchain. And when blockchains such as Ethereum are charging their users exorbitant gas fees for simple operations like swapping a token on its AMM which can be performed for cents elsewhere, you won’t want to waste thousands of dollars in monthly gas fees. This also has driven the demand for an interoperable mechanism aka a cross-chain bridge.
- Crypto Homecoming - Have you ever realized that most centralized exchanges like Coinbase or Binance do not give you the native crypto coins but only a crypto token representing the original coin? For instance — when you buy $AVAX from Coinbase what you get is not the native $AVAX coin but only a symbolic representation of $AVAX as the Ethereum based ERC20 token. To migrate your ERC20 tokens on the Avalanche network, one will need to use the Avalanche bridge.
But, how reliable is a crypto bridge, and can you trust one with your funds?
Crypto bridges are classified mainly as centralized with a trusted custodian and trustless ones powered by smart contracts. Both variants are susceptible to external exploits and technological risks. In the centralized approach, the primary risk is the custodian running away with the user funds whereas the smart contract bridges are vulnerable to bad players and hackers who are always on the look to identify loopholes in the smart contract code which they can exploit to their benefit. In one such recent incident, Wormhole — the primary bridge that connects Solana to Ethereum blockchain was exploited for $310 million. On top of these risks, there is always a technological risk associated with these bridges where a lack of technical know-how can cause a permanent loss of user funds.
Despite the prevailing risks tens of billions of crypto assets have been successfully bridged across blockchains with no sign of stopping. Moreover, the bridged asset value will only continue to skyrocket due to the discussed reasons. However, one thing is certain that with time the cross-chain bridge ecosystem as a whole will evolve into a more robust and exploit-proof one.
Until then you can take the following security measures to safeguard your funds while attempting to bridge them.
- Start with a little research. I will advise looking at the user reviews for a crypto bridge on Reddit by googling for the Crypto Bridge Name + Reviews + Reddit.
- Double-check for the contract address of the token to be bridged on both sending and receiving blockchains by visiting their respective blockchain explorers.
- Send a small fraction of the tokens first and only after you have received them on your desired destination, initiate a high-value transaction. Although this may sound too simple but will save you from losing all your investments.
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Disclaimer: This information is only meant for educational purposes and is not financial advice. DYOR before investing.