From the beginning until now, 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 of them has its own advantages and disadvantages and brings some value to users.
While possessing the most groundbreaking technologies, most current blockchains have a closed design and cannot interact with each other. Cross-chain Bridge appears to solve this problem.
Today, let's learn more about Cross-chain Bridge with Coin98 :
- What is Cross-chain Bridge? How it works, types of cross-chain bridges
- Why is Cross-chain bridge an inevitable trend?
- Some outstanding projects in the Cross-chain bridge segment, their advantages and disadvantages from which to look for investment opportunities.
Let's get started!
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 Layer 1, Layer 2, sidechain, Childchain.
You can think of each blockchain as a country. To ensure its own security, each country will have different laws and people must comply with that country's laws. Almost every country has its own currency standard and it is difficult for us to use the currency of one country to another.
Blockchain Similarly, 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,...).
Each blockchain is 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 take advantage of opportunities.
And just like countries need to trade, blockchains also need a way to transfer value between each other, and the Cross-chain bridge was born to do this.
Why is Cross-chain bridge an inevitable trend?
The Silk Road is an important trade route for mankind throughout a long period of 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 trade is paramount and this is also true for blockchain. Especially in the present time when blockchains have developed to a certain level, and each blockchain owns its own amount of assets and users, no longer BTCD and Ethereum as before.
Total value of DeFi locked assets across various blockchains
As a user, having a cross-chain bridge will help us:
- Participate in finding opportunities more easily . For example, if we want to transfer assets from BSC to Solana, we will not need to take many steps from transferring assets from BSC to Binance, then transferring to FTX and depositing to Solana , but can do it in one transaction through the bridge.
- Develop cross-chain applications . For example, an Aggregator project helps users deposit Token in one chain but farm in another chain ⇒ From there, optimize profits.
- And much more potential is waiting to be discovered.
How Cross-chain bridges work
At the present time, the number of projects working on cross-chain bridges is increasing, proving real demand from users for quickly transferring assets between chains.
Cross-chain bridges projects per ecosystem
Although the number of Cross-chain bridges is quite large, in general projects are applying a model that is lock- Mint-burn.
How Cross-chain bridges work. Source: Dragonfly research
Operating principle of the lock- Mint-burn model:
- Users deposit Token in chain A to the bridge.
- When receiving the asset, Bridge will Mint the wrapped version of the Token on chain B to the desired wallet address.
- When needing to withdraw assets, users send wrapped Token back to the bridge.
- Those Token will be burned and the bridge will Token Lockup on chain A for users.
Although the principle is quite simple, when applied to develop bridges, there are many different designs, each of them has its own advantages and disadvantages and we will learn about the types of Cross-chain bridges.
Types of Cross-chain bridges
Although there are many different designs, in general, we can Chia 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 Vai as brokers between chains, receiving assets from users on one chain and Mint wrapped Token on another chain.
For example, if you deposit BTC into BitGo, they will Mint ERC20 standard wBTC so you can use them on Ethereum dapps. Or similarly, if you want to transfer Token to BSC, choose to deposit assets to Binance.
- Advantages: Simple, convenient and suitable for new users.
- Disadvantages: Users are dependent on third parties, they have full rights to use the sender's assets.
Although the possibility of scamming users' assets is very low with big names like Binance , due to the damage to reputation and users will be greater with what they receive, there are still many other problems related to Centralized Bridge.
There are many doubts about whether Binance will issue more wrapped Token than the number of assets that users deposit, because currently it is difficult to track the number of assets deposited and withdrawn from the exchange.
Decentralized Cross-chain bridge
Decentralized Cross-chain Bridge does not require users to place trust in a third party.
Basically, a Decentralized Cross-chain Bridge is a pool containing Assets Under Management by a group of validators. The larger the number of validators, the more decentralized the bridge. Users deposit assets from this chain into the pool, validators verify the transaction, and the pool Mint wrapped Token on another chain.
- Advantages: Transparent because everything is verifiable on-chain.
- Disadvantages: Safety is not guaranteed when current bridge models are still very new. The pool containing the assets of the Decentralized Cross-chain Bridge is a good prey for attacks. Poly Network with the hack causing $611 million in damage is a typical example of a cross-chain project being attacked.
Besides, the biggest difference between Decentralized Bridges and Centralized bridges lies in how validators are incentivized to ensure bridge accuracy. Or in other words , how to keep validators working properly and prevent bad behavior when verifying transactions .
Because our opportunities lie mostly in Decentralized Cross-chain Bridge projects, I will take examples of current Decentralized Cross-chain Bridge designs and how they solve the above problem, at the same time. I will also list the most prominent bridges for each design.
Outstanding Decentralized cross-chain bridge projects
I will further classify Decentralized Cross-chain bridges into three types based on increasing security levels: Somewhat centralized, Decentralized, Untrusted.
Somewhat centralized bridge
This model will have a small group of validators controlling the Mint and burning of wrapped tokens through a multisig mechanism (majority consensus means the transaction is approved). Validators will usually have their accounts verified (KYC) and know each other in real life.
This model helps prevent bad behavior by identifying validators in advance, but this also does not guarantee that validators will not “ Rug-Pull ”. Only a few projects are applying this model such as Terra bridge and Chainswap and most have plans to further decentralize in the future.
There are only 5 nodes securing Chainswap
Decentralized bridges
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 to serve cross-chain exchange.
Decentralized bridges often apply the Staking & Slashing model , this model helps validators receive incentives when verifying transactions, on the contrary, their Stake assets will be lost if they perform bad actions.
Outstanding projects:
- Developed on existing PoS networks: Matic PoS bridge (Polygon), deBridge, Anyswap , THORChain , Peggy,...
- Build from scratch: Axelar.
Untrusted bridges
These bridges are connected directly between chains . Their core is the compatibility of the bridge with the network, untrusted bridges as part of the network and inheriting the security of the network. This type of bridge has the highest security but is difficult to develop and expand to chains .
Outstanding projects include: Near Rainbow bridge, Polkadot Snow Bridge, Solana's Wormhole, Cosmos's Gravity Bridge,...
In addition to the above projects, there is another name called Connext Network. Connext network can be understood as an untrusted bridge but supports connection to many chains.
Investment opportunity with Decentralized bridge
In this section, I will list investment opportunities in the Decentralized bridge segment:
Untrusted bridge – tool to track 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 an investment opportunity. However, this is an effective indicator to help you evaluate. Know which ecosystem the money is pouring into.
For example, under the tracking tab, the number of assets being locked in bridges from Ethereum to other chains. Regularly monitoring the data will help you identify where the money is flowing.
Tracking the number of assets locked in the Ethereum bridge – Source EtherscanUpdate another bridge tracking tool for you guys
TVL of bridges – source: Dune Analytics
Note : The number of locked assets above is only a partial reflection because users can also use Centralized bridges like Binance and are quite difficult to track.
Invest in Cross-chain bridge project
Below is an overview of some current bridge projects:
Note : These are a few projects I know in the Cross-chain bridge segment. The table may have shortcomings and we hope you Chia projects and opportunities in this segment. The table has filtered untrusted bridge projects attached to the network platform such as Wormhole, Rainbow bridge,... because it is almost certain that those projects will not Token Issuance.
The number of projects building bridges is very large, but the number of projects with products is relatively small. The amount of locked assets is an important factor to evaluate a bridge, however one point you need to note is that the nature of each bridge is different and TVL only reflects part of it.
For example:
- With bridges from Ethereum to Optimism Like Hop Protocol, because of the nature of Optimistic Roll Ups, the time to withdraw assets is up to 1-2 weeks ⇒ Hop creates additional pools to help users provide liquidation and support other users to withdraw assets quickly. quickly, in return the liquidation provider will receive a portion of the fee from the withdrawer.
- With Anyswap, users provide liquidation to further support the swap segment of the project.
- With RenVM, the number of Mint Token is equal to the number of lock Token .
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 what are the limitations of its use?
Skins in the game
Another way to invest in the project is to have skin in the game, similar to AMMs There are often Airdrop for those who provide liquidation, current bridges also often integrate pools, you can provide liquidation for a chance to receive 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 bridge problems).
Limitations of current bridges:
Too many bridges : Having too many bridges causes liquidation to be Shard and makes it difficult for users to always have to search and learn how to use many different bridges. Therefore, there will be a need for tools that synthesize cross-chain bridges, helping users use multiple bridges with the same operation on a single app.
Not really safe : Recent continuous hacks are a warning about the immaturity of bridges at the present time. Insurance projects can exploit this branch.
Poor user experience : Long waiting time, limit on the number of assets that can be transferred, limit on asset withdrawal, etc. Bridge projects will need to improve and enhance the product further to solve these problems the user is currently meeting.
Closing Thoughts
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 increasingly developed and widely used demonstrates users' need to participate in many different chains.
Current bridges are mostly still just for the purpose of pulling liquidation from the larger network, which is why we only see chains like Avalanche, Solana, Terra, Near as bridges and not Ethereum as bridges. In the future, instead of competing, bridges will support each other to help users have a seamless experience between chains.
It is not excluded that 20% of bridges will hold 80% of locked assets, this is similar to what wrapped BTC versions are doing at the present time when the market share belongs to the top few names.
Wrapped BTC market share on Ethereum – source: Debank
Epilogue
Hopefully the above article has provided you with the necessary knowledge about Cross-chain bridges as well as some support in investing. Here are a few key points that you need to keep in mind:
- Cross-chain bridge is an inevitable trend in the development of Crypto.
- The ever-evolving blockchain, the increasing number of bridges and users proves the real need for cross-chain bridges.
- Cross-chain bridge at the present time still has many limitations: Liquidation Shard , poor user experience, low security.
- Cross-chain bridges are the way to go to the next Crypto boom, and will certainly open up many new opportunities for those who know how to seize them.
“We build too many walls and not enough bridges” – Isaac Newton
