In the rapidly evolving world of blockchain, moving crypto assets across networks remains a significant challenge. As the industry matures, the Web3 ecosystem is becoming increasingly multi-chain, with various blockchain networks optimized for specific needs and use cases. However, this growth introduces risks for asset owners transferring assets between networks. Just last year, over $1 billion was exploited from various cryptocurrency bridges—and recently, an additional $200 million was stolen from Nomad, a cross-chain bridge.
What made this incident unique was its accessibility; it didn’t require deep technical knowledge. Almost anyone familiar with blockchain transaction models could replicate the attack by copying and pasting the original exploiter’s transaction data.
Nearly all existing cross-chain bridges have been exploited in one way or another. Some have survived, while others never fully recovered. This article explores how cross-chain bridges work, their importance, their vulnerabilities, and potential future developments as crypto assets continue to mature.
How Do Cross-Chain Bridges Work?
Literally, as the name implies, cross-chain bridges "connect" crypto assets across multiple blockchain networks. This trend arguably began in early 2020, driven by the growth of multiple Layer 1 (L1) ecosystems competing for market share and inviting users to explore their offerings.
These bridges typically work by locking tokens in a smart contract on one chain and issuing wrapped tokens on another. Users can always redeem these wrapped tokens for the original asset at a 1:1 ratio. A well-known example is Wrapped Bitcoin (WBTC).
Case Study: WBTC
WBTC is one of the most popular cross-chain bridge assets. Its nature is centralized and custodial. Users deposit BTC on the Bitcoin blockchain and receive WBTC—an ERC-20 token—on the Ethereum blockchain. BitGo acts as the custodian for WBTC, and users must undergo a KYC process to redeem their assets. A group of partners holds multi-signature keys for all deposited and minted BTC. Users can verify on-chain data to confirm 1:1 backing.
Types of Cross-Chain Bridges
Cross-chain bridges can generally be categorized into two types: trusted and trustless bridges.
Trusted Bridges
Trusted bridges rely on a centralized entity to operate, as seen in the WBTC example. Users must trust the security measures of these centralized custodians to ensure sufficient liquidity when redeeming native assets. The primary risks here include malicious behavior by the central entity and inadequate security management.
Trustless Bridges
Trustless bridges depend on smart contracts. Users need to trust the underlying blockchain's security and the correctness of the smart contract code. Risks in this model include poorly written code, hackers, and previously overlooked attack vectors.
Some trustless bridges incorporate Automated Market Makers (AMMs) to create a more seamless cross-chain swapping experience. This model is generally more efficient than traditional bridging methods but still carries inherent smart contract risks.
Why Are Cross-Chain Bridges Targeted?
For hackers, cross-chain bridges are like flowers to bees. As the world becomes more multi-chain and the total market capitalization of crypto assets (and DeFi TVL) increases, attacks on these bridges become more lucrative. As of August 2, 2022, over $20 billion was locked in various bridges.
Would you trust founders in their 20s or 30s and a team of fewer than 10 people to defend against state-level hackers? Incidents like Axie Infinity’s Ronin and Harmony highlight these vulnerabilities.
Vitalik Buterin once stated that the future would be multi-chain but not cross-chain. He argued that dApps living on different chains would create complex interdependencies. A 51% attack on just one chain could cause significant contagion, threatening the entire ecosystem’s economy.
Beyond security risks, tokenomics must also address how to manage tokens across different chains. Issues related to supply and demand need resolution to maintain original tokenomics frameworks and ensure inflation rates aren’t substantially affected by cross-chain activities.
The Irony of "Bailouts" in Crypto
Ironically, the term "bailout" is one of the most negative descriptors for Wall Street firms that make mistakes and require government assistance (or help from figures like Warren Buffett). Yet, cryptocurrency is repeating TradFi’s errors at lightning speed.
In the case of Poly Network, the outcome was positive only because the hacker returned almost all the stolen funds. But if we must rely on either capital bailouts or the goodwill of hackers, what are we doing here?
Wouldn’t it be better to use CEXs or trusted bridges for asset transfers?
These entities are subject to more regulations, have auditable reserves, founders who can be held accountable, and (hopefully) better service.
Of course, one could argue that CEXs and trusted bridges can block access to their services at any time, especially under regulatory pressure. While this is true, trustless bridges might also be forced to take similar actions—such as blocking IP addresses or flagging transactions from blacklisted wallets—though on a smaller scale. Ultimately, when crypto scales to a billion users, 99% of consumers won’t care how the bridge works. They’ll want the fastest, safest, and most trustworthy method to transfer assets.
I believe the game will be largely over when stablecoins like USDC and USDT find a way to enable cross-chain swaps and integrate fiat off-ramps in G-20 countries.
The Institutional Perspective
The goal is to build a decentralized financial ecosystem. But when an exploit occurs, we may need to rely on governments to recover funds. If that’s the case, why not trust regulated CEXs from the start? Yes, they might be slower to adopt new chains, but if the end result is the same—and with regulation likely making them safer—doesn’t this approach contradict the original purpose of decentralization?
I predict that "real" institutions managing trillions will prefer CEXs and trusted bridges over trustless ones. While the trustless bridge market will continue to exist, its activity will be driven mainly by speculators seeking the latest meme coins on new alt-chains.
Current events, combined with Vitalik’s views on a multi-chain future, suggest we may need to rethink the design, philosophy, and use cases of cross-chain bridges.
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Frequently Asked Questions
What is a cross-chain bridge?
A cross-chain bridge is a protocol that enables the transfer of digital assets between different blockchain networks. It often involves locking assets on one chain and minting equivalent tokens on another.
What are the risks of using cross-chain bridges?
Risks include smart contract vulnerabilities, centralized custodial failures, and potential regulatory interventions. Hackers often target bridges due to the large volumes of assets locked in them.
How do trusted and trustless bridges differ?
Trusted bridges rely on centralized intermediaries, while trustless bridges use smart contracts. Trusted bridges may offer better liquidity and regulatory compliance, whereas trustless bridges emphasize decentralization.
Why are cross-chain bridges important for DeFi?
They enhance interoperability, allowing users to access diverse ecosystems and leverage unique features of various blockchains without being confined to a single network.
Can centralized exchanges replace cross-chain bridges?
In some cases, CEXs can offer a more secure and regulated alternative for moving assets across chains, especially for institutional users who prioritize safety over decentralization.
What is the future of cross-chain bridging?
The future may involve hybrid models combining the security of trusted entities with the innovation of trustless protocols, alongside improved regulatory frameworks and better risk management practices.