The centralized bridge has a centralized control body. The bridge allows you to receive coins from any blockchains in a ratio of 1 to 1. Crypto exchanges block the user's assets, and offer similar ones in other networks. When it is necessary to return a coin to the first network, new coins are burned, and the base ones are unlocked. As a rule, such bridges require mandatory identification of an individual. And they also have quite significant fees for online transfers.
There is no intermediary structure in the work of decentralized bridges. The bridge uses a smart contract that connects different networks. Exchange operations with coins are carried out automatically if the conditions of the smart contract are met. The decentralized bridge functions in the same way as the centralized one.
Blocking of coins is carried out in the initial blockchains, a similar number is created in the second blockchains. When coins are burned on the second blockchain, the client receives them on the original network. The price of the token does not change on each network as it is pegged to the price of the underlying asset. The decentralized bridge does not require users to go through the mandatory identification procedure and, unlike the centralized bridge, does not collect user data.
Side Chain Bridge
Its peculiarity is that it provides a connection between the core network and the child network.Such a bridge is needed because the above networks operate using a completely different set of rules and algorithms. Since smart contracts are included in its structure, with their help, clients can move their coins across networks. The intermediary structure does not participate in this process in any way. This bridge helps to connect the blockchain of the first and second levels. Due to this, token holders get the opportunity to contact dApps in ecosystems.
Multichain Crypto Bridge
They are used when you need to exchange many tokens in a large number of networks. Multichain crypto bridges can also interact with many cryptocurrency wallets.
Interaction Between Blockchains
Bridges not only provide communication between individual blockchains, but also provide a connection between the parent chain and the child chain. This allows developers to deploy DApps on DeFi platforms as well. Blockchain interoperability increases the speed of mass adoption.
Cross-chain crypto bridges allow users to transfer assets and valuable data from one blockchain to another. Thus, users get access to the benefits of various blockchain technologies, not limited to the capabilities of one particular chain.
Via bridges, users can move their assets from a non-scalable blockchain to a high-performance blockchain and enjoy the benefits of low gas fees while taking advantage of the power of Ethereum smart contracts. They can even quickly complete on-chain microtransactions without worrying about high fees. The ability to conduct fast and low-cost transactions expands the possibilities of DeFi and DApps.
Cross-chain crypto bridges greatly increase network scalability. Since the bridge provides a connection between the primary and secondary chains, it can distribute the transaction load across its ecosystem. Distributing traffic across many blockchains and tiers is advantageous for large transaction volumes, especially when the main chain is congested.
With the development of the blockchain industry, the number of simultaneously operating blockchains began to grow. However, they have a closed architecture, that is, transactions cannot leave the “native” chain, which means that there is no need to talk about a single cryptocurrency space. Rather, we have a series of independent cryptocurrency “islands”.
For a long time, this situation suited everyone and cross-chain platforms were not very popular. Each blockchain project sought to capture the entire market, so the developers did not see the need for any cross-chain solutions. And if you needed assets of another blockchain, you could buy them on the exchange.
However, over time it became clear that this approach was not viable. A single blockchain has never appeared – each network has its own set of advantages and disadvantages. So, for different purposes, users choose different platforms, and the exchange of assets through the exchange is, frankly, not the most profitable event, considering how many commissions you have to pay, especially on a centralized exchange.
Therefore, bridges between blockchains have become an urgent need and now we are seeing a real boom in their development. Each cross-chain platform has individual features in the approach to the cross-chain bridge architecture. The basic principle of operation in the vast majority of cases remains unchanged – the key differences are in the nuances of implementation.
A typical gateway bridge consists of the following main components (in addition to them, there is also a whole set of infrastructure elements that provide communication between the main “actors”):
Oracles in a cross-chain bridge are any structure that confirms the fact of a transaction in the original blockchain. They can be either decentralized (for example, represent a network of independent nodes in a separate blockchain) or completely centralized (for example, in some exchange bridges, the exchange itself acts as an oracle).
The task of the oracle is to confirm that the transaction in the original blockchain actually took place and was confirmed. After that, it calls the smart contract in the target blockchain and gives the go-ahead to continue the operation.
A smart contract on the destination blockchain (also called a mint contract), having received information about the transaction on blockchain A, issues a copy of the locked asset on blockchain B – the so-called wrapped (wrapped) tokens. And then sends these tokens to the addressee.
Wrapped tokens are synthetic assets that completely repeat the value and price fluctuations of the original asset. In other words, a wrapped Bitcoin (commonly referred to as wBTC) will always be worth exactly 1 BTC, no matter what blockchain it is hosted on. Sending wrapped tokens from blockchain B to blockchain A triggers the synthetic asset burn mechanism.
Wrapped tokens in the original blockchain are burned when sent to the bridge smart contract. Oracles confirm the fact of the transaction, after which the contract in blockchain A unlocks the corresponding number of original coins and sends them to their destination.
This is the only way to unlock coins in a lock contract. This ensures that it is the transfer of value between blockchains that occurs, and not the creation of a completely new, unsecured coin.
Understanding the many bridges between blockchains can be quite difficult for a beginner, given that each expert and each platform offers its own classification and its own explanation of what kind of cross-chain bridge is best.
However, the most significant criteria for a cross-chain bridge is how it handles user funds and how the consensus of the oracles is reached. According to the methods of handling user funds, bridges are divided into three types:
The use of escrow means that there is a centralized entity in the bridge structure that handles user funds. It is the escrow that takes the assets and makes sure they are transferred accurately. Theoretically, escrows are responsible for this, but in practice, their presence means that the decentralization of the bridge is absent.
Custodial bridges take coins from users before freezing them and releasing wrapped copies.
Non-custodial bridges block coins directly in users' wallets.On the one hand, the user will still not be able to use them until the reverse operation is completed, on the other hand, the bridge and its developers do not have access to user funds. So, there is no risk of theft of funds by the bridge.
According to the method of reaching consensus, bridges are divided into two large groups:
In the first case, everything is simple – there is an “operator” in the bridge structure, which alone decides whether this or that transaction was made.
Decentralized bridges, in turn, are divided according to the consensus algorithms used in blockchains where oracle nodes are deployed. The most popular ones are Proof-of-Stake, Proof-of-Authority and Proof-of-Interest.
Theoretically, the features described above can be combined in cross-chain bridges in any way. In practice, for example, there is no point in building a non-custodial bridge with a centralized consensus mechanism. So non-custodial decisions are always decentralized.
Most exchange bridges (at least on centralized crypto exchanges) use a combination of escrow and centralized consensus. On the one hand, this is the easiest way to create a bridge, on the other hand, the basic idea of decentralization for cryptocurrencies is not realized.
Custodial bridges can use both centralized and decentralized consensus mechanisms. And most bridges today use a combination of custodiality and distributed oracle consensus.
The explosion in popularity of cross-chain bridges should not mislead you – their development is not an easy task that every team can master. They remain one of the most difficult projects in the blockchain industry to implement. And, the reasons for this are quite obvious:
Developing your own cross-chain bridge from scratch is an extremely complex and time-consuming task that requires a team of specialists who have knowledge from a wide variety of areas of programming, cryptography and finance.
Given the rapid development of the DeFI industry, we can safely say that the boom of cross-chain bridges will continue in the near future. The need to ensure interaction between blockchains will only grow, and, consequently, the need for cross-chain solutions will also grow.