Until recently, if you chose to put money into crypto, you were most likely going to interact with one of two blockchains: Bitcoin or Ethereum. Recently – in the past 18 months – more Layer 1 and Layer 2 networks with strong decentralized finance (DeFi) ecosystems have emerged, with some notable examples like Solana, Polygon, Avalanche, and Flow. Because they are separate blockchains, the assets contained in the wallets of these chains are not inherently interoperable – i.e. the value housed in a Solana wallet cannot be transferred to an Ethereum wallet without a series of messy and time-consuming transactions. transactions accompanied by a series of transaction fees.
The infrastructural concept of a crypto bridge solves this problem by using a smart contract to “wrap” tokens and assets for use on other blockchains. The terminology here helps in understanding, as assets can be wrapped or unwrapped, and passing an asset through two bridges – thus wrapping it twice – results in the asset having to be unwrapped twice to become what he was originally.
This technique turned out to be important as layer 1 blockchains started overlapping and converging in some direction at the start of the current bear market. Layer 1 ecosystem failures, like that of Terra, further illustrate the usefulness of cryptocurrency bridges.
Is Cryptocurrency Bridging Safe?
As with most other safety and security issues in the blockchain space, this nuanced question comes down to two major factors that can act as red flags. First, the quality of smart contracts and the auditing of those smart contracts. A bridge built on flawed or poorly audited smart contracts will not be secure. The other red flag is network size and centralization, as a network with a few nodes or multiple nodes run by a single group is susceptible to being hacked just as easily as a centralized network. Beyond that, it’s difficult to assess a bridge’s sturdiness without consulting other experts.
Multi-chain versus cross-chain
The distinction between multi-chain bridges and inter-chain bridges is quite simple but crucial to understanding the usefulness of a bridge. Essentially, multi-chain ecosystems exist when a project properly exists on two separate blockchains like Cosmos or Polkadot. Bridges within these networks are generally more secure than normal bridges, also known as cross-chain bridges (think Solana to Ethereum bridge) due to structural consistency and integration when passing a parachain Polkadot or from one Cosmos blockchain to another.
The question of which of these technologies will dominate can only truly be answered with the answer to the question of what sorts of blockchains will dominate the future. If the future lies in “blockchains of blockchains” like Polkadot or Cosmos, then multi-chain bridges will be more popular. Currently, inter-chain bridges are more popular but are seen by many as a temporary solution, while solutions such as the Inter Blockchain Communication (IBC) protocol are being actively developed to handle the blockchain traffic of tomorrow.
Cross-Chain Bridge Hacks
Over $1 billion has been stolen in bridge-related hacks in the past year, the most high-profile being the attacks on the Ronin Bridge and the Wormhole Bridge. The Wormhole Hack was done by exploiting a design flaw to bypass signature validation in the bridge’s smart contracts, which essentially opened up the tokens held by the bridge at the time, which totaled approximately $325 million. The Ronin hack was accomplished by exploiting the small size of the validating network to deplete the bridge’s reserves after several validating nodes – functioning similarly – were compromised.
How to secure your digital assets
In light of these hacks, it is evident that the smallest attack surfaces online can and will be exploited in the context of digital assets. As such, the easiest way to secure digital assets is to use a hardware wallet, which is disconnected from the internet when not in use. Using a hardware wallet won’t change the extent to which a cross-chain bridge hack will impact users, but it’s as important a security measure as never sharing seed phrases and remain alert to potential phishing attacks by using sites that mimic exchanges, protocols and/or wallets.
Best hardware wallet: Ledger and Trezor
securely through the Ledger Hardware Wallet website
Launched in 2014, Ledger has evolved into a rapidly growing company developing infrastructure and security solutions for cryptocurrencies as well as blockchain applications for businesses and individuals. Born in Paris, the company has since grown to over 130 employees in France and San Francisco.
With 1,500,000 Ledger wallets already sold in 165 countries, the company aims to secure the disruptive new class of crypto assets. Ledger has developed a distinctive operating system called BOLOS, which it integrates with a secure chip for its line of wallets. So far, Ledger is proud to be the only market player to provide this technology.
- ERC-20 tokens
- All experience levels
- Easy to install and use
- Supports over 1,500 different digital resources
- Long battery life
- Bluetooth connectivity features
Ledger and Trezor are household names when it comes to hardware wallets, with robust support for most tokens and a solid chance of future support for upcoming token standards and blockchains. The Nano S Plus is Ledger’s latest offering, with tweaks like a bigger screen and better non-fungible token (NFT) handling.
As a more beginner-oriented (but more expensive) method, you can use a centralized exchange like Coinbase Global Inc. (NASDAQ: COIN) or Gemini to trade tokens at market prices to access the network you want to be on. The main downside here is that you lose money in slippage costs and fluctuating market prices. You face higher transaction costs than most bridges because you will incur network costs when you transfer your tokens from a software or hardware wallet to a centralized exchange and then sell and buy at the rates of the market and pay transaction fees, then incur a second set of network costs for the network you connect to.
Cryptocurrency Market Outlook
The cryptocurrency market has certainly seen a downturn over the past few weeks, but in many ways the amount by which Bitcoin and to some extent Ethereum have deviated from price is smaller than expected given Bitcoin’s role – to the tune of 30,000 BTC – in the fall in value of LUNA alongside the depegging of UST. The altcoin market is more severely down, and it looks like an understanding of who the long-term players in the space are will emerge in the coming months.
Is it safe to use token bridges?
There is nothing inherently dangerous about using token bridges or wrapped tokens, but under both of these smart contracts it is possible that poorly audited smart contracts could be used in an attack. The key to safely using token bridges — and almost any other DeFi protocol — is to do your homework on the protocol and others’ experiences with it.
The distinction between cross-chain and multi-chain bridges is something to be aware of when interacting with token bridges, as is understanding how wrapped tokens work.