To play multi-chain DeFi, you need to know about cross-chain bridges

Recently, with the rise of Ethereum layer1 challengers and layer2 DeFi, players are no strangers to the frequently used "cross-chain bridge". When we use CEX to transfer encrypted assets (such as transferring assets on the Ethereum chain to currency An exchange, and then transferred to the BSC chain in the way of BEP20), in fact, it is also using the "bridge". There are many ways to transfer assets between different chains. The bridge is a fundamental component that is often overlooked, but is critical to assessing the safety of our funds.

In addition, due to the cross-chain bridge, we can use the off-chain protocol to expand the network, allowing most transactions to be transferred from the blockchain layer1 to the off-chain system, thereby avoiding the network fees and delays of layer1.

The cross-chain bridge is responsible for keeping assets on layer1 and releasing them on another (and external) service. It defines who will escrow the funds and the conditions that must be met for the assets to be unlocked.

In short, whenever a layer1 blockchain like Ethereum is going to connect to any other system, it needs to use a bridge. All bridges have similar operations:

Deposits, users can deposit funds into the bridge, and (tokens) representing that asset will be issued on other systems;

Update the account balance, the bridge is notified of the new account balance information, which can be used to facilitate withdrawals;

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Withdrawals, users can withdraw assets from the bridge based on their balance on another system where issued tokens are burned.

The most common type of bridge (one that people use so often without realizing it is a bridge) is the single-organization bridge:

Most cryptocurrency exchanges provide single-organization bridge services

If we only consider bridges and nothing else, then it can be said that a cryptocurrency exchange is an off-chain protocol. Users can lock funds in the exchange, bypass network fees and delays when trading, and finally withdraw funds to the layer1 blockchain by withdrawing coins.

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In addition to single-organization bridges, there are two other types of bridges, which rely on a set of custodians:

A multi-organizational bridge, a fixed set of independent parties (K/N) keeps locked funds in custody.

A cryptoeconomic bridge where a dynamic set of parties (determined by their asset weights) has custody of funds.

None of the three bridges on the Layer 1 blockchain can verify that account balances from other systems are correct (or that other systems' liabilities exceed the bridge's assets). It is up to this group of custodians to verify that all withdrawals are processed against another system. They ultimately decide whether funds can be released, and who should receive them.

So far, we've thought mostly about custodial services like cryptocurrency exchanges when it comes to bridges. An increasingly popular use case for bridges is to connect one blockchain to another (which, by the way, is where the term sidechain originated).

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The security of the bridge and the side chain is independent and separate

There are a few examples of bridges:

WBTC: A single-organization bridge that brings BTC to Ethereum.

Liquid network or RSK: A multi-organizational bridge where a consortium of parties with HSMs lock/unlock funds from BTC to another blockchain.

Polygon Bridge. A crypto-economic bridge where the 2/3+1 stake locked in the bridge regularly agrees on the account balances of all users on Polygon, which users can use to withdraw their funds on Ethereum (actually, Polygon eventually is controlled by a small multisig contract, but this example focuses on its long-term goals).

Rainbow bridge. A cryptoeconomic bridge where the bridge contract is a light client that can verify progress on other blockchains. It does not check the validity of other blockchains, and the safety of funds ultimately depends on the continued progress of other blockchains (guaranteed by cryptoeconomic rules).

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Most critically, each bridge has its own security model, which is independent of the blockchain network. We can take a simple case of WBTC to further elaborate:

BitGo Trust hosts the funds locked in Bitcoin and they are responsible for issuing the same amount of WBTC on Ethereum. A smart contract on Ethereum keeps track of the account balance for all transfers of WBTC. To be trusted, BitGo respects account balances recorded in smart contracts.

In the case of WBTC, there are several aspects to consider:

Single Custodian. WBTC's bridge relies on a single custodian to guarantee its integrity. They can issue more WBTC on Ethereum than locked in Bitcoin, and they can decide not to honor any withdrawal of WBTC back into Bitcoin.

Independent security model. Ethereum has its own security model, independent of Bitcoin. The bridge has its own security model, independent of the two blockchain networks.

Ethereum is a sidechain. Transactions have been moved from Bitcoin to the Ethereum chain.

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What all three bridges have in common is that they do not check the integrity of the sidechain, and there is no self-enforcing contingency plan to protect funds if the custodian (or sidechain) goes offline. They only focus on their own security model, without considering the security of the layer1 blockchain where the bridge is located.

The promise of Layer 2 scalability is to move transaction throughput from one layer to another off-chain system. A bridge is required to custody funds issued on another system.

However, unlike the other types of bridges explored in this article, a Layer 2 protocol aims to secure funds with the same security as a Layer 1 blockchain, and it cannot rely on custodians (or other off-chain systems) to secure funds.

It requires a new type of bridge:

Layer 2 bridge. The layer 1 blockchain has custody of the funds, and the bridge must ensure that the layer 2 protocol is not compromised. In the worst case, the bridge will self-enforce the validity of the Layer 2 protocol until all funds have been withdrawn.

Layer2 bridges are the most powerful of all cross-chain bridges.

It does not rely on custodians to secure funds. Instead, the bridge must ensure that all is well with off-chain systems before the funds are released. If for some reason the bridge is convinced that the off-chain system is compromised, the bridge can simply bypass the other network entirely.

Projects focused on layer2 bridges

This is why Layer 2 protocols are so exciting, and it took years for startups to come up with solutions. The race to be the first to bring a Layer 2 protocol to market has largely focused on how to implement a secure layer 2 bridge (and not necessarily how to implement other blockchain networks).

This is a good opportunity to further explore technical issues and definitions. We made it clear that the bridge must ensure that the layer2 protocol is not broken, there are 4 aspects:

Data availability. How can the bridge be sure that all the data of another blockchain network is public so that users can independently recompute the layer2 database?

Integrity of state transitions. How can the bridge be assured that all state transitions of the layer2 network are well-formed and valid?

Withdrawal protection. If the Layer 2 network is compromised, how can the bridge guarantee that all honest users' funds can be withdrawn?

Agreement Validity. How does the bridge ensure that transactions can still be executed if the Layer 2 protocol stalls or goes offline?

Of course, the above problems must be solved, although the bridge contract has significantly less computing resources than the off-chain system, so the bridge cannot re-execute all transactions in real time. Otherwise, it's not a scalable solution.

Solving the above issues puts us in a bind. This is the world of on-chain challenges, fraud proofs, validity proofs, posting transaction data to layer1 blockchains (rollups) and on-chain escapes.

This article doesn't focus on the solutions, but here's the emphasis that all solutions are not the same. Some layer 2 protocols to be deployed will not be able to meet the above security goals. They cannot be said to be layer2 protocols due to the lack of layer2 bridges.

As mentioned above, there are four types of bridges that allow funds to be locked in one blockchain and reflected in another off-chain system (most likely another blockchain).

Custodian bridges. The first three bridges (single-organization, multi-organization, cryptoeconomics) focus on which set of custodians has control over locked funds. The role of the custodian is to verify that the off-chain system is correct before allowing funds to be withdrawn from the bridge. Assuming the integrity of off-chain systems is a client-side concern, custodians have sufficient computing resources to handle it. Although there are measures to constrain the authority of custodians, and cryptoeconomic incentives to encourage custodians to abide by the agreement, the bridge protocol does not fully constrain custodians. There are many examples of bridges losing user funds (like MtGo), and this is because the integrity of bridges ultimately relies on trust between people.

Layer 2 bridge. Bridges replace the role of custodians in custody of funds and checking the integrity of off-chain systems. The core of the problem is that the bridge must be confident that the off-chain system has not been compromised, and it lacks the computing resources to independently check each transaction (otherwise it is not a scalable solution). Aside from the technical challenges, it doesn't come for free. There is an ongoing financial cost to convince the layer1 blockchain that the off-chain system is structurally complete and well-integrated. However, the bridge has ultimate custody of the funds, not the off-chain system operator.

Overall, the jury is still out on whether users really care about Layer 2 bridges, and whether we should extend Ethereum's security model to off-chain systems. It is possible that all four types of bridges will remain in the future, and they are critical to user adoption.

Users beware, which protocols you prefer, what type of bridges they use, and it's important to better understand how your funds are protected from breaches.

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