An article to clarify bridges (Bridges), side chains (Sidechain) and layer 2 protocols (Layer-2)

As a community group, I tend to be incredibly excited about off-chain protocols as a way to scale the web. It allows most transactions to be moved from layer 1 blockchains to off-chain systems, thereby getting rid of the high network fees and latency issues on layer 1 blockchains.

But what are Bridges?

In this article, I will explore the basics of all off-chain protocols. A basic component that is often overlooked but is crucial to assessing the security of funds:

Bridges are responsible for keeping assets on a layer 1 blockchain, while at the same time, the same assets are published on another (and external) service. It defines who will escrow the funds and the conditions that must be met before the assets can be unlocked.

In short, whenever a Layer 1 blockchain like Ethereum connects to any other system, a bridge is used. All bridges trigger the following functions:

Deposit (or deposit). Users can deposit funds into the bridge, and another system will issue some representation of the asset.

Account balance update. Notifies the bridge about the new account balance, which can be used to assist the withdrawal process.

Withdrawal (or known as withdrawal). Users can withdraw assets from the bridge based on their balance on another system, and the issued tokens are simultaneously burned on the other system.

The most common type of bridging (one that people use but rarely realize) is a single organization:

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Most cryptocurrency exchanges (not all) offer a single organization bridge to the service.

If we only consider bridges and nothing else, then we can call cryptocurrency exchanges off-chain protocols. Users can lock funds into the service, transact without network fees and delays, and eventually withdraw their funds to the layer-1 blockchain.

In addition to single-organization bridges, there are two other types of bridges that rely on a set of managed parties:

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A multi-organization bridge, where a fixed number of independent organizations (K out of N) have custody of locked funds.

Encrypted economics bridge, the organization is changeable, the quantity is determined by the weight of assets, and the custody of funds is exercised.

A key point is that none of the three bridges on the layer 1 blockchain can verify that the account balances from the other system are correct (or that the liabilities in the other system exceed the assets in the bridge), whether all Withdrawals are processed according to another system determined by escrow parties, who ultimately decide whether funds can be released and who should receive them.

Sidechains and bridges are independent

So far, we have discussed bridges used to log into custodial services such as crypto exchanges. An increasingly popular use case for bridges is to connect one blockchain to another (this is where the term "sidechain" originated).

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There are a few scenarios for bridge use cases:

WBTC: A single organization bridge to unlock BTC to Ethereum.

Liquidity Network or RSK: A multi-organizational bridge with a consortium of parties with Hardware Security Modules (HSMs) to lock/unlock funds from BTC to another blockchain.

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Polygon Bridge: A cryptoeconomic bridge where the 2/3+1 stake locked in the bridge regularly agrees on the account balances of all users on Polygon, and users can use this agreement to withdraw funds on Ethereum (actually, Polygon Ultimately controlled by small multi-signature contracts, but here we look at its long-term goals).

Rainbow Bridge: Cryptoeconomics bridge, bridge contracts are light clients that can verify the progress of other blockchains. It does not check the validity of the other blockchain, and the safety of funds ultimately depends on the continued progress of the other blockchain (guaranteed by cryptoeconomics).

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

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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. BitGo is trusted to track and honor account balances recorded in smart contracts.

There are several aspects to consider in the WBTC example.

Single Custodian. The WBTC bridge relies on a single custodian to guarantee its integrity. They can issue more WBTC on Ethereum than are locked in Bitcoin, and they can decide not to honor any WBTC-to-Bitcoin conversions.

Independent security model. Ethereum has its own security model that is independent of Bitcoin, and bridges have their own security model that is in turn independent of the two blockchain networks.

Ethereum acts as a sidechain in this example, and transactions have been moved from Bitcoin to the Ethereum blockchain.

What these three bridge types have in common is that they do not check the integrity of the sidechain, and there is no automatically triggered contingency plan to protect funds if the custodian (or sidechain) goes offline. They just operate on their own security model, not the layer 1 blockchain that the bridge is on.

What about layer 2 protocols?

The promise of layer 2 scalability is to move transaction throughput from a layer 1 blockchain to another off-chain system, at which point we need bridges to hold funds issued on other systems.

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

It requires a new type of bridge:

Layer 2 bridges (bridgers). The layer 1 blockchain holds custody of the funds, and the bridge must ensure that the layer 2 protocol has not been compromised. In the worst case, the bridge will automatically enable the layer 2 protocol until all funds can be withdrawn.

Layer 2 bridges are the most powerful of all bridges.

It does not rely on a set of custodians to secure funds. Instead, bridges must be made to ensure that the off-chain system is complete and functioning well before funds are released. If, for some reason, a bridge determines that the off-chain system is compromised, the bridge can simply ignore the other network.

Several companies are focusing on Layer 2 bridging and building fundamentally new blockchain networks.

This is what makes Layer 2 protocols so exciting, and it took years for startups to come up with solutions. Competition in the layer 2 protocol market is largely focused on how to deploy and implement secure layer 2 bridges (and not necessarily how to deploy other blockchain networks).

This is a good opportunity to further explore technical issues and definitions. As we mentioned earlier, we must ensure that the second-layer protocol is not damaged. There are four types of damage:

Data availability. How does the bridge confirm that all data of another blockchain network is publicly available so that users can independently recompute the layer 2 database?

Integrity of state transitions. How can I make the bridge confirm that all state transitions for the layer 2 network are well-formed and valid?

Integrity of Withdrawals. If the second layer network is compromised, how can the bridge ensure that all legitimate users' funds can be withdrawn?

Protocol activity. How does the bridge guarantee that transactions can still be executed when the layer 2 protocol goes down or goes offline?

The above problems must be solved while bridging has significantly less computing resources than off-chain systems, otherwise, it is not a scalable solution.

Solving the above issues can get us into trouble. It’s a complex world of on-chain challenges, fraud proofs, validity proofs, posting transaction data to layer 1 blockchains (Rollups) and off-chain.

Although this article does not focus on solutions, we emphasize that all solutions are not the same. Some upcoming layer 2 protocols will not be able to meet the above security goals. They cannot be said to be layer 2 protocols due to the lack of layer 2 bridges.

None of the four bridges is "wrong"

As we have seen throughout this article, there are four types of bridges that allow funds to be locked in one blockchain and to be in another off-chain system (most likely another blockchain) Indicated.

Managed bridge. The first three bridges focus on which set of custodians controls locked funds. The role of the custodian is to verify that the off-chain system is correct before allowing any assets to be withdrawn from the bridge. The assumption is that the integrity of the off-chain system is a client-side concern, and that the custodian has sufficient computing resources to handle it. While it is possible to lighten the weight of custodians and introduce cryptoeconomic incentives to encourage custodians to follow the protocol, bridge protocols cannot fully constrain custodians. There have been several cases of losing user funds (e.g. MtGo), this is because the integrity of the bridge ultimately depends on human trust.

Layer 2 bridge. The bridge takes over the role of custodians, who hold funds and check the integrity of off-chain systems. The heart of the matter is that an off-chain system must be confident that it cannot be compromised, but it lacks the computing resources to independently check each transaction (otherwise, it is not a scalability solution). In addition to posing a heightened technical challenge, it doesn't come for free. For layer 1 blockchains to confirm that off-chain systems are indeed well-structured and complete – there is an ongoing financial cost. However, the bridge ultimately owns custody of the funds, not the off-chain system operator.

Overall, the jury is still out on whether users really care about layer 2 bridging and whether Ethereum's security model should be extended to off-chain systems. As with all things in life, my guess is that all four bridges are here to stay because they are critical to user adoption.

My only advice is to be careful about the type of bridge your favorite protocol uses to better understand how your funds are protected from bad actors.

By: Infura Internal Professor Patrick McCorry

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