An Analysis of Cross-Chain Bridges: What are the use cases and risks? What types are there?

Web3 has evolved into an ecosystem composed of L1 blockchains and L2 scaling solutions, each with unique functionalities and trade-offs. With the increasing number of blockchain protocols, the demand for cross-chain asset transfers is also growing. To meet this demand, we need to utilize cross-chain bridges. This translation is from an official Ethereum article. For more information, please refer to the original article.

What is a Cross-Chain Bridge?

The operation of a blockchain cross-chain bridge is similar to a bridge in the physical world that connects two physical locations. A cross-chain bridge in the blockchain world connects two blockchain ecosystems, facilitating communication between blockchains through the transfer of messages and assets.

Let's consider an example:

You are an American planning to travel to Europe. You hold US dollars but need Euros to use locally. To convert your US dollars to Euros, you can use the services of a currency exchange and pay a small fee.

However, what if you want to transact in a similar way but across different blockchains? Suppose you want to exchange ETH on the Ethereum mainnet with ETH on Arbitrum. Just like currency exchange between US dollars and Euros, you need a mechanism to transfer ETH from the Ethereum mainnet to Arbitrum, and a cross-chain bridge makes this transaction possible. In this case, Arbitrum has its native cross-chain bridge to facilitate the transfer of ETH between the mainnet and Arbitrum.

Why Do We Need Cross-Chain Bridges?

However, all blockchains develop in isolated environments with different rules and consensus mechanisms. This means they cannot naturally communicate with each other, and tokens cannot freely move between blockchains.

The existence of cross-chain bridges is to connect different blockchains, allowing the transfer of information and tokens between them. The following are the functions of cross-chain bridges:

• Transfer of assets and information between blockchains
• DApps can leverage the advantages of different blockchains to enhance their capabilities as protocols now have more innovative design space.
• Users can interact with new platforms and leverage the advantages of different blockchains
• Developers from different blockchain ecosystems can collaborate and build new platforms for users

Use Cases of Cross-Chain Bridges

Here are some scenarios where cross-chain bridges can be utilized:

Reduced Transaction Fees

If you hold ETH on the Ethereum mainnet but want to enjoy lower transaction fees while exploring different DApps, you can simply transfer your ETH from the mainnet to any L2 scaling solution.

Using DApps on Other Blockchains

If you have used Aave on the Ethereum mainnet for lending USDT, you can switch to Aave on Polygon, where the borrowing rates are higher.

Exploring Blockchain Ecosystems

If you hold ETH on the Ethereum mainnet but want to explore other L1s to use their native DApps, you can use a cross-chain bridge to transfer ETH to other L1s.

Having Native Crypto Assets

If you wish to own native LUNA but your assets are only on the Ethereum mainnet, you can purchase WLUNA (Wrapped LUNA) to have exposure to LUNA on Ethereum. However, WLUNA is an ERC-20 token native to the Ethereum network, not the original asset in the Terra ecosystem. To truly own native LUNA, you must use the Terra cross-chain bridge to transfer your assets from Ethereum to Terra. This will bridge your WLUNA and convert it to native LUNA.

Note: All these actions can also be done through centralized exchanges. However, unless your funds are already on an exchange, it will involve multiple steps. Using a cross-chain bridge is a better option.

Types of Cross-Chain Bridges

Cross-chain bridges come in various design types, usually categorized as trusted and trustless:

Trusted Cross-Chain Bridges

• Operation relies on a central organization or system
• Trust assumptions on fund custody and bridge security, with users mostly relying on the reputation of the cross-chain bridge operator
• Users need to relinquish control of their crypto assets

Trustless Cross-Chain Bridges

• Operate using smart contracts and algorithms
• Security of the bridge is equivalent to the underlying blockchain security
• Through smart contracts, this type of cross-chain bridge allows users to retain control of their funds

In summary, trusted cross-chain bridges come with trust assumptions, while trustless cross-chain bridges minimize trust to a minimum and do not make new trust assumptions outside the underlying scope. Here are some definitions:

• Trustless: Security equivalent to the underlying scope. Refer to Arjun Bhuptani's article for more details.
• Trust assumptions: Lowering the security of the underlying scope by adding external verifiers in the system, hence reducing the security of the crypto economy.

To better understand the primary differences between these two approaches, let's consider an example.

Imagine you are at an airport preparing to go through security, and there are two types of security checkpoints:

1. Manual security checkpoint – Airport personnel manually check your ticket and identification details before handing you the boarding pass
2. Automated security checkpoint – Operated by machines, you input your flight details, and once everything is checked, you receive your boarding pass

The manual security checkpoint is like a trusted cross-chain bridge as it relies on a third party, the airport personnel, to operate. As a customer, you trust the airport personnel to make the right decisions and handle your private information correctly.

The automated security checkpoint is a trustless cross-chain bridge, eliminating the role of operators and operating through technology. Users retain control of their data throughout and do not have to trust third parties with their private information.

Many cross-chain bridge solutions employ these two extreme models with varying degrees of trust.

Risks of Using Cross-Chain Bridges

Cross-chain bridges are in the early stages of development, and the best designs may not have been discovered yet. Therefore, there are risks associated with operating any cross-chain bridge:

• Smart contract risks: Code vulnerabilities in contracts could lead to user fund losses
• Technical risks: Software failures, buggy code, human errors, spam, and malicious attacks can affect user operations

Furthermore, trusted cross-chain bridges add extra risks due to trust assumptions, such as:

• Audit risks: Theoretically, cross-chain bridge operators could halt users from transferring assets via the bridge
• Custodial risks: Cross-chain bridge operators could collude in private to steal user assets

User funds are at risk if:

• Smart contracts have vulnerabilities
• User operations go wrong
• The underlying blockchain is subject to a hacker attack
• Trusted cross-chain bridge operators act maliciously
• The cross-chain bridge is targeted in a hack

In a recent incident involving Solana's cross-chain bridge Wormhole hack, approximately 120,000 wETH tokens worth around $325 million were stolen.

Cross-chain bridges are crucial for users to access Ethereum L2 and even for those exploring different blockchain ecosystems. However, given the risks involved in interacting with cross-chain bridges, users need to understand the trade-offs when using them.