Bridging the World of Blockchains

The world of blockchain consists of various cities (L1) and skyscrapers (L2) which need to be connected to each other for faster growth. Even though many new cities have been inhabited in this world of blockchains, the public transport infrastructure like bridges still leaves a lot to be desired. Interoperability between multiple chains will define this new era of the blockchain revolution and the ease of using it will lead to mass adoption.

The Blockchain space is growing fast with innovations happening at an impressive pace which have led to the creation of various new blockchains.

Timeline of L1 Blockchains

Many new blockchains bring in technological improvements like Proof of Stake. However, some of the new blockchains merely duplicate an existing one to increase the overall capacity of blockchain transactions. For example, Solana brought in a new transaction execution engine that can process transactions concurrently while BSC reuses Ethereum’s software and is basically a clone of Ethereum.

New technical improvements are essential for the long-term growth and development of Blockchains but increasing the supply also has a positive impact.

Blockchains have a limited capacity of transactions they can process (blockspace). Decentralized Finance and NFTs have led to an increase in demand for blockspace much faster than the supply has increased. This has led to an exponential increase in transaction costs.

Source: Messari – Chart of Average Transaction Fees on Ethereum

Plenty of blockchains like BSC have popped up recently that don’t bring in new innovations but bring in more supply (blockspace). These blockchains increase the supply which leads to overall lower prices and that in turn leads to more adoption. These blockchains are a good short-term solution to increase supply and hence are beneficial for the Blockchain space. In the long term, we need more scalable solutions.

Blockchain development is open and every blockchain can learn from the others, leading to overall industry growth. Most of the Blockchains will eventually offer similar features but some cities do some stuff better than the others. There will be some carefully planned cities like Zurich but also some unplanned and out-of-control cities like Bengaluru. You can keep scaling a city by building taller and taller skyscrapers but eventually, you’ll run out of land (block size in blockchains). In fact, other parts of the system like sewage will start clogging even before you run out of land. Eventually, Inhabiting and developing a new city becomes a better choice than further growing an existing one.

In technological terms, scaling a single blockchain can be seen as vertical scaling while scaling the whole system by adding new blockchains can be seen as horizontal scaling. Vertical scaling is often easier and offers more immediate results but horizontal scaling is more effective in the long run as it offers higher scalability.

There will always exist multiple cities but they need to be interconnected. roads, railways, and bridges are essential to facilitate inter-city communication. People need to move from one city to another every now and then to make the best use of different opportunities. Blockchains aren’t very different. They offer the same core functionality but every blockchain brings its own specialty. Users need to move from one blockchain to another to make full use of the opportunities.

Cross-Blockchain Bridges

Bridges connect one blockchain to another. Some bridges like Polkadot XCM and Cosmos IBC allow generic message-passing while most others focus on just moving tokens from one blockchain to another. Moving tokens around different blockchains is the most common use case of blockchain interoperability right now but we’ll see more requirements for generic bridges as we start moving towards truly interoperable decentralized applications.

Overview of the Blockchain Interoperability ecosystem

Token bridges enable the movement of assets between vastly different networks, such as Bitcoin and Ethereum, and between one parent blockchain and its child chain, called a sidechain, which either operates under different consensus rules or inherits its security from the parent blockchain (e.g., rollups built on Ethereum).

Token bridges have mainly two token mechanisms (Mint/Burn and Liquidity) and three security models (Centralized, PoS, Decentralized). AnySwap is the leading cross-chain bridging protocol offering interoperability across 25 chains. They support both types of token mechanics. Their daily volume is over $150m with almost 10k daily users.

Token mechanisms

Mint-and-burn strategy: Most bridges follow the mint-and-burn/lock mechanism, albeit in different ways. For example: Bridging between chain A and chain B: moving funds from A to B, we mint new tokens or unlock existing locked on B while burning/locking the tokens on A. Similarly, moving funds from B to A, we mint new tokens or unlock existing locked tokens on A and burn/lock the corresponding tokens on A.

This is similar to how teleportation works in science fiction series like Star Trek: to “teleport” a person, their mind and body (token information) is replicated at the destination (token in B) and their body at the start location (token in A) is destroyed/frozen. Problems arise when the body is not replicated at the destination (token in B is not generated) or the original body is intact/unfrozen (token in A is still accessible), or else at the end of the teleportation (transaction), there could be 2 bodies (gain of funds) or 0 bodies left (loss of funds). Hence there’s often a mapping between the tokens on A and B to ensure they are representing the same token information. Arbitrum Bridge and Anyswap Bridge are examples of such bridges.

Liquidity strategy: In this mechanism, tokens are not minted/burned but transferred between the user and the token pool of the bridge. The initial tokens are added to the token pools by liquidity providers that earn a portion of the fee paid by users to bridge their tokens. To bridge tokens using this mechanism, the users deposit tokens in a token pool on one blockchain and withdraw them from the token pool of a different blockchain. The limitation of this approach is that you can only bridge tokens as long as there is liquidity/tokens available in the token pool of the target chain. Connext network and Hop protocol are examples of such bridges.

Security Models

Centralized Bridges

Examples: Avalanche Bridge, wBTC (custodian: BitGo)

A centralized authority or a group of authorities take care of bridging between chains, often by maintaining liquidity pools that hold the tokens across both chains and transporting tokens to accounts accordingly while bridging.

Advantages

• Easiest in architecture

• Faster, simpler, and easy to incorporate

Disadvantages

• Centralized and dependent on a single authority or a group of authorities, which could be malicious/hacked, leading to loss/gain of funds

• Against true vision of Web3

• Usually platform-specific

Proof-of-Stake (POS) Bridges

Examples: AllBridge, RenBridge, Polygon POS Bridge

Instead of a single centralized authority, there now exists a set of external validators that stake tokens on the legitimacy of a deposit/withdrawal while bridging. This is achieved through smart contracts

Advantages

• Uses proof-of-stake, so not dependent on a single authority

• Faster than completely decentralized solutions (deposits within 7-8 minutes and withdrawals within 30 minutes as compared to a 7-day withdrawal process)

• Usually platform-independent/multiple platforms offer similar bridging features

Disadvantages

• Similar to centralized bridges, if the validators are malicious, can lead to loss/gain of funds

• Slower than centralized bridges

• Incentivization schemes for validators to behave properly isn’t very clear

Decentralized Bridges

Examples: Polkadot XCM, Cosmos IBC, Arbitrum Bridge, Polygon Plasma

A completely decentralized bridge involves pushing all the transactions to a parent chain using the security of the parent chain (Ethereum in the case of Polygon Plasma) to verify the validity of a bridging transaction. This involves a long waiting period (usually 7 days) to pass all the roots of the transactions to the “main-chain” and flag potentially fraudulent transactions.

Advantages

• Truly decentralized

• Trustless (dependent on mathematical truths)

• Increased security guarantee, since secured by miners on the mainchain

Disadvantages

• Restriction on child tokens. In most cases, a simple ERC20 token is deployed on child chains without any bells and whistles.

• Long wait period (Usually 7 days, much slower than PoS and centralized bridges)

• Platform dependent (for example, Cosmos IBC requires blockchains built upon Cosmos network)

• Often fraudulent transactions are just flagged, but there are no guarantees for recovering funds

UX problems with interoperability

The current interoperability solutions leave much to be desired in terms of user experience. UI/UX has been one of the biggest pain point in the blockchain ecosystem since the very beginning but in this new world of multiple chains, the cracks have started showing more. Using multiple blockchains feels like you are communicating between different planets rather than cities. Everything seems completely unrelated segregated across different blockchains. You can’t use multiple apps without constantly switching between different RPC endpoints manually.

Another problem with bridging tokens is that almost every mint/burn mechanism-based bridge deploys its own bridged token on the secondary chain. This means, there can be multiple copies of the original token on the secondary chain. Eventually, one of the bridged token gets most of the adoption, and the other bridges become useless. However, during the early days, it can be really confusing to decide which bridge to use so that you get the “correct” bridged token.

Bridging NFTs is even more cumbersome and in most cases not even possible. None of the BAYC holders we asked were able to bridge their NFT from Ethereum mainnet to any other Blockchain. User experience can’t be called smooth unless a BAYC holder can use it without any problems.

Finding a way to move from one chain to another feels almost impossible for newcomers. Even for experts, the process is quite inefficient due to high fees and a lack of aggregators. There’s scope for a 1inch like aggregator for token bridges that compares fees and availability of all bridges but a multichain wallet that focuses on interoperability will be able to better alleviate the pain points.

Closing Thoughts

It will be foolish to expect that only one variant of a revolutionary invention will gain adoption. We all use different phones. However, you can make a call from an iPhone to an Android without much trouble even though iPhones and Androids offer unique features.

The future is Multichain and the acceptance of it will push our builders to innovate on interoperability and its standards.

We will have some blockchains offering unique features while others will be clones. However, all will require interoperability between them. bridges enable blockchain interoperability but are quite limited in what they can do right now and are extremely hard to use for new or non-tech users. Tech evolution on bridges will be the next big tech wave.

The user experience in the space is another big neglected piece. For blockchains to gain widespread adoption, we need easier interoperability solutions without the UX/UI fiction. People don’t need to understand how 5G works to enjoy a smooth internet experience. Similarly, people shouldn’t be expected to understand how bridges work to use multiple blockchains.

This is where multichain wallets come in. Your blockchain wallet is the concierge that helps you plan your bridging journey. A good wallet can make the hardest journey feel smooth.

Multichain wallet

Some of the multichain specific features that we’d love to see:

• Aggregated view of your portfolio across all supported chains.

• On-demand bridging of assets, without requiring users to go to dodgy websites and manually bridge tokens.

• Aggregated quotes from all supported bridges.

• Queue transactions that are submitted when bridging completes.

• Allows apps to access multiple networks via a single API.

• API for apps to fetch aggregated balances and other cross-chain data.

• Cross blockchain swaps to get the best rates for large trades.

Apart from interoperability features, there are some generic features that we believe are essential:

• Decoding of transaction data to show what exactly is being signed.

• Simulation of transactions to show after-effects of the transaction.

• Ability to directly connect into multisigs like Gnosis Safe and propose transactions there.

• NFT Display and Trading.

• Machine learning-based exploit prevention by warning users before they sign suspicious transactions.

• Fallback/Load balancers for Blockchain APIs (RPC endpoints).

We believe wallets with such features will be a game-changer and will bring in the next wave of adoption for Blockchains. If you know of a wallet that supports these features or are planning on building one, get in touch and let us know! We’d love to collaborate.