Blockchain interoperability is a long-term goal for projects such as Cosmos (ATOM). In an ideal scenario this will mean being able to use crypto assets across a variety of blockchains with little to no extra steps required by you as a user. However, an internet of blockchains doesn’t exist in that form yet, and so if you’re looking to use your various digital assets across more than one blockchain you’re going to require a cryptocurrency bridge.
A cryptocurrency bridge is a protocol developed in order to allow you to safely and securely transfer your assets from one blockchain to another. This lets you use those assets on another blockchain network for things such as decentralized finance platforms. You could be looking to provide liquidity, stake, or simply supply and borrow funds on another network. But how do bridges really work? Are they safe? We’ll answer all of that and more in this guide.
How Do Crypto Bridges Work?
In order to bridge cryptocurrency from one blockchain to another, there needs to be a protocol created by a development team. These are often created by a team that is external to the actual project/blockchain itself, though this isn’t always the case. Bridges created by teams external to the blockchain development team can often be targets for hackers, but are still viable ways to bridge your assets (more on this later).
For example, the Binance Bridge was created by Binance as a way to allow people to bridge their assets from multiple blockchains to the Binance Smart Chain (BSC). But the bridge to bring Bitcoin as Wrapped Bitcoin to Ethereum was created by a joint partnership between Kyber, Ren, and BitGo. Kyber and Ren are both blockchain projects themselves, while BitGo is a custodian.
In order to bridge crypto assets, you need to have just two things. First, you need to hold the asset you wish to bridge. It doesn’t need to necessarily be in a non-custodial wallet because many crypto exchanges offer you multiple networks for deposits and withdrawals, saving you a step, but you need to have the asset itself.
Second, you will need a wallet address to receive your bridged assets. This means that if for example you’re bridging assets from Ethereum to Binance Smart Chain, you need a receiving address/wallet created on the BSC.
Assuming you have both of these things in place, you can use a bridge protocol such as Celer or AnySwap in order to bridge assets from one blockchain to another. Follow the steps outlined by the protocol/bridge and be sure to double check the transactions before confirming them.
Wrapped vs Bridged Cryptocurrencies
When looking into bridging cryptocurrencies you may have come across the phrase “wrapped tokens” or something similar. Wrapped and bridged tokens are ostensibly the same thing, just phrased differently.
Wrapped crypto assets are pegged to the value of another original crypto, or even a stock, and can be put to work on DeFi platforms such as Uniswap.
The original crypto asset is “wrapped” into a custodial wallet (such as the one used by BitGo for Wrapped Bitcoin (WBTC). Then, a newly minted token is created to transact on other platforms, in this case, Ethereum. All of this is kept organized using smart contracts. This allows non-native assets to be used on any blockchain, which promotes interoperability between networks.
When bridging an asset, this same process is going on using smart contracts. You “bridge” the asset but really you’re sending it to a custodian via a smart contract. The smart contract then issues you the “bridged” assets on the other blockchain network. But technically, you are being issued completely new assets.
When you go to bridge it back, the reverse happens, meaning your newly issued assets are burned, and then the original assets are released from the smart contract back to your wallet on the original network.
Are Crypto Bridges Safe?
Unfortunately, many crypto bridges have been successful targets for hackers and bad actors across the sector. This is not to say that all crypto bridges are unsafe to use, but rather, due to their nature as being connected to multiple blockchains, it creates many attack vectors. In addition, the developers are often working with different programming languages across these networks, meaning they can miss an issue when auditing the code. This results in a situation where bridges can be abused by bad actors looking to make a quick buck.
That being said, this doesn’t mean it’s unsafe to use crypto bridges. Rather, it may simply be a good idea to not use a brand new bridge, and instead stick to using bridges that have been running for a long time and that have little to no history of hacks. For example, Wrapping Bitcoin to use on Ethereum has been safe for a long time and carries little to no risk. In contrast, something like the Nomad Bridge which was launched in 2022 and was meant to connect Ethereum and Cardano, faced many issues, got hacked, and had to be shut down in order to rework the protocol.
So, patience is key with bridges. Let other users be the guinea pigs unless you’re desperate to take advantage of some feature on another blockchain network.
Why Bridge Assets at All?
At this point, with the potential risks now laid out, you may be wondering why you’d want to bridge assets at all. Well, there are a few reasons, but they’re essentially all DeFi and yield related.
What we mean by this is that users often want to bridge assets to another chain in order to provide them as liquidity to a DeFi protocol such as PancakeSwap. They’re looking to earn a return on their holdings at a higher rate than is available on the home blockchain network. Unless you’re willing to just invest more money into a different asset on that blockchain, it makes sense to utilize the assets you have, but this then requires you to bridge them. So, you bridge assets in order to maximize their potential return.
Can I Bridge Any Asset?
No, you can’t bridge any crypto asset. As mentioned earlier in this guide, protocols/bridges need to be created in order for it to be possible for you to bridge a specific crypto asset. Not every blockchain network has had a bridge created for it to be connected with other blockchains. Oftentimes you can also only bridge the main blockchain asset (for example, you can bridge Cardano (ADA) to the BSC, but you cannot bridge other Cardano assets such as Djed (DJED) or MinSwap (MIN).
Closing Thoughts: A Bridge to the Future?
If blockchain is going to become a mainstream utility, cryptocurrency bridges are going to be a key to their overall viability. By allowing users to use their assets across multiple blockchain networks, bridges create a more open sector. While there are issues to be had when it comes to bridges, they are still viable ways to bring your liquidity from one blockchain to another. Just be sure to do your due diligence before using a bridge.