Until recently, if you were choosing to put money into crypto, it’s highly likely that you were going to be interacting with one of two blockchains: Bitcoin or Ethereum. Recently – within the past 18 months – more Layer 1 and Layer 2 networks with robust decentralized finance (DeFi) ecosystems have emerged, with some notable examples being Solana, Polygon, Avalanche and Flow. By virtue of these being distinct blockchains, the assets contained in wallets on these chains aren’t inherently interoperable – that is, the value housed within a Solana wallet can’t be brought into an Ethereum wallet without a series of messy, time-consuming transactions accompanied by a series of transaction fees.
The infrastructural concept of a crypto bridge solves this issue by using a smart contract to “wrap” tokens and assets for use on other blockchains. The terminology here aids in the understanding, as assets can be wrapped or unwrapped, and shuttling an asset through two bridges – thereby wrapping it twice – makes it such that the asset would need to be unwrapped twice to become what it originally was.
This technique has proven to be important as Layer 1 blockchains have begun overlapping and converging in some sense at the start of the current bear market. Layer 1 ecosystem failures, like that of Terra, further exemplify the utility of cryptocurrency bridges.
Is Bridging Cryptocurrencies Safe?
As with most other questions of safety and security in the blockchain space, this nuanced question comes down to two major factors that can act as red flags. First is the quality of the smart contracts and the auditing of these smart contracts. A bridge built on top of flawed or badly audited smart contracts will not be secure. The other red flag is network size and centralization, as a network with a few nodes or many nodes run by a single group is prone to being hijacked as easily as a centralized network. Beyond this, it’s difficult to assess the robustness of a bridge without consulting other experts.
Multi-Chain vs. Cross-Chain
The distinction between multi-chain and cross-chain bridges is fairly simple but crucial in understanding the utility of a bridge. In essence, multi-chain ecosystems exist when a project properly exists on two separate blockchains like Cosmos or Polkadot. Bridges within these networks are generally more secure than normal bridges, also called cross-chain bridges (think about a bridge from Solana to Ethereum) by virtue of the structural consistency and integration when going from one Polkadot parachain or Cosmos blockchain to another.
The question as to which of these technologies will dominate can only really be answered with the answer to the question as to what sorts of blockchains will dominate the future. If the future lies with “blockchains of blockchains” like Polkadot or Cosmos, then multi-chain bridges will be more popular. Currently, cross-chain bridges are more popular but are considered by many to be a temporary solution while solutions like the Inter Blockchain Communication (IBC) protocol are being actively developed to handle tomorrow’s blockchain traffic.
Cross-Chain Bridge Hacks
Over $1 billion has been stolen from bridge-related hacks in the past year, with the most high-profile among these being the attacks on the Ronin Bridge and the Wormhole Bridge. The Wormhole hack was done by exploiting a design flaw to bypass signature validation within the bridge’s smart contracts, which essentially opened up the tokens being held by the bridge at that point, which totalled around $325 million. The Ronin hack was accomplished by exploiting the small size of the validator network to drain the bridge’s reserves after multiple validator nodes – operated similarly – were compromised.
How to Secure Your Digital Assets
In light of these hacks, it’s evident that the smallest online attack surfaces can and will be exploited in the context of digital assets. As such, the easiest way to secure digital assets is through the use of a hardware wallet, which is disconnected from the internet when not in use. Using a hardware wallet won’t change the extent to which a cross-chain bridge hack will impact users, but it’s as important a security measure as never sharing seed phrases and remaining vigilant of potential phishing attacks using sites that mimic exchanges, protocols and or wallets.
Best Hardware Wallet: Ledger and Trezor
Ledger and Trezor are household names as far as hardware wallets are concerned, with robust support for most tokens and a solid chance at future support for up-and-coming token standards and blockchains. The Nano S Plus is Ledger’s newest offering, with tweaks like a larger screen and better non-fungible token (NFT) management.
Bridging Alternative
As a more beginner-oriented (but more expensive) method, you can use a centralized exchange like Coinbase Global Inc. (NASDAQ: COIN) or Gemini to swap tokens at market prices to get to whichever network you want to be on. The key downside here is that you lose money in slippage costs and market price fluctuations. You face higher transaction costs than that of most bridges, as you will need to pay network costs when you transfer your tokens from a software or hardware wallet to a centralized exchange, then sell and buy at market rates and pay transaction fees and then incur a second round of network costs for the network that you’re onboarding to.
Cryptocurrency Market Outlook
The cryptocurrency market has definitely been on a downturn over the last few weeks, but in many senses, the amount by which Bitcoin and to some extent Ethereum have deviated in price is smaller than expected given the role of Bitcoin – to the tune of 30,000 BTC – in LUNA’s drop in value alongside UST’s depegging. The altcoin market is more severely down, and it seems like an understanding of who the long-term players of the space are will emerge in the months to come. Can investors hodl today? Are they more vulnerable in a down market? Only time will tell.
Is it Safe to Use Token Bridges?
There is nothing inherently unsafe about using token bridges or wrapped tokens, but by virtue of both of these using smart contracts, it’s possible for poorly audited smart contracts to be used in an attack. The key to safely using token bridges – and almost any other DeFi protocol – is to do your homework on the protocol and others’ experiences with it.
The distinction between cross-chain and multi-chain bridges is something to be cognizant of when interacting with token bridges, as is an understanding of how wrapped tokens work. At the same time, there’s no amount of research that can stop a hacker. It makes sense to remain apprised of what is going on in the crypto industry and adjust your investments accordingly.
Frequently Asked Questions
Are crypto investments safe?
Crypto investments can be safe if you use a quality wallet and steer clear or dangerous protocols or projects that don’t appear to be completely secure.
Can you make money from crypto?
Yes, you can make money from crypto, but you must invest wisely, monitor the markets and keep an eye on your portfolio.
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About Aadharsh Pannirselvam
Aadharsh Pannirselvam is a student at the University of Chicago studying Economics and Data Science while building with Blockchain Chicago and the Chicago DAO. Aadharsh works on creating easily digestible web3 and DeFi content at Benzinga while learning off of the bleeding edges of blockchains and digital assets and exploring a career in the space. He holds positions in Ethereum, Bitcoin, and various other DeFi protocols and ecosystems. Aadharsh was previously affiliated with Flipside Crypto and is currently affiliated with Galaxy Digital. Aadharsh’s opinions are his own and not financial advice. The best way to get in touch with Aadharsh is via Twitter, @aadharsh2010 or via LinkedIn.