To play with multi-chain DeFi, you need to know about cross-chain bridges

Layer2 bridges are the most powerful of all cross-chain bridges

To play with multi-chain DeFi, you need to know about cross-chain bridges

With the recent rise of the ethereum layer1 challenger and layer2 DeFi, players are certainly not unfamiliar with the frequently used “cross-chain bridge”, when we use CEX to transfer crypto assets (e.g. transferring assets on the ethereum chain to the Cryptocurrency Exchange and then transferring them to the BSC chain as BEP20), we are actually using a “bridge”. chain), we are in fact using a “bridge”. There are various ways to transfer assets between different chains. The bridge is a fundamental component that is often overlooked, but is critical to assessing the safety of our funds.

In addition, thanks to cross-chain bridges, we can use off-chain protocols to extend the network, allowing most transactions to be moved from blockchain layer1 to off-chain systems, thus avoiding layer1 network costs and latency issues.

What is a cross-chain bridge (bridge)?
A cross-chain bridge is responsible for holding assets on layer1 while releasing this asset on another (and external) service. It defines who holds the funds, and the conditions that must be met for the asset to be unlocked.
In short, whenever a layer1 blockchain like Ether is going to connect to any other system, it needs to use a bridge. All bridges have similar operations.

Deposits, where the user can deposit funds to the bridge and tokens representing that asset (are issued on other systems).

Updating account balances, where the bridge is notified of new account balance information, which can be used to help with withdrawals.

Withdrawal, the user can withdraw assets from the bridge based on their balance on another system, and the tokens issued on that system will be burned.

The most common type of bridge (that people often use without realizing it is a bridge) is the single-organisation bridge.

To play with multi-chain DeFi, you need to know about cross-chain bridges

Most cryptocurrency exchanges offer a single-organization bridge

If we consider only the bridge and nothing else, then we can say that a cryptocurrency exchange is an off-chain protocol. Users can lock their funds in the exchange, bypass network fees and latency issues when trading, and eventually withdraw them to the layer1 blockchain by withdrawing their coins.

In addition to single-organization bridges, there are two other types of bridges that rely on a set of custodians.

Multi-organizational bridges, where a fixed set of independent parties (K/N) hold custody of the locked funds.

Cryptographic economic bridges, where a dynamic set of parties (determined by their asset weights) hold custody of the funds.

All three bridges on the Layer1 blockchain cannot verify that account balances from other systems are correct (or that the liabilities of other systems exceed the assets of the bridge). It is up to this group of custodians to verify that all withdrawals are processed according to another system. They ultimately decide if the funds can be released and who should receive them.

Side chains and bridges are independent
So far, the main thing that comes to mind regarding bridges are escrow services like cryptocurrency exchanges. And an increasingly popular use case for bridges is connecting one blockchain to another (which, by the way, is where the term sidechain originated).

To play with multi-chain DeFi, you need to know about cross-chain bridges

The safety of the bridge and the side chain are independently separated

There are several examples of bridges.

WBTC: a single-organization bridge that brings BTC to Ether.

Liquid network or RSK: A multi-organizational bridge where a coalition of parties with HSM lock/unlock funds from BTC to another blockchain.

Polygon bridge. A crypto-economic bridge in which 2/3 + 1 interests locked in the bridge periodically agree on the account balances of all users on Polygon, which users can use to withdraw their funds on Ether (in practice, polygon is ultimately controlled by a small multisig contract, but this example focuses on its long-term goals).

Rainbow Bridge. A crypto-economic bridge where the bridge contract is a light client that can verify the progress of other blockchains. It does not check the validity of other blockchains, and the security of funds ultimately depends on the continued progress of other blockchains (guaranteed through crypto-economic rules).

The key thing is that each bridge has its own security model, which is independent from the blockchain network. We can take a simple case WBTC to further elaborate.

BitGo Trust holds in trust the funds locked in Bitcoin and they are responsible for issuing the same amount of WBTC on Ether. a smart contract on Ether keeps track of the account balance of all WBTC transfers. Trustworthy, BitGo respects the account balances recorded in the smart contract.
In the WBTC example, there are several aspects to consider.

Single custodian. WBTC’s bridges rely on a single custodian for their integrity. They can issue more WBTC on Ether than is locked in Bitcoin, and they can decide not to cash out any WBTC withdrawn to Bitcoin.

Independent security model. Ether has its own security model, independent of Bitcoin. Bridge has its own security model, independent of both blockchain networks.

Ether is a sidechain. Transactions have been moved from Bitcoin to Ether’s chain.

What all three bridges have in common is that they do not check the integrity of the sidechain and have no self-executing contingency plan to protect funds if the custodian (or sidechain) goes offline. They only look at their own security model and do not consider the security of the layer1 blockchain on which the bridge sits.

Layer2 Protocol
The promise of Layer2 scalability is to move transaction throughput from one layer to another off-chain system. A bridge is needed to hold funds issued on another system.

However, unlike the other types of bridges explored in this paper, the Layer 2 protocol is committed to protecting funds with the same security as the Layer 1 blockchain, and it cannot rely on a custodian (or other off-chain system) to protect the funds.

It requires a new type of bridge: the

Layer2 bridge. The Layer 1 blockchain has custody of the funds, and the bridge must ensure that the Layer 2 protocol is not compromised. In the worst case scenario, the bridge will self-reinforce the effectiveness of the Layer 2 protocol until all funds are withdrawn.

The Layer2 bridge is the most robust of all cross-chain bridges.

It does not rely on the custodian to protect the funds. Instead, the bridge must ensure that all is well with the off-chain system before funds are released. If, for some reason, the bridge is convinced that the off-chain system is broken, then the bridge can simply bypass the rest of the network altogether.

To play with multi-chain DeFi, you need to know about cross-chain bridges

A project focused on layer2 bridges

This is why the layer2 protocol is so exciting that it has taken several years for emerging companies to come up with a solution. The competition to be the first to bring the Layer2 protocol to market is focused on how to implement a secure layer2 bridge (and not necessarily how to implement other blockchain networks).

This is a good opportunity to further explore technical issues and definitions. We make it clear that the bridge must ensure that the layer2 protocol is not broken in 4 ways.

Data availability. How can the bridge be sure that all data of another blockchain network is public so that users can independently recompute the layer2 database?

Integrity of state transitions. How can the bridge be confident that all state transitions of the layer2 network are correctly formatted and valid?

Withdrawal assurance. If the layer2 network is compromised, how does the bridge guarantee that all honest users’ funds will be withdrawn?

Protocol validity. If the Layer2 protocol is stalled or taken offline, how does the bridge guarantee that transactions can still be executed?

Of course, the above issues must be addressed, even though the bridge contract has significantly fewer computational resources than the off-chain system, so the bridge cannot re-execute all transactions in real time. Otherwise, it would not be a scalable solution.

Solving the above problem leaves us in a quandary. This is the world of on-chain challenges, proof of fraud, proof of validity, publishing transaction data to layer1 blockchains (rollups), and on-chain exits.

This article does not focus on solutions, but it is emphasized here that all solutions are not created equal. Some of the layer2 protocols to be deployed will not meet the above security objectives. They cannot be said to be layer2 protocols due to the lack of layer2 bridges.

Summing up
As mentioned above, there are four types of bridges that allow funds to be locked in a blockchain and represented in another off-chain system (most likely another blockchain).

Custodian bridges (Custodian bridges). The first three bridges (single-organization, multi-organization, crypto-economy) are concerned with which set of custodians have control over the locked-in funds. The role of the custodian is to verify that the off-chain system is correct before allowing funds to be withdrawn from the bridge. Assuming that the integrity of the off-chain system is a client-side issue, the custodians have sufficient computational resources to handle it. Although there are measures to constrain the custodian’s authority, and cryptographic economic incentives to encourage custodians to comply with the protocol, the bridge protocol does not fully bind the custodian. There are many examples of bridges losing user funds (e.g. MtGo), and this is because the integrity of the bridge ultimately relies on trust between people.

Layer2 Bridges. The bridge takes over the role of the custodian for the funds and checking the integrity of the off-chain system. The core of the problem is that the bridge must be confident that the off-chain system is not compromised, while it lacks the computational resources to check each transaction independently (otherwise it would not be a scalable solution). In addition to the technical challenges, it is not free. There is an ongoing financial cost for the layer1 blockchain to be confident that the off-chain system is structurally intact and well-integrated. However, the bridge has the ultimate custody of the funds, not the off-chain system operator.

Overall, the jury is still out on whether users really care about the layer2 bridge and whether we should extend the ethereum security model to off-chain systems. It is possible that all 4 bridges will stay in the future, and they are critical to user adoption.

Users need to be aware of the protocols you prefer, what types of bridges they use, and it is important to better understand how your funds are protected from compromise.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/to-play-with-multi-chain-defi-you-need-to-know-about-cross-chain-bridges/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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