LI.FI Guest Post: Understanding Cross-Chain Bridging

Credits: LI.FI, Data Source: DeFi Llama
  • What are bridges, and why do we need them?
  • Different types of bridges and bridge designs
  • Risks of using bridges
  • The case for aggregating bridges with LI.FI
  • Onboarding the masses into crypto with multi-chain onramps

What are Bridges and Why Do We Need Them?

Alice bridges ETH from Ethereum and gets wETH on Avalanche

Different Types of Bridges and Bridge Designs

  • Native Bridges — Designed to support the movement of assets between two blockchains. The primary aim of building native bridges is to bootstrap liquidity on a blockchain. Example — Arbitrum Bridge, Harmony’s Horizon Bridge, Binance Bridge, Ronin.
  • Liquidity Networks — Use liquidity pools to exchange assets on one chain for the desired assets on the other chain. An atomic swap mechanism exchanges assets. This is considered a very secure type of bridge because liquidity networks provide users with native assets and not wrapped assets. Example — Connext, Hop, Hyphen.
  • Data Messaging Protocols — Enables the transfer of data and messages across chains in addition to assets. Given their ability to send messages between chains, these bridges can facilitate complex cross-chain strategies. Example — Nomad, LayerZero, Axelar, Wormhole.
  • Trustlessness — the protocol does not add any new trust assumptions, and its security is equal to the underlying blockchain.
  • Extensibility — the protocol’s ability to be supported by any blockchain.
  • Generalizability — the protocol’s ability to handle arbitrary cross-chain data (aka message passing outside of tokens).
The Interoperability Trilemma
  • Light clients and relays or natively verified bridges — These bridges optimize for trustlessness and generalizability. They verify the proof of work on other blockchains to confirm cross-chain transactions. Actors monitor events on the source chain, generate proof of work, and forward those proofs to light clients on the destination chain. Then, the validity of proofs for specific transactions on the destination chain is checked against the records kept by the light clients on the source chain. Example — Cosmos IBC, Near Rainbow Bridge.
  • External validators or externally verified bridges — These bridges optimize for extensibility and generalizability. They rely on a federation or group of validators outside the source and destination chain to confirm transactions between blockchains. A trusted federation is responsible for communicating and moving assets between blockchains. Example — Multichain, Synapse.
  • Atomic swaps or locally verified bridges — These bridges optimize for trustlessness and extensibility. They use self-executing smart contracts to exchange assets on the source chain for assets on the destination chain. Smart contracts replace third-party validators, which makes this mechanism trustless. Example — Connext, Hop.
Mapping bridges according to the interoperability trilemma

Risks of Using Bridges

  • Smart contract risk — Though most bridges have successfully completed audits (multiple for some) from well-reputed security firms, they are still susceptible to bugs in the code of smart contracts. This vulnerability was exposed during the Wormhole bridge hack.
  • Technology risk — Given the digital nature of bridges’ operations, just like anything else in crypto, they are exposed to technology risks such as software failure, spam, buggy code, chain delays, etc.
  • Exposure to wrapped tokens — Many bridges give users wrapped tokens post bridging, i.,e, representations of the original asset and not the original (or native) asset itself. This exposes the user to risks associated with the bridge and its tokens in case of any exploits. For instance, if a bridge is exploited, the bridge’s wrapped tokens will likely lose value. This vulnerability can currently be seen with the wrapped assets on Harmony’s Horizon bridge post hack as they have lost peg.
  • Counterparty risks — Externally verified bridges that use validators in their bridge design add trust assumptions to the system. This forces users to trust third-party actors with their funds and thus exposes them to 1) censorship risks where someone can stop a user from transferring their funds, 2) custodial risks as validators can collude to steal user’s funds, and 3) rug pulls.

The Case for Aggregating Bridges With LI.FI

Community worksheet noting bridges between chains
Aggregating Cross-Chain Money Legos with LI.FI

Alchemy Pay Provides Multi-Chain On/Off Payment Ramps

Alchemy Pay’s fiat-crypto on/off ramps on BeFi’s wallet app

About LI.FI

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Alchemy Pay

Alchemy Pay (ACH) bridges fiat and crypto global economies through a real-world payment system and mainstream-friendly access to web3 services.