The blockchain space is largely fragmented, composed of different blockchain networks that are often not connected in any way and operate using different protocols. This lack of connectivity and communication between networks poses a significant challenge to users willing to transfer assets between blockchains. The answer to the dilemma is the use of blockchain bridges.
Blockchain bridges are a software solution that allows for interconnection between networks and facilitates the transfer of assets between them. Also known as cross-chain bridges, these solutions have many applications within blockchain space and offer a substantial incentive for users from outside the crypto community to onboard the industry. However, the benefits offered by blockchain bridges come with their own challenges, many of which focus on security issues.
Why Use Cross-Chain Bridges
The ability to transfer assets and information from one blockchain to another provides a host of benefits. The main beneficiaries are the users themselves who will have the freedom to communicate across networks and thus trade assets without having to register multiple accounts in different systems.
A very important benefit of being able to operate cross-chain is the lowered gas fees, as users will not have to pay for many entry points. Another advantage is the higher throughput resulting from lower gas fees, as transactions will be processed faster.
Combined, these benefits make it clear that cross-chain bridges are ideal solutions for such sectors as decentralized finance, allowing more newcomers to onboard. The use of integrated bridges, such as those used in many DeFi protocols, makes the process of converting tokens from one type to another more streamlined and less expensive.
Types of Cross-Chain Bridges
At present, there are two main networks that rely on cross-chain bridges – Ethereum and Bitcoin. The solutions currently being tested and integrated by DeFi protocols mostly revolve around these blockchains, since the vast majority of transactions in decentralized space take place on them.
Rollups are a type of bridge that create a new transaction environment for tokens. The process involves the bundling of transactions before their transfer to the main network. The bundling saves on transaction costs, since users will be paying not for individual transactions, but for one large transaction instead. The bundling of transactions also saves a lot of time on both processing and transfer. The security of rollups is achieved through many different techniques, such as validity proofs, zero-knowledge proof, and even game theory.
However, rollups are not considered to be very secure when it comes to connecting chains that are fundamentally different, such as Ethereum and Solana.
Challenges of Implementation
The main challenges that are impeding the development and deployment of cross-chain bridges reside at the code level of the host blockchains. For instance, bridges that are known as unidirectional allow users to transfer assets only in one direction. This means that assets transferred from the Bitcoin network to the Ethereum network cannot be transferred back. Conversion from BTC to ERC-20 is not reversible.
However, there are bridges like Multichain, which are bidirectional and allow users to transfer assets and convert them between chains.
Bridges are also divided into centralized and decentralized types. Centralized bridges, also known as custodial or trusted bridges, hold the converted assets in centralized fashion. Decentralized bridges, also known as non-custodial bridges, maintain custody of the assets at the protocol level. Some advocates of decentralization claim that non-custodial bridges are more secure by virtue of not having a centralized point of access and control entity. The assumption is that trusted bridges are susceptible to risk, because the company that holds the assets can lose control over them by virtue of a hack, exploit, or even government intervention. However, the exploit of the Wormhole bridge and Qubit before it, refute that assumption.
The STON.fi Solution
STON.fi is developing its own cross-chain solution – the Request for Quote (RFQ)-based DeFi protocol with cross-chain swaps implemented via Hashed Timelock Contracts (HTLC). Such a solution results in eliminating the need for second-layer solutions, intermediaries, or third parties. This approach minimizes user risk associated with security breaches and significantly enhances the transaction speed.
Under the RFQ-based protocol, the traders express their intention to swap a specific amount of an asset for another one by sending a Request for Quote (RFQ) to Professional Market Makers (PMMs). The PMMs respond to RFQ with signed Quotes, specifying swap rate and other conditions. The best Quote is selected by the protocol according to predefined criteria and submitted to the trader. HTLC-protocols (also known as “Atomic swaps”) allow to exchange crypto assets atomically, i.e. either both parties receive the intended amount of assets or the exchange fails entirely. HTLC based solution has the following main advantages, namely: no additional trusted entities; no accidental permanent loss of funds; guaranteed rates; predictable transaction time (no KYC); simple user scenarios, a user-friendly interface and streamlined processes.