A quick disclaimer upfront: All information given in this presentation is researched and intended to be educational and illustrative to the specific topic as always. Any companies, products, people, or other items mentioned do not constitute an endorsement, recommendation, or relationship. Every owner has to do their due diligence, as the decisions and responsibility about any investment lie with the owner. This is no financial advice.
What are blockchain bridges?
Everyone knows what a bridge is: a connecting piece between two points, be it between roads, hills with attached points, or similar. Bridges come in many variations, but they always serve the same purpose: connecting point A to point B.
Blockchain bridges are no different. It is an element of the connection that creates the bridge between two blockchains and thus allows the trading of the respective blockchain tokens or coins on another platform.
In the simplest example, you can take Ethereum, which can be found on the Ethereum blockchain. However, it can also be traded on the blockchain of Polygon, even though there is no ETH there through a bridge. The bridge makes it possible by converting the basic coin Ethereum into a special, identical version on the Polygon blockchain. The version on the Polygon blockchain receives the same base value, is issued at the same trade value, and can be traded exactly as it would be on the Ethereum blockchain, but with one special feature: the coin on the new Blockchain has a different name, WETH. This version is called a “wrapped coin.”
Wrapped coins and pegged tokens are the exact same coin or token but reside as a copy on a different blockchain so that it can be used by the respective systems.
SafeMoon is currently working on the upcoming release of the new feature cross-chain, which allows trading between two tokens of different blockchains on the SafeMoon SWaP and thus simplifies direct trading.
Two types of blockchain bridges
There are two types of blockchain bridges. Technically, these bridges all belong to the generic term of cross-chain bridges, but there are subtleties in the distinction. The two variants are the standard blockchain bridge and the advanced cross-chain bridge.
The standard blockchain bridge The standard blockchain bridge ensures the provision of a token or a coin on another blockchain and limits its possibilities through the simple and direct trading of a cryptocurrency. This mostly means the basic trading of the major currency of the respective blockchain that is connected.
Advanced cross-chain bridge The advanced cross-chain bridge does the same as the normal blockchain bridge but offers much greater expansion possibilities in the handling of the offer.
Not only the main coin of a currency is offered, as a normal bridge already does, but it also offers the possibility to switch between different tokens available on the respective blockchains. This significantly shortens the original path via the coin of the respective blockchain, the switch to the pegged/wrapped version, and the then renewed purchase on the other blockchain and saves immense fees. Direct trading thus creates the freedom to trade instantly from one blockchain to another.
In addition to these two variants of blockchain bridges, there is also the possibility of representing the respective bridge in the system, which shapes the handling of it. We are talking here about trusted and trustless bridges.
Trusted bridges are blockchain bridges that run and are controlled via centralized systems. This means that on larger, already trusted systems such as major exchanges, the bridges, due to the respective operators as middle man, directly dispose of the requested operations for the exchange of cryptocurrencies and thus carry out the decisions made by one side. In this way, one gives the bridge the trust, since this is acting in two systems that are already familiar and used.
Trustless bridges are different. They operate in direct function with smart contracts and algorithms, whereby the security is controlled by the existing contracts and the security level is thus determined.
There is no need for monitoring, as the action is integrated via smart contracts and is always the same, so the function offered is executed without additional confirmation when it is requested. This means that the user still has control over his funds up to the moment of the switch and can interrupt them even shortly before the process is completed.
These systems can be compared to a supermarket. An example: On the one hand, the purchase can take place via a cashier who checks the goods, enters the value manually, and thus provides a reliable invoice that must be paid. In this case, the cashier is trusted to calculate the figures correctly herself and to ask for the correct equivalent value based on the goods on offer, measured against the current market situation.
In an automated supermarket with self-checkout, this is different. The system is preset, the prices are all there, and you can scan and check the products yourself right up to the last second, and then complete the purchase, paying for the products you have selected yourself for a familiar, fixed value.
Why are blockchain bridges important?
Blockchain bridges are not only needed for the expansion of trade. As you can imagine, this is one of the bigger advantages, because when you talk about a connection, you also talk about an increase in the diversity of supply.
But blockchain bridges have a much bigger benefit. The ecosystem on its own has a limit at a certain point, which can only be improved by technological innovations and extensions. Blockchain bridges solve this problem for certain dApps and other applications that do not reside on the blockchain. For example, pegged tokens or wrapped coins on other blockchains can be incorporated into dApps that do not operate on the main blockchain, thus expanding their own influence but also significantly increasing the trading of the token offered.
The use of a cross-chain offered token or coin for other programs such as staking, farming or similar can also be increased, for example, if you have already exhausted most of the staking potential of a program on the main resident blockchain, you can continue to stake the pegged token or wrapped coin in its surplus on other blockchains. Thus, one's own profit can also be further increased, as more can be staked.
Moreover, blockchain bridges when deployed on other ecosystems mostly offer a significant advantage in terms of fees. These are significantly lower there due to the lower utilization of resources and thus form a much more pleasant trading situation.
What are the risks of blockchain bridges?
There are many important arguments and benefits to using Bridges and deploying them (as mentioned earlier). However, each additional unit in a system brings the possibility of creating risks and opening security gaps.
In this context, risks in the incorrect placement of the bridge between tokens can lead to a distortion of value and thus affect trading in such a way that the value already created quickly loses weight. This severely compromises the entire project framework and all projects on the respective resident blockchains, as it distorts the price counter value in each segment.
There is also the risk of allowing security vulnerabilities to emerge with this. When attached to smart contracts, backdoors can be created, whereby money can be withdrawn and money can be lost with every transaction in the form of fees (called money siphoning). As a result, money is shown by a third party for each transaction due to a faulty protocol and fed to an unknown source, creating price gaps.
The third risk is arbitrage. Arbitrage in itself is a form of trading in which someone buys the same good on one blockchain for a cheaper price and sells it again at a higher price on another blockchain, thus earning a profit through the intermediate trading value. This is not forbidden, but it can also damage the price in the long run if it is handled too much. A solution to this is quite simple - adjusting the systemized prices or the available funds on any trading venues if this is possible. Otherwise, bots of any kind can also be blocked by blacklist functions, if trading is carried out too excessively.
Future outlook on the possibilities for expansion of blockchain bridges
Blockchain bridges are a wonderful connection between respective systems to expand trading. The potential to extend the ecosystem beyond other systems is huge, but with security gaps and potential for loss in case of negligence. Therefore, again, it is important for any growth to be done with calm and a lot of forethought so as not to accidentally destroy a project.
There is often talk of blockchain bridges being hacked or losing value. This usually happens when projects are released quickly and deployed without testing. This creates massive security holes and allows scammers to make a profit, but again, the future is the guide. As in every technological innovation, the connectivity options are renewed, expanded, and improved so that we not only learn from past events but also prevent them completely.
SafeMoon is working on the implementation of the cross-chain technology for SafeMoon SWaP and is paying particular attention to the previously known risks and dangers. With insured wallets, we are also making sure that we are laying all the foundations for a secure future. And once our feature is on the market, innovation will reinvent commerce here as well - and we at SafeMoon are always working to discover, improve and implement technology in new ways.