Crossing the crypto river with the right bridge

A Comprehensive Overview of the Bridge Market

From life-giving rivers, art movements, and government scandals to being a gateway to the multi-chain future, we definitely do love bridges! And in this piece, we’ll delve into the bridge market and explore what it presents to the vast community of 420 million crypto users, according to Triple-A.

Bridges, in simple words, allow users to move assets/metadata from one blockchain to another and provide the solution of interoperability to the fragmented world of blockchains!

These bridges’ off-chain actors or verifiers act as intricate connectors to facilitate the flow across these decentralised galaxies.

In addition to facilitating the cross-chain transfer of assets and information, bridges provide a multitude of benefits for users, developers, and dApps alike.

Much like how each blockchain has its own universe with its unique rules, consensus mechanisms, and tokens, cross-chain bridges are also distinct in the way they operate and have various designs and intricacies.

This blog will delve into various design approaches and their implications, aiming to bridge the gap between bridge users and the bridges themselves! Phewf! So, let’s begin!

We’ve encountered the challenging scenario known as the “Interoperability Trilemma” in the world of bridges, which says Similar to the Scalability Trilemma, there exists an Interoperability Trilemma in the Ethereum ecosystem. Interop protocols can only have two of the following three properties:

• Trustlessness: having equivalent security to the underlying domains.
• Extensibility: able to be supported on any domain.
• Generalizeability: capable of handling arbitrary cross-domain data.

To simplify and elucidate this concept, let’s delve into what we call the “Four Pillars of Bridges”: Capital Efficiency, Security, Latency, and Cost. These pillars significantly impact both bridge operators and users, with users being particularly affected as their assets are at stake.

Capital Efficiency

In the decentralised finance (DeFi) world, the significance of Total Value Locked (TVL) as a measure of success has been overstated. Liquidity aggregation is essential, but what truly matters is how effectively that liquidity is utilised, and this is what we call Capital Efficiency!

However, most bridges, like Satellite, Stargate, etc, are still stuck in the “Liquidity Era of DeFi” and are accommodating extremely large TVL and do not acknowledge the paradox it presents.

The surge in liquidity has given rise to a pressing concern: the excessive emission of liquidity mining rewards. As projects strive to attract users and incentivise liquidity provision, they are obligated to distribute substantial sums, often reaching into the millions, in liquidity mining rewards. While these incentives are crucial for fostering participation and growth, the challenge lies in striking a balance between attracting users and maintaining these projects’ sustainability and long-term viability.

Brimming with assets, these bridges also act as honeypots for black-hat hackers on the prowl for high-value vulnerabilities!

The Ronin bridge attack is a testament to the fact that these bridges are not mature enough to accommodate such numbers; not only do they risk being compromised themselves, but they also run the risk of having their entire liquidity base compromised!

Before moving to the next section, let’s discuss how you, as a user, can select a more meaningful measure of a bridge’s success.

You can evaluate this measure through various metrics such as -

1. Utilisation Ratio = Daily Trading Volume / TVL
2. System Return on Investment (ROI) = Total Revenue Generated / Total Amount Spent in Sourcing the TVL

This measure focuses on assessing the efficiency of a protocol’s capital utilisation, thereby preventing unnecessary liquidity loss.

Security

Security is the foundation upon which trust and reliability are built. The importance of security cannot be overstated, especially considering the tumultuous events that have unfolded since 2021. With the rapid ascent of L1s and the growing significance of bridges, security breaches have become a recurrent concern and a pervasive theme.

Last year, Chainalysis estimated that around 70% of the loot, totalling around 2 billion, was from bridges, underlining the attractiveness of these platforms as profitable targets for malicious actors.

In this context, the linchpins of blockchain interoperability can be classified into two distinct categories: Trustless and Trusted Bridges.

Trusted Bridges are the ones that depend on third-party entities for ensuring the security of their operations, while trustless bridges maintain security via smart contracts and algorithms.

In a simpler way, Trusted Bridges are like a group of boat rowers that take you from one side to another. Celer’s cBridge and Axelar are some examples.

On the other hand, Trustless Bridges are like actual bridges, you can cross them on your own without placing your trust in a third-party entity. IBC is an example of such bridge.

Latency

Latency, in the context of cross-chain bridges, refers to the time delay between the initiation of a transaction on the source chain and its confirmation on the destination blockchain. It plays an important role in the user experience and efficiency of cross-chain transactions. There are two major ways here -

First is the Optimistic Model, which assumes submitted transactions are correct and transfers them without immediate verification. Imagine the Optimistic Model as a self-checkout lane at a grocery store. You scan your items and pay without immediate verification, assuming everything is correct. Beamer and Across are some examples of such models.

This fast model gives users quick access to their funds on the destination chain and also reduces transaction fees by minimising computational work, making it more attractive to users.

Second is the Pre-transaction verification model, which verifies the validity of a transaction before allowing it to proceed (so, be ready to be in the long queue). Verification processes, such as consensus among multiple validators, can introduce significant delays in transaction processing. Besides, pre-transaction verification’s computational and resource-intensive nature may result in higher transaction fees. Axelar and Stargate are examples of such models.

Cost

Most Cross-chain bridges entail various challenges, primarily stemming from their substantial Total Value Locked (TVL) and complex smart contract structures.

As we previously explored, the issue of high TVL carries its own complexities and paradoxes. However, another significant drawback arises from the necessity of effectively managing and upkeeping this liquidity, a task that inevitably imposes costs on end users.

Moreover, the very nature of the smart contracts that underpin most of the cross-chain bridges tends to be inherently intricate. These complex contracts demand substantial computational resources, increasing gas fees for users when they engage in transaction execution.

The explanation provided above is somewhat abstract in nature. It’s worth noting that numerous hybrid approaches and subsets of crypto-economic and technological mechanisms are today being employed to improve these aspects.

So, is there a bridge that can stand on these pillars in a way that balances everything for a user? The answer is YES!

It’s the Router’s new Asset Transfer Bridge. It’s trustless, it’s capital-efficient as there’s no TVL locked on it, and the cost to use it is considerably less than most of the bridges out there. And it uses a reverse verification security infra that ensures ultra-low latency.

We’ll delve into its architecture and touch upon every segment to explain what makes it one of the best bridges out there!

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