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Cross-chain technologies are necessary to connect different blockchains, enabling seamless and efficient operation between them. They aim to overcome the isolation of blockchains and create a cohesive ecosystem that allows users to switch between networks and chains effortlessly.
When people talk about cross-chain, they often refer to cross-chain bridges. These bridges enable users to transfer coins and tokens between blockchains without using a centralized exchange or having to convert their assets.
For instance, suppose you have Bitcoin and wish to use it on the Ethereum blockchain to access certain DeFi services, stake tokens in liquidity pools, or purchase some new ERC-20 tokens. However, these two networks operate under distinct rules and protocols, making them incompatible. Fortunately, with the help of a cross-chain bridge, Bitcoin users can transfer their coins to Ethereum.
When it comes to cross-chain bridges, they are usually categorized based on how they handle tokens: lock and mint, burn and mint, and lock and unlock. These names are quite self-explanatory.
Lock-and-mint bridges are arguably the most common type. These bridges work by locking the tokens that users want to exchange (tokens A) within a smart contract on the original blockchain. After that, they give users an equal number of tokens B (wrapped token A) on the desired blockchain.
Let's say you want to exchange Bitcoin for Ethereum. A lock-and-mint bridge will take your Bitcoin and create an equivalent amount on Ethereum for you to use ("wrap" your Bitcoin). Your Ethereum wallet will then receive a wrapped version of Bitcoin (wBTC) that has the same value as one Bitcoin but is based on the Ethereum token standard ERC-20 and functions like any other token on the Ethereum blockchain. When you want to convert back to Bitcoin, your wBTC (or the remaining amount) gets burned, and an equal amount of Bitcoin goes back to your wallet.
The second bridge differs from the first in the way it handles the original assets. While the first type locks the original assets in a smart contract, a burn-and-mint bridge burns them. As a result, the tokens on the original blockchain get destroyed permanently without creating frozen liquidity.
Lastly, the third type of bridge, also known as lock-and-unlock bridges, locks the user's tokens on the original blockchain and unlocks them within a liquidity pool on the desired blockchain. It is a newer type of cross-chain bridge currently gaining popularity among projects.
Bridges can also be categorized as either centralized (custodial or trusted) or decentralized (noncustodial or trustless). The primary distinction between the two is the level of control over the crypto assets that cross a bridge. The bridge is decentralized if a smart contract holds the locked coins or tokens. On the other hand, if a company that operates the bridge controls the assets, it is centralized.
Another type of classification is direction-related. Some bridges are unidirectional or one-way bridges, meaning users can only transfer their assets to the target blockchain and not the other way around. Others are bidirectional or two-way bridges, as they allow users to transfer their assets freely to a desired blockchain and back.
Blockchain bridges are an essential tool for advancing blockchain interoperability. However, they also have several downsides that users should carefully consider before using them. One of the significant drawbacks is the security risks. Smart contracts or validators can be vulnerable to hacker attacks, putting users' crypto assets at risk of theft or exploitation. For example, an infinite mint attack can occur when a hacker finds a way to mint an incredibly large amount of wrapped tokens, increasing their supply to a harmful amount. This way, hackers can earn millions of dollars by selling them on DEXes and, ultimately, crash their value completely.
Luckily, there is hope for addressing security concerns with zero-knowledge technologies (Zk technologies), which enhance the security of cross-chain swaps and protect sensitive information by using cryptography instead of validators.
Another significant issue with cross-chain bridges is so-called frozen liquidity. When creating wrapped tokens, many bridges lock original assets in smart contracts, making them inaccessible and unusable. It may negatively impact the DeFi market, which already struggles to attract and maintain adequate liquidity levels.
DeFi projects are attempting to address this issue, with one solution being using peer-to-peer transactions instead of bridges.
The use of cross-chain technology has greatly improved the ability of different networks to work together. However, as with any new technology, several issues need to be addressed to ensure its success in the future. These include handling the increasing number of users and ensuring sufficient security.
Kinetex Network is a decentralized cross-chain ecosystem that brings together liquidity from DEXes, DEX aggregators, bridges, limit order protocols, and other liquidity sources in one place, making it easily accessible to users. The Kinetex innovative cross-chain dApp will soon employ Zk-SNARKs, a type of Zero-knowledge proof, to eliminate the risks of MEV attacks and prevent price slippages, making cross-chain transfers more secure and efficient.
Kinetex Network: Website | Kinetex dApp
