Blockchain Bridges: Custodial vs. Non-Custodial
A bridge connects separate networks to facilitate interoperability and data exchange.
Bridges are crucial infrastructure in blockchain that enables interoperability between separate networks. However, in 2022, the spate of bridge hacks that resulted in more than $2 billion in lost assets has raised concerns about bridge security.
In this article, we will examine blockchain bridges in detail, clarify the meaning of custodial and non-custodial bridges, and explore innovative solutions to reduce the frequency and severity of future attacks, paving the way for the next 1 billion users onboarded into this technology.
What are Blockchain Bridges?
A blockchain bridge is a protocol that connects two blockchains to enable the interaction of data or value between them. Blockchain Bridges enable interoperability that would otherwise be siloed due to incompatibility. This interoperability unlocks innovation by enabling users’ access to new protocols and provides developers with the tools to build and collaborate on new products across various blockchains, promoting decentralization in the industry and providing information and capital with an efficient means of transfer. In the future, we expect many new blockchains to appear and grow with their unique use cases and communities, and the ability for them to interact will be critical to future success.
Since the inception of Ethereum, which launched in July 2015, many bridges have been built to link to new smart-contract blockchains. Many different types of bridges exist. Let’s break them down into two categories: Custodial and Non-Custodial.
- Custodial (Trusted or Centralized) refers to a bridge that depends on a central entity, requires users to give up control of their crypto assets, and generally relies on the reputation of the operator.
- Non-Custodial (Trustless or Decentralized) refers to a bridge that uses smart contracts and algorithms, enables users to maintain control of their assets, and does not rely on any single entity.
There are further ways to divide bridge categories. The chart below categorizes existing bridges by function.
Bridge technology is less than a decade old. It’s incredibly innovative and has an important role in developing the entire blockchain ecosystem. However, they are also prone to unintended consequences. This has been no clearer than through the $2 billion in bridge hacks thus far last year, which include:
- Nomad Bridge: $190 million was stolen in August 2022 due to a vulnerability in smart contract code.
- Harmony Bridge: $100 million was stolen in June 2022 after a PDF containing a virus infiltrated a computer that held two of the five private keys needed to send funds.
- Ronan Bridge: $600 million was stolen in April 2022 from the Ethereum sidechain used for playing Axie Infinity. Four private keys and a third-party validator run by a DAO were compromised, enabling the theft of funds.
- Solana Wormhole: $320 million was stolen in February 2022 when a hacker was able to mint 120,000 wrapped ETH, which they then exchanged for both regular ETH and SOL.
- Qubit: $80 million was stolen in January 2022 due to a smart contract code bug.
All mentioned hacks stem from a mix of custodial and non-custodial bridges. However, a regulated custodial solution offers another layer of security. A custodial bridging solution must compensate users for losses, and government intervention is possible in the case of custodial breaches.
Stably Bridge: A Custodial Bridging Solution
Stably is a partner of Prime Trust, a Nevada-based Trust Company. The Stably Bridge helps individuals transfer their digital assets between blockchain networks. Using Stably USD ($USDS) for the example, Stably Prime was built on Prime Trust’s API. Each $USDS is redeemable for real USD, and someone can “burn” their $USDS via Prime Trust, which credits their account with the relevant number of USD credits. They can then use this USD to “mint” $USDS onto another blockchain of their choice. Since the equivalent of real USD exists, this process is completely safe and legal. Moreover, it is built on Prime Trust’s API, meaning that for a hacker to steal someone’s $USDS, they would have to hack Prime Trust itself, which is difficult.
The Interoperability Solutions
Bridges are not the only way of communicating between blockchains.
LayerZero, based out of Vancouver, Canada, uses primitive-level communication between blockchains to transfer either information or crypto assets. LayerZero is not necessarily a bridge itself but a communication primitive for transferring assets between blockchains, acting as a bridge.
LI.FI is an advanced bridge and DEX aggregator with smart routing capabilities to find the best route to move any asset on any chain to another asset on another chain. We have added support for 13 bridges across 15+ EVM-compatible chains, along with all DEX aggregators & DEXs on those chains, into a single solution that is available as an SDK, widget, or API.
In conclusion, the blockchain industry is on the cusp of a new era of growth and opportunity, with the potential to onboard the next billion users into its ecosystem. By leveraging the power of collaboration and innovation, we can overcome the challenges facing blockchain adoption and create a more inclusive and accessible platform for all. By prioritizing user education, experience, and continuing to develop cutting-edge technologies such as non-custodial bridges, we can unlock the full potential of blockchain and usher in a new era of decentralized finance and applications.
Let us all work together towards this future where blockchain technology can benefit everyone around the globe.
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