In our previous blog we discussed why the future of blockchains belongs to a Crosschain world and the need for Interoperability. This blog is Part 1 of 2 blogs that will dive into the different categories of crosschain solutions. It is important to note that there are numerous ways to describe the same technology, and this can be confusing when categorizing bridges. Furthermore, some bridges utilize a hybrid model, making it difficult to distinguish between the types. To better understand the types of bridges, Coinchange Research team has attended numerous lectures, presentations, and had personal conversations with various organizations such as l2Beat, Polygon, Connext, Hop, and LayerZero Labs. Based on this, we have made an effort to categorize the different types of bridges.
At the very core of every bridge is a ‘Messaging Infrastructure. This acts as the layer that sends data across chains, facilitating various transfers. Bridges are applications built on top of this messaging layer. So the hierarchy is a messaging layer, then bridge applications on top of it. Based on the application or the utility of the bridge, there can be several types of bridges such as Token bridges, NFT bridges, Governance bridges, Lending bridges, ENS bridges etc.
A token bridge is a protocol that allows you to send tokens from one chain to another. Token bridges can be further split into two categories:
Message-based Token Bridges
Upon locking or burning an asset on a source chain, they typically mint assets on a destination chain. A typical transaction flow would be locking an asset on chain A and minting the asset on chain B. And while exiting back, burning the asset on chain B, and unlocking the asset on chain A. Examples: Rollup Bridges, Polygon Native bridge, Multichain, Axelar Network etc.
This type of bridge has the advantage of allowing virtually limitless minting and burning, thus improving user experience by ensuring an absence of liquidity issues. However, this approach is also more vulnerable to exploitation by hackers, who may mint as many tokens as they desire and dump them on the market.
Liquidity Networks based Token bridges
Message-based bridges can sometime take a long time to complete a crosschain transfer. For example, it takes around 7 days to exit an optimistic rollup. Hence, some token bridges can also have another layer called ‘liquidity networks’ on top of the message based bridge. These allow you to swap tokens from one chain to another. You basically swap out an already minted asset rather than sending a message to mint a token on the destination chain. Examples are protocols like Hop and Connext. People use liquidity networks based token bridges for faster transfers by bypassing the native bridge’s delay. One problem with liquidity networks is that the liquidity can dry up and the user will have to wait longer.
To summarize, all bridges have a base infrastructure messaging layer, and various types of bridges are built on top of this layer. Depending on the application, they can be a Token, NFT, Governance, Lending or an ENS bridge. Token bridges can be further classified into Lock and Mint type or Liquidity Network type. Finally we looked at the pros and cons of each category.
Coinchange research team has written a long-form research report on the Crosschain Interoperability and Security which will be published in the next few weeks, where we do a deep dive on the the various bridge security models and propose solutions for users to make the right choice while selecting a bridge for their transaction. So stay tuned for that, meanwhile kick back and earn yield on your crypto using Coinchange.