Headline: What is a “bridge?”

Body:    Many, many years ago, there was no bridge across the Chesapeake.  The only way to cross it was to take a ferry across the waters.  This was inconvenient for anybody on the Western Shore, but, it did keep the Eastern Shore less built up and more bucolic for a few extra decades.  Said another way, the Bay Bridge made the Eastern Shore more inter-operable with the rest of Maryland, at the price of increased urbanization, and a lower level of safety (both in terms of increased traffic and land value.)  A bridge in cryptocurrency operates in much the same way, and causes much the same advantages and disadvantages.  The bridge allows for more interoperability in currency types, but, as this is a human enterprise, each time you nudge a system, there are always unintended consequences.    Online, these consequences manifest as exploits where a bad actor tries to make a lot of money with a minimum of effort.

What are these bridges?

OK, I am not a coder, so I will try to define it for you.  Before I go to bed every night (This is a goal) I should always put my cell phone on the charger.   But, I cannot plug my cell directly into the wall, so, there is an adapter that goes into the wall, with a USB connection.  This cord connects to my phone through a USB-C connection.   You can think of this adapter as a sort of bridge.   The phone has not been permanently transformed (I hope) but for a limited period, it has been put into a condition where it can receive electricity from the wall.   The bridge sends a currency (say Dogecoin) in a “wrapper” denoting it as an equivalent value of Ethereum.

Is this really a big deal?

Yes.  There have been more than a few exploits to consider.  There was an attack on the Wormhole Bridge in February 2022 that led to a loss of $326 Million. Qubit bridge was hacked for $80 Million. This is a sizable problem.

Are there different types of bridges?

Yes, there are several.   One simple one is the single span, and one very complex one is the wire suspension bridge.   (The assistant whispers in my ear.)  Sorry, but just like  civil engineers, their online brothers and sisters have indeed  developed more than one type of bridge.  The most important distinction is uni-directional or bi-directional.   Before you get confused, think again of the Bay bridge.   (Please consider only 1 of the 2 spans here.)   The span is usually only going from west to east, or east to west.      This is unidirectional, and would allow you to turn one kind of cryptocurrency into another, but, there are “no givebacks” and no way to change back.  But, we have all been involved with the Bay Bridge on a Saturday in the summer.   There is so much traffic flowing east, authorities will turn one or more lanes on the normally west-bound span temporarily into east-bound lanes.   On Sunday evenings this pattern reverses.  This is now a bi-directional bridge, and would allow you to turn cryptocurrency  into another, and back again at will.  As you can probably imagine, it’s a bit dangerous, during the changeover period, to temporarily change westbound lanes into eastbound lanes.   So, it follows that the bi-directional bridge can be much more handy, but somewhat less safe.

Safety is always first on my mind, why do we want bridges to be developed?

Safety is an important thing to consider.   But, bridges do have some considerable advantages too.  For one thing, Ethereum’s blockchain is wonderful for many reasons, but the gas fees can become  onerous.   So, if there was a bridge, somebody could use cryptocurrency denominated in a different more usable currency, but retain the safety of the Ethereum ecosystem, this would be a good thing.

Are there different sizes and kinds of bridges?

Yes, there are different sized-bridges.   In the real world, there are a lot of people who need to transit from one side of San Francisco Bay to the other, so, the Golden Gate is simply HUGE.   But, it would probably be inappropriate and needlessly expensive to build a Golden Gate-sized bridge over the Severn River near Annapolis.  In a similar way there are different sized virtual bridges too, but some get quite large.   Three of the largest appear to be the Wrapped Bitcoin Bridge ($10.2 Billion) Multichain Bridge ($7 Billion) Avalanche Bridge ($6 Billion), There are others too, but the point I am trying to make is that there are serious amounts of money wrapped up in these bridges.

Beyond size, there is another consideration.   There are “Trusted” bridges and “Trustless” bridges.  The difference is whether or not a central authority is involved.   In a Trusted Bridge environment, there is a central authority, and in a “trustles” system, there is no central authority.  The advantages and disadvantages attach logically.  The Trusted Bridge allows you to trust a central custodian (actually requires you to trust them) but the operation  is quite simple from the investor’s point of view.   In comparison, the “trustless” bridge environments do not have this central authority, and are essentially computer code and require some level of skill to operate.

Are there Risks to using bridges?

Yes, there are risks, and they sprout from the Trusted versus trustless consideration above.   In the trustless bridge environment, there is “smart contract risk” and “technology risk.”   The smart contract risk is the risk that the coding behind the bridge has an error of some type.   The technology risk is the risk that somebody will devise a virus or piece of malware that will  effectively attack the bridge.  The Trusted bridge environment adds “censorship risk” and “custodial risk” because you are relying upon the reputation of a third party.  The third party could arbitrarily say that you are not allowed to change your currency into some other kind of currency.   Also, your custodian (the group who hosts your wallet) could just disappear one day, and they take your assets with them.

The Verdict

 Cryptocurrency is still a rather new topic.  In fact, the only sure thing, is that with rapidly evolving rules and best practices, there will be an equally accelerated discovery of poorly protected nodes within the network.  Even though the cryptography is good, each attempt at an improvement will likely have unexpected problems.  Perhaps some consultancy will develop a way to field test these bridges before they are offered to the public?  Often, before the military will accept delivery of a product, they will test it in the context of a wargame.   Perhaps  there could be some equivalent within cryptocurrency.   The question is, Who would certify the results?   How would you decide to believe them or not?  Certainly we will figure these things out, but for now, if we shake the Economics 8-Ball, we keep getting, “The future looks cloudy.”

REFERENCES

https://academy.binance.com/en/articles/three-popular-crypto-bridges-and-how-they-work

https://www.coindesk.com/learn/what-are-blockchain-bridges-and-how-do-they-work/

https://ethereum.org/en/bridges/

https://www.investopedia.com/what-are-cross-chain-bridges-6750848

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.