The bridge to the future

Unless there is easy and seamless connectivity between different blockchain-based asset types on different platforms, the full benefits of tokenization will not be realized. However, achieving this interoperability has proven a significant obstacle. The blockchain bridge has emerged as a promising solution, albeit one that has historically carried cost and risk. But recent advancements have made these bridges accessible, secure, and cost-effective.

Blockchain technology, which captured the imagination of the public some 15 years ago, promised to revolutionize the financial world. With each passing year, new and use cases have emerged, slowly but surely attracting a growing user base. Although the exact timeline for mass adoption remains a topic of debate, many in the industry agree it is an eventuality.

A driving force behind this projected growth is the power of tokenization. This process involves digitally representing assets, and liabilities on a blockchain, recording their attributes, status, transaction history, and ownership. Tokenization has introduced new asset classes and players, offering significant advantages over traditional assets, including open access, transparency, and reduced transactional friction and cost. Projections indicate that liquid markets such as funds and commodities may reach around USD 4 trillion in value by 2030, while tokenization in global illiquid assets, from real estate to artworks, could touch approximately USD 16 trillion or nearly 10 per cent of global GDP by the same year. In essence, tokenization is revolutionizing the financial world, paving the way for the widespread adoption of blockchain.

However, a critical challenge must be overcome before this transformation can take place. The issue of interoperability, stemming from the isolated development of different blockchains without regulation or standards, has created a fragmented ecosystem of ‘walled gardens’. This fragmentation has hindered the efficient flow of assets between platforms. The solution lies in interconnecting these platforms to expand access to assets, cater to a broader range of investors, and create an environment suitable for stablecoins, central bank digital currencies (CBDCs), and blockchain-native payment mechanisms.

The quest for a solution to interoperability has been complex, time-consuming, and costly due to the absence of a common language and varying architectural designs across different blockchains. Implementing secure and seamless connections between blockchains has been fraught with challenges and potential risks.

In recent years, the concept of the blockchain bridge has emerged as a pivotal element in achieving interoperability. These bridges, comprising off-chain services and on-chain components, facilitate the movement of tokens between different blockchains. One approach involves the bridge service controlling an address on each blockchain, creating corresponding tokens on the destination blockchain when tokens are received by the ‘exit’ address on the origin blockchain. Depending on the original token’s features, it can be either deleted (burned) or kept in escrow. The bridge must ensure that the corresponding tokens on the destination chain are backed 1:1 by the tokens in the origin chain’s escrow.

Bridges can leverage smart contracts too, where supported, to enhance transparency in program logic. However, this approach has pros and cons: while transparent code can increase trust in bridges, it is challenging to upgrade, making it vulnerable to immediate exploitation of any bugs found. The design of bridges depends on factors such as the type of assets they aim to transfer, the distributed ledger technology (DLT) networks they connect, and the trust and security assumptions in place. This raises the key question of whether these bridges are secure, to which the answer is, ‘they can be’.

Despite the robust nature of DLTs, vulnerabilities in blockchain bridges exist because they have fewer participants and operators than major blockchain networks. This vulnerability is most apparent when bridges employ smart contracts, which may not undergo thorough validation, potentially leaving connected assets exposed to exploitation. Examples of bridge vulnerabilities leading to substantial losses, such as the attack on the Solana-Ethereum bridge in February 2022, highlight the need for security and standardization.

One initiative addressing the standardization and security of blockchain bridges is the Secure Asset Transfer Protocol (SATP) developed by the Internet Engineering Task Force (IETF). SATP bridges offer a highly secure means of connecting blockchains through uniform, compliant interfaces and data models. This eliminates the need for bespoke implementations for each DLT, enhancing security and reducing vulnerabilities. SATP bridges utilize the burn and mint technique, ensuring only one version of a token exists at any time and eliminating the honeypot attack problem (where scammers try to lure their victims into traps by deploying seemingly vulnerable contracts that contain hidden traps).

By combining the SATP approach with additional characteristics, it is possible to create bridges that work seamlessly with different DLTs and networks. These bridges enable atomic asset transfers, prevent double spending, and provide full auditability, allowing third parties to verify the initiation, timing, and entities involved in asset transfers in real-time.

While challenges and vulnerabilities persist, the progress made in developing secure and interoperable blockchain bridges is a testament to the ongoing evolution of blockchain technology. As these solutions continue to mature, we move closer to the day when blockchain fulfills its promise to revolutionize the financial world and trigger mass adoption, ushering in a new era of finance.

Dr Luke Riley is Head of Innovation at Quant.


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