Unless there is simple and seamless connectivity between different types of blockchain-based assets on different platforms, the full benefits of tokenization will not be realized. However, achieving this interoperability has proven to be a significant obstacle. The blockchain bridge has emerged as a promising solution, although it historically carries costs and risks. But recent advances have made these bridges accessible, safe and cost-effective.
Blockchain technology, which captured the public imagination around 15 years ago, promised to revolutionize the financial world. Over the years, new use cases have emerged, slowly but surely attracting a growing user base. While the exact timeline for mass adoption remains a matter of debate, many in the industry agree that it is a possibility.
One of the drivers of this projected growth is the power of tokenization. This process involves the digital representation of assets and liabilities on a blockchain, recording their attributes, status, transaction history and ownership. Tokenization has introduced new asset classes and new players, offering significant advantages over traditional assets, including open access, transparency and reduced transactional friction and costs. Projections indicate that liquid markets such as funds and commodities could reach a value of around $4 trillion by 2030, while the tokenization of global illiquid assets, from real estate to artwork , could affect approximately 16 trillion dollars or almost 10 percent of global GDP in the same year. Essentially, tokenization is revolutionizing the financial world, paving the way for the widespread adoption of blockchain.
However, a crucial challenge must be overcome before this transformation can take place. The question of interoperability, born 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 wider range of investors and create an environment suitable for stablecoins, central bank digital currencies (CBDCs) and mechanisms native blockchain payment systems.
The search for an interoperability solution proved complex, time-consuming and costly due to the lack of a common language and varying architectural designs across different blockchains. Implementing secure and transparent connections between blockchains has proven to be fraught with pitfalls and potential risks.
In recent years, the concept of blockchain bridges has emerged as an essential 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 the tokens are received by the “exit” address on the origin blockchain. Depending on the characteristics of the original token, it can either be deleted (engraved) or kept in escrow. The bridge must ensure that matching tokens on the destination chain are backed 1:1 by escrow tokens on the original chain.
Bridges can also leverage smart contracts, where supported, to improve transparency of program logic. However, this approach has advantages and disadvantages: while transparent code can increase trust in bridges, it is difficult to upgrade, making it vulnerable to immediate exploitation of any detected bugs. 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 safe, to which the answer is: “they can be.”
Despite the robust nature of DLTs, blockchain bridges have vulnerabilities because they have fewer participants and operators than major blockchain networks. This vulnerability is particularly evident when bridges use smart contracts, which may not be subject to thorough validation, potentially leaving connected assets exposed to exploitation. Examples of bridge vulnerabilities resulting in substantial losses, such as the Solana-Ethereum bridge attack 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 provide a highly secure way to connect blockchains through uniform, compliant interfaces and data models. This eliminates the need for bespoke implementations for each DLT, thereby improving security and reducing vulnerabilities. SATP bridges use the burn and mint technique, ensuring that only one version of a token exists at any time and eliminating the problem of honeypot attacks (where fraudsters attempt to lure their victims into traps by deploying seemingly vulnerable contracts containing hidden traps).
By combining the SATP approach with additional features, it is possible to create bridges that work seamlessly with different DLTs and networks. These bridges enable atomic asset transfers, avoid double spending and provide full auditability, allowing third parties to verify the initiation, timing and entities involved in asset transfers in real time.
Although challenges and vulnerabilities persist, progress in developing secure and interoperable blockchain bridges demonstrates the continued 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 spark mass adoption, ushering in a new financial era.
Dr Luke Riley is Head of Innovation at As to.