The existence of cryptocurrencies relies entirely on blockchain technology. Between the birth of Bitcoin in 2009 and today, more than 1,500 cryptocurrencies are thriving in the ecosystem. While the idea of blockchain is a single type of data transmission, research firm Alchemy claims that there are more than 125 Layer 1 and Layer 2 blockchains. Cross-chain bridges have been introduced to bridge the gap between blockchains. This disparity and a wide range of cryptocurrencies are used to facilitate unique trade-offs, ensuring security and scalability. Essentially, cross-chain bridges enhance the interoperability quotient in the cryptosphere and allow users to send crypto-currency from one chain to another.
Before cross-chain bridges were born, people couldn’t use Bitcoin on Ethereum blockchain or vice versa. This has restricted crypto users from working on different blockchains like credit cards work for different vendors.
A bridge across the chain reported connects independent blockchains and enables the transfer of assets and information between them. This allows users to access other protocols easily.
Previously, if an ETH holder wanted to convert these assets into Polygons, he or she would have to use a centralized exchange like Coinbase or Binance do like that.
Cross-chain bridges, on the other hand, work by “bundling” tokens in a smart contract and issuing native assets that can be used on another blockchain.
“For example, wrapped BTC (wBTC) is an ERC-20 token that uses BTC as collateral. Users must deposit BTC on the Bitcoin blockchain before receiving wBTC tokens on the Ethereum network,” Alchemy Research explains.
Binance Bridge, Celer cBridge, Multichain, and Wormhole are among the popular cross-chain bridges.
However, in recent times, these cross-chain bridges have attracted the attention of hackers and money launderers who are flooding into the crypto space.
Over the past two years, more than $540 million (or Rs 4,290) has been laundered by RenBridge. The platform is a decentralized application (dApp) that allows minting real BTC, ZEC and BCH on Ethereum as ERC20 tokens (renBTC, renZEC, renBCH), a report by Elliptic stated in a recent study.
Back in June, the 1st grade blockchain Harmony’s Horizon Bridge was hacked for about $100 million (approximately Rs 780). Harmony’s blockchain bridge allows users to transfer digital assets between different blockchains, most notably the Binance Smart Chain, Ethereum, Bitcoin, and Harmony networks.
Qubit Finance’s Bridge was hacked for the amount of $80 million (about Rs 630. Worm pit bridge a month later, and hacker drained $625 million (approximately 4,730 rs) in Ether and USDC from Axie Infinity’s Ronin Bridge March.
As Elliptic reports, decentralized cross-chain bridges like RenBridge provide an unregulated alternative for exchanges to transfer value between blockchains and thus pose a challenge. Transactions on these cross-chain bridges are handled by a network of thousands of validators nicknamed “Darknodes”.
Malicious actors exploit these bridges by sending their tokens from one chain into the bridge and then receiving the equivalent of tokens in parallel in the other chain.
Early July, Financial Action Task Force (FATF) published a special report stating that illegal activities related to cross-chain bridges will become an area that will attract the attention of regulators as 2022 enters its second half. .
FATF is a set of global standards for anti-money laundering and countering the financing of terrorism (AML/CFT) measures.
