The existence of cryptocurrency is completely dependent on blockchain technology. Between Bitcoin’s inception in 2009 and to date, more than 1,500 cryptocurrencies have thrived in the ecosystem. While blockchain is conceptualized as a single data transfer form, research firm Alchemy claims there are 125 Layer 1 and Layer 2 blockchains. Cross-chain bridges were introduced to bridge the gap between these various blockchains and the wide range of cryptocurrencies used to facilitate unique trade-offs, security guarantees and scalability. Essentially, cross-chain bridges increase the interoperability part of the crypto sector and allow users to send cryptocurrency from one chain to another.
Before cross-chain bridges existed, people were unable to use Bitcoin on the Ethereum blockchain or vice versa. This prevents cryptocurrency users from operating on different blockchains similar to how credit cards work for different providers.
Cross-chain bridge In the report Connects independent blockchains and enables the transfer of assets and information between them. This, in turn, allows users to easily access other protocols.
Previously, if an ETH holder wanted to convert these assets into Bitcoin, that person had to use a centralized exchange like Coinbase or Binance to do so.
Cross-chain bridges, on the other hand, work by “wrapping” a token in a smart contract and issuing the underlying asset 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,” the Alchemy study explained.
Popular cross-chain bridges are Binance Bridge, Celer cBridge, Multichain and Wormhole.
In recent times, however, this cross-chain bridge has attracted the attention of hackers and money launderers moving to the crypto sector.
In the last two years, Rainbridge has laundered $540 million (roughly Rs. 4,290 crore). The platform is a decentralized application (dApp) that supports ERC20 tokens (renBTC, renZEC, renBCH), a Report Elliptic noted in a recent study.
Back in June, layer-1 blockchain Harmony’s Horizon Bridge was hacked for an estimated $100 million (roughly Rs. 780 crore). Harmony’s Blockchain Bridge enables users to transfer digital assets between various blockchains, the most notable of which are Binance Smart Chain, Ethereum, Bitcoin, and the Harmony Network.
Cubit Finance’s bridge was hacked for $80 million (roughly Rs. 630 crore) in January, a month later thieves stole $320 million (roughly Rs. 2,510 crore) from the wormhole bridge and hackers made off with $625 million (roughly Rs. 4,730 crore). In Ether and USDC from Axe Infinity’s Ronin Bridge in March.
According to the Oval report, decentralized cross-chain bridges like RenBridge offer an unregulated option for exchanges to transfer value between blockchains and thus pose a challenge. Transactions on this cross-chain bridge are processed by a network of thousands of pseudonymous validators known as “darknodes”.
Malicious actors exploit these bridges by depositing their tokens from one chain to the bridge and then receiving a parallel token equivalent in another chain.
Earlier in July Financial Action Task Force (FATF) published a special report that illegal activities involving cross-chain bridges will become an area of regulatory focus in the second half of 2022.
The FATF is the global standard setter for anti-money laundering and countering the financing of terrorism (AML/CFT) measures.
