$25 billion – This is the amount of capital that passed across bridges at their height in March. If blockchains are seen as nations, the cross-chain movement of money is going through its "FDI moment" (FDI counts for Foreign Direct Investment). Capital that was formerly confined inside nations started to travel freely throughout the world in the 1990s. In the same way that the unrestricted flow of FDI led to new types of business and globalization in the actual world, blockchains are also undergoing "cross-chain globalization".

Today's highlight project, "Wormhole," began as a Solana Hackathon Project by Certus One, but swiftly climbed to be Jump Crypto's darling, with $4.7 Billion in Total Value Locked (TVL) at its height.

In this article, we will learn about the importance of bridges in infrastructure, security problems, how Wormhole is addressing them, and, finally, the juiciest part, the bull and bear argument for Wormhole.

Bridges and cross-chain

There are now over 20 blockchains with significant ecosystems, with Ethereum leading the field. With the advent of Alt L1s (Solana, Cosmos, Avalanche) and L2s, and now even gleaming Alt L1s like Aptos and Sui, we are gradually moving towards a multi-chain future with numerous ecosystems. However, blockchains are presently fragmented.

wormhole bridge from eth to solana

Source: Wormhole

To achieve a real multi-chain future, we must facilitate the movement of both funds and information. This is where bridges come into play!

Bridges are classified into two types:

Two-way Asset Bridge that allows money to flow
Messaging Bridges that allow information to flow

Let's start with Asset Bridges, which have found widespread acceptance, and then look at why Messaging Bridges are the next frontier!

Banks accept assets (deposits) on one end and issue liabilities (loans) on the other. They must keep sufficient liquidity on both ends in order to handle loans and deposits on a continual basis. Bridges, meanwhile, must maintain liquidity on both sides of blockchains in order to conduct cross-chain transactions seamlessly.

Most bridges are currently state-sponsored or 'network-sponsored,' which basically means that they are supported by the blockchains on which they are created. In the real world, we are linked by roads and railroads, which are sponsored by the government; much as bridges in crypto allow users and their assets to flow into another blockchain, thus it makes sense for the blockchain to sponsor them.

But do users believe them? Forget about the users; can you trust them?

Most users don't mind decentralization as long as they can effectively move cash between chains without losing a single penny. And the TVL is situated where the users are. As a result, the most efficient and trustworthy bridges will be those with a long track record, making 'network-sponsored' bridges the preferred alternative for users.

>>> Read more: Blockchain Bridges: A Trilemma Trade-off

Wormhole security

Wormhole addresses security concerns surrounding bridges. Wormhole was most likely made famous by the $350 million Wormhole hack. Because bridges are the most susceptible points in a network, they are often the obvious targets of these intrusions.

Let us first investigate the security vulnerabilities associated with crypto bridges. Starting with a high-level perspective, the first item that springs to mind is the Network risk. Let's say a chain is hacked, and the intruder can create random transactions on it in a 51% attack. The next thing that may happen when you go further is that the validators get corrupted.

And, at heart, there is always a smart contract that may be hacked, allowing the attacker to escape with the funds that are accessible. Bridges may transmit as many tokens and as much value as you like. However, although being completely unlimited is tempting, it may quickly backfire if there is a smart contract breach or chain compromise since the token bridge can be rapidly depleted in record time.

When attempting to bridge a token, reconciliation or accounting on both chains becomes critical to ensure that the money is there on the origin chain before it can be transferred to the destination network.

And then there's Wormhole!

Wormhole is a message-passing protocol that links and cross-chains numerous blockchain networks like Ethereum, Solana, Polygon, Avalance, and many more.

This message-passing method enables cross-chain capability. Users engage with xDapps (cross-chain decentralized applications) to move xAssets (cross-chain assets) across networks or access xData (cross-chain data) to provide services on their current network. xDapps are chain-agnostic applications that can make use of xAssets and xData.

On top of the Wormhole messaging protocol, two specific apps aid in the liquidity of xAssets. The Portal Token Bridge and Portal NFT Bridge allow token and NFT transfers across the Wormhole Bridge to be done in a regular message format.

For example, a Solana-powered app may take straight Ethereum deposits! The developer merely has to connect the Wormhole SDK with their front end, and the Portal Token Bridge will pick up the deposit and send it to the destination chain, Solana in this case.

Wormhole guardians

A guardian is someone who monitors and confirms communications and signals. Consider one guardian to be a single node; Wormhole relies on a network of dispersed nodes to monitor the statuses of the many blockchains. Every guardian performs this action individually, and the resultant signature is merged at the end.

wormhole guardian

Source: Certus

A multisig demonstrates that a state has been observed and approved by the majority of the wormhole network via the accumulation of independent observations from guardians. These multisigs are referred to as VAAs in Wormhole.

Everstake, 01node, ChainLayer, and Certus One (the original creators of Wormhole) are some of the most often utilized Guardians.

When a sufficient number of guardians agree that an observation has been made, the message is placed in a structure known as a VAA, which combines the message with the signatures of the guardians to establish proof. Finally, in order to receive a wormhole message, a smart contract on a receiving chain must process these VAAs.

A 'Relayer' is anything that functions as a go-between between the wormhole and the target chain. Relayer retrieves signed VAAs from the wormhole network and transmit them to the destination chain. But why are they significant? Let's take them out of the picture to see why they're essential. If there was no relayer, you would have to get the VAA from the network, submit it to the target chain, and pay the gas costs using the target chain's tokens, which would not be an out-of-this-world experience. In a nutshell, a relayer is software that sends messages between the guardian network and the destination chain.

Dapps built on Wormhole

The wormhole ecosystem is already brimming with a myriad of applications; let's go through them all one by one, category by category:

Core Layer Allbridge: Like the Portal bridge, Allbridge is a blockchain bridge that allows tokens and/or arbitrary data to be transferred across chains. Allbridge Core, their second offering, provides a one-click solution to transmit native stable money across chains without the need to wrap and unwrap the tokens beforehand. To perform such "wrap-less" transfers, Allbridge employs a cross-chain exchange in the Wormhole core layer.

xAssets Friktion: A structured products platform on Solana - leverages Wormhole's Portal Bridge to allow its customers to deposit assets from other chains, such as Avalanche, which are then converted to Solana Assets in the backend. It just introduced Volt#01 for APT, which connects Aptos and Solana through Wormhole. Apart from friction, xAssets are used by initiatives like Mango Markets, Solend, and Port Finance.

xChain Sweat Economy: It rewards fitness activities with a range of DeFi, NFT, on-chain, and off-chain incentives. It seeks to provide value to all types of physical exercise. Sweat Wallet users are rewarded with SWEAT coins for each activity they do. SWEAT is created using only confirmed user movement. Wormhole has transformed the SWEAT coin into a real xChain asset! SWEAT was initially a NEP-141 token on the NEAR blockchain. However, it is now also available as a native ERC-20 token through Wormhole.

Mayan Finance: Token Bridges - EVM-based chains may access Solana protocols thanks to a cross-chain exchange architecture. Mayan's goal is to make cross-chain swaps as easy as native swaps. To do this, users may make cross-chain exchanges with a single click. Mayan created their own "Swap Bridge" based on Wormhole's general message-passing layer. While swap orders are fulfilled using the Serum order book.

Nexa: A decentralized, cross-chain selling platform for native, chain-independent assets. Nexa supports xChain Token Sales (XTS) powered by Wormhole. Users from any chain are welcome to connect to their wallets and participate in the xChain Token Sale.

The Portal Bridge

The Wormhole Portal is an application based on Wormhole. The Wormhole team saw the need for a clear difference between the protocol itself (Wormhole) and a reference implementation for a native bridge built on top of it (Portal) in early 2022, leading to the creation of Portal. When you use Portal to bridge tokens, the destination chain generates a new Portal-wrapped token while storing the origin token in a smart contract. You may trade them for alternative or native tokens on the destination chain.

Portal-wrapped items have regularly achieved canonical status on non-native chains. Trading assets like wETH on Solana and wSOL on Ethereum is highly liquid, and these assets are fungible and exchangeable exactly like their original equivalents.

Wormhole pros and cons

Pros

More Permissionless: Exchanges are a good alternative to Asset Bridges for doing cross-chain transactions in a permissioned and centralized manner, i.e. you must go through the custody of exchanges and conduct KYC, which many DeFi-native users do not desire.
Smart contract composability: Developers may build on top of these bridges with ease.
No External Liquidity Lock-up: Due to asset wrapping, no external liquidity lock-up is necessary.

Cons

Attack on Verifiers: There is a high reliance on verifiers to function in a trustworthy manner; yet, they are subject to attack, as witnessed in prior bridge hacks such as Wormhole and Ronin. Furthermore, their interaction creates smart contract weaknesses.
Wrapped Assets – Liquidity and DePeg Concerns: The liquidity of these wrapped assets is now fragmented, which reduces capital efficiency and creates relatively limited possibilities for users to unravel these assets. Furthermore, they are issued on the protocol's credit and are vulnerable to hackers, resulting in depeg, which may dramatically increase systemic financial risk and loss of trust.

Cross-chain Messaging

Cross-chain bridges enable isolated ecosystems to communicate with one another. Will state-sponsored Ethereum bridges triumph in the long run?

A variety of bridges may permit the free movement of money, but two-way bridges alone cannot construct a globally compatible system. This is because the bulk of these bridges only handle simple money transactions and cannot support complex interactions.

Cross-chain communications might be a solution in this case. Cross-chain messaging refers to the ability to invoke a contract on a different chain. It is considerably more than just transferring assets. Consider the ability to utilize Serum from Ethereum or to build multisig on Squads from any chain. It will only be feasible when the blockchains can communicate with one another in a trustworthy way. This kind of composability is not yet possible; now, every cross-chain action is merely a collection of numerous items placed together.

Finally, the key objective will be that consumers will not need to be aware of the chains that the application's backend employs. People have always used the Internet in this manner: when a website links an API to a third-party server, the user only uses one application. It is obvious whether you use Solana, Ethereum, or any other chain today. Future revisions of web3 may give a user experience similar to the internet, in which you just have access to the application you are now using and the rest of the complexity is handled in the backend.

Competitors Landscape

LayerZero

LayerZero is just a set of contracts that define the roles of "relayers" and "oracles." Oracles are responsible for reporting the true status of the underlying blockchains, whereas relayers are in charge of transporting messages cross-chain and confirming message validity. The user may choose to utilize a specific third-party relayer or Oracle. LayerZero is not meant to fulfill relaying or oracle functions; it is only a neutral communication channel.

Axelar

Axelar is a Proof-of-Stake network with its own native cryptocurrency. Every Axelar node is running software from another blockchain (Ethereum, Cosmos, and so on). When you ask it about the status of any underlying blockchain it connects to, the Axelar nodes synchronize with one another to query their local blockchain clients and agree on the current state of other chains.

Synapse

Another protocol that allows for safe cross-chain communication is Synapse. Synapse provides a growing library of smart contracts for developers to employ, and it can be deployed on any blockchain to construct truly native cross-chain applications. Synapse offers interoperability compatibility for all blockchain implementations such as loan products, cross-chain DEX, yield aggregators, and so on, whether they use monolithic base layers, roll-ups, or application-specific chains.

Cross-chain aggregator (Bungee)

Bungee is a cross-chain aggregator that identifies the finest bridging routes for you. It contains things like the maximum output on the destination chain, the lowest GAS price, the shortest bridging time, and so on.

Supported blockchains and assets

Wormhole supports an increasing number of networks, including Solana, Ethereum, BSC, and Avalance, as well as Terra 2.0, Celo, Fantom, Klaytn, Polygon, Aptos, Aurora, and many more.

Wormhole recently conducted a hackathon called "xHack" for chain builders. During those four weeks at xHack, it welcomed hundreds of builders, instructors, and panelists from various DeFi protocols, L1s, Wormhole core contributors, Web3 researchers, and many more.

Community is a MOAT in web3, and as more individuals get associated with Wormhole, the community is expanding and will continue to develop. There are now over 19k+ users on their Discord server and over 70k+ followers on Twitter.

Future developments and predictions

Unwrapping: Wrapped assets on the destination chain, along with a total bridge time of 10-20 minutes, is a major headache in the User Experience. The answer here might be "Native Asset Swapping," in which USDC is simply burnt off a source chain, says Solana, and a USDC on the destination chain, like Ethereum, gets created. Wormhole's cross-chain transmission simply relays the message of burning and minting. Many cross-chain assets may therefore be connected natively, eliminating the requirement for asset wrapping, resulting in improved UX and lower costs. Circle, in fact, has already taken steps in this way with its most recent statement. This has the potential to provide a wide variety of seamless applications in payments and loans, with assets such as USDC being completely interoperable across chains.

Cross-chain identification: As the on-chain identification sector heats up, interoperability between chains represents a significant possibility in the future, allowing developers to request user data from other networks. For example, ENS (Ethereum Name Service) is one of the largest identity ecosystems, and developers will be able to construct a "Login with ENS" system even on the Solana or Aptos blockchains by accessing users' cross-chain data (xData). Essentially, apps on other chains may view the end user's avatar, name, wallet address, and other information without the user having to re-upload it on another blockchain. Another significant possibility in this approach is cross-chain reputation.

Wormhole's bull case: A multi-chain future with cross-chain applications

Ensuring Maximum Coverage in the Multi-Chain Future: As we move toward a more multi-chain future, guaranteeing optimum blockchain coverage becomes more important. Wormhole already supports 17+ blockchains, and it just included Aptos as soon as it was live on the mainnet, demonstrating that the wormhole is eager to serve even the most current blockchains.

Jump investing $320 million from their own pockets demonstrates their conviction in the enormous possibilities and may be seen as an investment to ensure they have the complete trust of the ecosystem. This worked to their advantage since users now have the certainty that even if a future hack occurs, the wormhole will ensure that users do not lose money. They also announced a $10 million bug reward to guarantee that vulnerabilities are reduced to the greatest extent feasible.

Wormhole's bear case: Multi-chain but segregated blockchains

1. Why will the future be multi-chain but not cross-chain?

vitalik prefer multichain

Source: imgflip

Vitalik Buterin notably explained his skepticism about bridges in a Reddit post. Here's a summary of what he said.

The reason for this is due to bridge security constraints. He explains how cross-chain activity has an anti-network effect: it is safe while there is little activity, but the hazards rise as more activity occurs.

It centers on 51% attacks, but not in the manner most people think about 51% attacks' effects. If the blockchain is hacked in some ridiculous manner, the consequences are still acceptable if you had 100 ETH but sold it on Uniswap for 240000 DAI. You might retain your 100 ETH or get the 240000 DAI. The outcome of receiving neither (or both) would be undesirable since it would violate the protocol's standards.

Assume you have 100 ETH on Ethereum, and Ethereum is 51% attacked, causing certain transactions to be blocked and/or canceled. Whatever happens, you will still have 100 ETH. Even a 51% attacker will be unable to propose a block stealing your ETH since it would violate protocol rules and be rejected by the network. Even if you employ 99% of the hash power, the remaining 1% will still follow the chain since the blocks comply with the protocol restrictions.

The problem emerges while transferring ETH to a bridge on Solana. Let's continue with the same example from his article. You are sending 100 ETH across a bridge to get 100 Solana-WETH, but Ethereum is 51% attacked at the same time. When the attacker's deposit of their own ETH was verified by the Solana side, he instantly reversed the transaction on the Ethereum side. Because the Solana-WETH contract is no longer fully supported, your 100 Solana-WETH may now be worth just 60 ETH.

2. High Competition

Although Wormhole is now leading the field with a fantastic team and support, the market has just heated up, and we will see a slew of bridges Infra being developed with a better functional model and UX, which might be a huge headwind moving ahead.

3. A Siloed Future

While blockchains may continue to emerge, each blockchain has its own use case and environment, and there is no need to interchange assets and information between blockchains. In this case, the bridges as a whole would have little or no traction.

Conclusion

A completely cross-chain cosmos offers a broader diversity of decentralized apps, assets, and dApp composability. Wormhole has the potential to supercharge user numbers and protocol expansion across the ecosystem.

We need to establish a user experience comparable to that of Web2 apps, where you don't feel like anything insane is going on behind the scenes, but rather that it seems seamless through the blockchain states' walled nations coming together through bridges, we must ensure that nothing is lost in the process and that everything is safe and secure. Because, at the end of the day, losing money is the ultimate negative customer experience.

Just as globalization in the 1990s gave birth to MNCs, we think that cross-chain interoperability will allow everyone to enjoy the whole growing Web3 world effortlessly with 100X better UX!

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Wormhole: More than an asset bridge