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The Wormhole Deep Dive — Connecting the blockchain countries via Bridges
How Bridges are an essential infra play, the security concerns, and how wormhole is solving them for the multi-chain future.
$25 Billion — That’s the amount of capital that flowed through bridges at its peak in the month of March. If you consider blockchains as countries, the cross-chain flow of capital is going through their “FDI moment”. In the 1990s, the capital which was once restricted inside the countries began to flow freely across the globe. Just like the free flow of FDI (Foreign Direct Investment) led to new kinds of commerce & globalization in real-word, blockchains are now going through “cross-chain globalization”.
Leading this Renaissance is today’s spotlight project — “Wormhole”, which started as just a Solana Hackathon Project by Certus One, but quickly rose to be Jump Crypto’s darling and $4.7 Billion in Total Value Locked (TVL) at its peak.🤯
In this piece, we will discover how Bridges are an essential Infrastructure, security concerns, how wormhole is solving them, and at last the juiciest part, the bull & bear case for Wormhole.
Bridges & Cross-chain:
Right now, there are 20+ blockchains with sizeable ecosystems, with Ethereum leading the pack. With the rise of Alt L1s (Solana, Cosmos, Avalanche) and L2s and now even shiny Alt L1s like Aptos and Sui, we are slowly heading towards a Multi-chain future, where there will be many ecosystems existing. However, currently, blockchains are siloed.
For a true multi-chain future, we need to enable the flow of both capital as well information. Here’s where bridges kick in!
Roughly, there are two types of bridges:
Two-way Asset Bridge, which enables the flow of capital
Messaging Bridges, which enable the flow of Information
Let’s first focus on Asset Bridges, which have seen immense adoption, and then see why Messaging Bridges are the next frontier!
Banks take in assets (deposits) on one end and issue liabilities (loans) on the other end. They must continuously maintain enough liquidity on both ends so that they can continuously process both loans and deposits. Similarly, Bridges has to ensure liquidity on both sides of blockchains, so that they can process cross-chain transactions smoothly.
Currently, most of the bridges are ‘state-sponsored’ or ‘network-sponsored’, which simply means that they are sponsored by the blockchains on which they are built. In the real world, we are connected through roads and rails and they are subsidized by the nation, just like that bridges in crypto make the influx of users and their assets into another blockchain, that’s why it makes sense for the blockchain to sponsor them.
But do users trust them? Forget users, can YOU trust them?
Most users don’t really care for decentralization as long as they are able to transfer their funds successfully across chains and not lose a single penny. And the TVL lies where the users are. So the most efficient and trusted bridges will be those with a long track record and that makes the ‘network-sponsored’ bridges the go-to option for users.
Security Concerns around Bridges — How Wormhole solves them?
Most likely you heard about Wormhole from the infamous $350 Million Wormhole hack. Bridges are the most vulnerable point in a network so they often become the obvious targets of these hacks.
Let’s first explore what are the security risks that should be considered for crypto bridges
If we start from the high-level overview, the first thing that comes is the risk with the Network.
When a chain gets compromised, let’s suppose in a 51% attack the intruder can make random transactions on that chain.
Then when you go on step deeper the next thing that can happen is when the validators get compromised.
And at the core, there always exists a Smart contract that can get compromised and the attacker can get away with the available funds. Bridges have the capability to transfer as many tokens, as much value as you want. But being fully limitless is an appealing quality, but it can swiftly backfire if there is a smart contract breach or chain compromise because the token bridge can be rapidly drained in record time.
When trying to bridge a token, reconciliation or accounting on both chains becomes crucial to make sure that the origin chain has the money before it can be moved to the destination network.
And there comes Wormhole!
Wormhole is a message-passing protocol that connects multiple blockchain networks like Ethereum, Solana, Polygon, Avalance, and many more together and provides them with cross-chain compatibility.
xDapps — The future of DApps
Cross-chain functionality is made possible by this message-passing mechanism. To transfer the xAssets (cross-chain assets) between networks or access the xData (cross-chain data) to supply them with services on their present network, users interact with xDapps (cross-chain decentralized applications). xDapps are the type of chain-agnostic application that can take advantage of xAssets and xData
Two particular applications help in getting liquidity for xAssets on top of the Wormhole message protocol. Token and NFT transfers through the Wormhole bridge can be done in a standard message format thanks to the Portal Token Bridge and Portal NFT Bridge.
for example, On an app running on Solana could accept direct Ethereum deposits! The developer only needs to integrate the Wormhole SDK into their front end, and the Portal Token Bridge will pick up the deposit and transfer it to the target chain, here Solana.
Who are Guardians?
A guardian is someone who observes the messages and signs or verifies them. Think of one guardian as one node, Wormhole depends upon a set of distributed nodes to monitor the states of the various blockchains. This action is done independently by every guardian and at the end, the resulting signature is combined.
A multisig proves a state has been witnessed and accepted by the majority of the wormhole network by the ensuing collection of independent observations from guardians. In Wormhole, these multisigs are known as VAAs.
Some of the popularly used Guardians are: Everstake, 01node, ChainLayer, Certus One (The original founders of Wormhole)
Verifiable Action Approval (VAA)
When enough guardians agree that an observation has been made, the message is put into a structure called a VAA, which combines the message with the guardian’s signatures to create proof. In the end, a smart contract on a receiving chain has to process these VAAs in order to receive a wormhole message.
Here comes Relayer!
The thing which acts as a middleman between the wormhole and the target chain is called a ‘Relayer’. A Relayer picks up signed VAAs from the wormhole network and sends it to the target chain.
But why they are important?
To understand why they are needed, let’s remove them from this situation. If there were no relayer, you would need to get the VAA from the network, submit it to the target chain, and pay the gas fees using the tokens of the target chain, which would not be an out-of-the-world experience for sure (get it? 😏)
Tl;dr: A relayer is software that transfers messages between the guardian network and the target chain.
Applications building on Wormhole:
The wormhole ecosystem is already pumping up with a plethora of applications, let’s discuss all of them one by one, category by category:
Similar to the Portal bridge, Allbridge is a blockchain bridge that enables the transfer of tokens and/or arbitrary data between chains. Their other product, Allbridge Core, offers a one-click way to move native stable currency between chains without the need to wrap and unwrap the tokens first. Allbridge uses a cross-chain swap in the Wormhole core layer to carry out those “wrap-less” transfers.
Friktion (a structured products platform on Solana) uses Wormhole’s Portal Bridge to enable its users to deposit assets from other chains like Avalanche and in the backend, it converts them to Solana Assets. It recently launched Volt#01 for APT bridged from Aptos to Solana via Wormhole.
Apart from friction, there are projects like Mango Markets, Solend, Port finance also use the xAssets.
It utilizes a variety of DeFi, NFT, on-chain, and off-chain incentives to reward people for fitness activities. it aims to create value for any type of physical activity. Users of Sweat Wallet are rewarded with SWEAT tokens for every action they take. Only verified user movement is used to create SWEAT. The SWEAT coin becomes a true xChain asset thanks to Wormhole! While SWEAT originally existed as a NEP-141 token on the NEAR blockchain, it is now also accessible as a native ERC-20 token by using Wormhole.
A cross-chain exchange architecture allows EVM-based chains to access Solana protocols. The objective of Mayan is to make cross-chain swaps as simple as native swaps. Users are able to perform cross-chain swaps with a single click in order to execute this. Mayan built their own “Swap Bridge”, on Wormhole’s generic message-passing layer. While it uses the Serum order book to fulfill swap orders.
A decentralized, cross-chain sale platform, to launch native, chain-agnostic assets. Nexa allows for xChain Token Sales (XTS) which is powered by Wormhole. Users from any chain can connect to their wallets and participate in an xChain Token Sale.
The Portal Bridge
The Wormhole Portal is the application that is built upon Wormhole. In early 2022, the Wormhole team saw the necessity to have a clear distinction between the protocol itself (Wormhole) and a reference implementation for a native bridge built on top of it (Portal) — leading to the development of Portal. When you bridge tokens using Portal, the target chain creates a new Portal-wrapped token while locking the origin token in a smart contract. On the target chain, you can exchange those for different or native tokens.
On non-native chains, portal-wrapped assets have frequently gained canonical status. It is quite liquid to trade assets like wETH on Solana and wSOL on Ethereum, and these assets are fungible and exchangeable just like their native counterparts.
Let’s now discuss some Pros & Cons of Asset Bridges like Wormhole:
More Permissionless: A good alternative to Asset Bridges is Exchanges, where you can perform cross-chain transactions in a permissioned and centralized way i.e you have to go through the custody of exchanges and perform KYC, which isn’t preferable by many DeFi-native users.
Smart contract composability: Developers can seamlessly build on top of these bridges
No liquidity Lock-up: All thanks to the wrapping up of assets, there is no external liquidity lock-up required.
Attack on Verifiers: There is a lot of dependency on verifiers to act in a trusted way, however, they are vulnerable to attack, as seen in previous bridge hacks like wormhole and Ronin. Further, their interaction also introduces smart contract vulnerabilities
Wrapped Assets — Liquidity & DePeg issues: The liquidity of these wrapped assets is fragmented right now, which decreases capital efficiency to some extent and also induces very limited options for users to unwrap these assets. Moreover, these are issued on the credit of the protocol and are exposed to hacks, leading to depeg, which can significantly induce systemic financial risk and loss of confidence.
The Asset list is still permissioned by the protocols — we are yet to decentralize this!
An alternative solution to such Token Bridges is “Omni-chain DEX” which tries to combine both CEX and Token Bridges. Think of them as uniswap, but for Bridges. Just like uniswap, anyone can add liquidity to any assets, and instead of wrapping, there is simply a bridge’s native token in which the sender’s asset needs to convert and then the receiver’s asset on another gets converted back from the native token. However, the middle chain induces its own vulnerabilities and with extra swaps, comes an additional layer of fees and slippage.
All bridges Infrastructure projects are currently figuring out the most optimal solution: with minimum cost, maximum decentralization, highest security, maximum asset & blockchain coverage, and best user experience — we will have to wait and watch, who wins the race in token bridges!🍿
Cross-chain bridges allow isolated ecosystems to interact with each other.
Haseeb recently wrote about this, Will state-sponsored bridges to Ethereum win in the long term?
The free flow of capital may be enabled through a variety of bridges, but a worldwide interoperable system cannot be established by two-way bridges alone. This is so because the majority of these bridges only provide straightforward money transfers; they cannot support complicated interactions.
Cross-chain messaging can be a solution here. Cross-chain messaging means the ability to call a contract on another chain. It’s so much more than just the asset transfer. Think of being able to use Serum from Ethereum, or being able to create multisig on Squads from any chain. It will only be possible when the blockchain can talk to each other in a trustful manner. This form of composability is not available today, currently, every activity on cross-chain is just multiple things put together.
In the end, the main goal will be that users won’t necessarily need to be aware of the chains that the application’s backend uses. People have always used the Internet in this way: when a website connects an API to a server operated by a third party, the user only uses a single application. If you use Solana, Ethereum, or any other chain today, it is evident. Future iterations of web3 might provide a similar user experience to the internet, where you only have access to the application you are currently using and the rest of the intricacy happens in the backend.
LayerZero is just a couple of contracts that outline the tasks of “relayers” and “oracles”. Oracles are in charge of reporting the real state on the underlying blockchains, and relayers are in charge of actually delivering the messages cross-chain and establishing message validity. The user has the option of using a certain third-party relayer or oracle. LayerZero is not intended to perform either the relaying or the oracle; it is merely a neutral communications medium.
Axelar is a PoS network that has its own native token. Every node on Axelar is using software from another blockchain (Ethereum, Cosmos, etc.). The Axelar nodes synchronize with one another to query their local blockchain clients and concur on the present state of other chains when you ask it about the status of any underlying blockchain it connects to.
Synapse is another protocol that enables secure cross-chain communication. Synapse has an expandable collection of smart contracts for developers to use, it can be deployed on any blockchain, to create genuinely native cross-chain apps. Whether using monolithic base layers, roll-ups, or application-specific chains, Synapse provides interoperability support amongst all blockchain implementations like lending products, cross-chain DEX, yield aggregators, etc.
Bungee (Cross-chain Aggregator)
Bungee is a cross-chain aggregator which finds the best routes for your bridging needs. It includes things like Maximum output on the destination chain, minimum GAS fee, lowest bridging time, etc.
Blockchain-specific bridges like the Polygon PoS bridge (State-sponsored)
Blockchains & Assets Supported
Wormhole supports a growing list of networks, apart from Solana, Ethereum, BSC, Avalance it also supports chains like Terra 2.0, Celo, Fantom, Klaytn, Polygon, Aptos, Aurora, and many more.
Wormhole recently organized a hackathon named “xHack” for builders across the chains. It hosted hundreds of builders, speakers and panelists from different DeFi protocols, L1s, Wormhole core contributors, Web3 researchers, and many others in those four weeks at xHack.
Community is a MOAT in web3, As more and more people are getting involved with Wormhole, the community is continuously growing and will continue to do so. Currently, on their Discord server, there are already more than 19k+ members, and on Twitter more than 70k+ followers (!).
Future Recommendations & Scope
Native Asset Swapping: Unwrapping wrapped Assets on the destination chain along with a total bridge time of 10–20 minutes is a huge pain in the User Experience. The solution here can be “Native Asset Swapping”, where let’s say USDC is just burned from a source chain, let’s say Solana, and a USDC on the destination chain, let’s say Ethereum is minted. The communication of burning and minting is just relayed via Wormhole’s cross-chain messaging. This way, many cross-chain assets can be bridged natively, without any need for wrapping of assets — leading to superior UX and cheaper fees. In fact, Circle has already worked in this direction with its latest announcement. This can offer a wide range of seamless applications in payments, and lending, where assets like USDC will be truly interoperable across chains.
Cross-chain Identity: With on-chain identity space heating up, interoperability across chains is a big opportunity going forward — it will allow developers to ask for user details from other networks. For instance, ENS (Ethereum Name Service) is one of the biggest identity ecosystems, and accessing users’ cross-chain data (xData) will allow developers to implement a “Login with ENS” system even on the Solana or Aptos blockchain. Essentially, applications on other chains can read the details about the end user’s avatar, name, wallet address, and more without the user needing to re-upload that information on another blockchain. Cross-chain reputation is another big opportunity in this direction.
Bull Case for Wormhole: Multi-chain Future with cross-chain applications 📈
The Multi-chain Future — Ensuring Maximum Coverage: As we gear towards a more multi-chain future, ensuring maximum blockchain coverage becomes quite critical. Wormhole already supports 17+ blockchains, and recently, it also added Aptos as soon it was live on the mainnet, depicting that the wormhole is very keen on supporting even the newest blockchains.
Jump adding $320M from their own pocket shows their belief in the huge opportunity and it can be considered as an investment to make sure, they have the full trust of the ecosystem. This did work in their favor, as now users have the assurance, that even if there is a future hack, the wormhole will make sure that users don’t lose money. Further, they also announced a $10 Million bug bounty to ensure vulnerabilities are minimized as much as possible.
Bear Case for Wormhole: Multi-chain but siloed Blockchains
Why the future will be multi-chain, but will not be cross-chain
In a Reddit post, Vitalik Buterin infamously described why he has some pessimism about bridges.
Here is the gist of what he said.
The reason is the security limits of bridges. He points out how Cross-chain activity has an anti-network effect: it is safe while there isn’t much activity, but the risks increase as there is more activity happening.
It revolves around 51% attacks, but not the way most people think about the consequences of 51% attacks. If the blockchain is hacked in some absurd way, the aftermath is still reasonable if you had 100 ETH but sold it for 240000 DAI on Uniswap. You would either keep your 100 ETH or receive the 240000 DAI. The result in which you receive neither (or both) would be unacceptable because it would break the protocol’s rules.
Imagine, for instance, that you have 100 ETH on Ethereum and that Ethereum gets 51% attacked, causing some transactions to be blocked and/or revoked. You will still have 100 ETH, no matter what happens. Even a 51% attacker will be unable to propose a block that steals your ETH because it would go against protocol regulations and be rejected by the network. Even using 99% of the hash power can not steal your ETH because the rest 1% would still follow the chain as the blocks adhere to the protocol regulations.
But the issue arises when you are moving ETH to a bridge on Solana. Let’s take the same example from his post. You are transferring 100 ETH using a bridge to get 100 Solana-WETH but at that time Ethereum gets 51% attacked. When the Solana side confirmed the attacker’s deposit of their own ETH, he immediately reversed the transaction on the Ethereum side. Your 100 Solana-WETH may now only be worth 60 ETH because the Solana-WETH contract is no longer fully backed.
2. High Competition:
Although wormhole is currently leading the pack with an excellent team & backing, however, the space is heating up lately, and we will see a plethora of bridges Infra getting built which might have a better working model & UX, which might be a significant headwind going forward.
3. Siloed Future:
It’s also possible that blockchains may continue to pop up, but each blockchain has its own use case and ecosystem around that and there is not much need to exchange assets & information across the blockchains. In this scenario, the bridges as a whole, wouldn’t find much or limited traction.
Closing Thoughts: Cross-chain Globalisation
A truly cross-chain universe enables a wider range of decentralized applications, assets, and composability across all dApps. Wormhole has the ability to Supercharge the user counts and protocol growth across the ecosystem.
We have to achieve a user experience on par with what we have in Web2 applications where you don’t feel like something crazy is going on behind the scene, instead, it just feels seamless. With the siloed nations of the blockchain states coming together with bridges we need to make sure nothing gets lost in between, everything is safe and secured. Because at the end of the day if users lose money, that’s the ultimate bad user experience!
Just like globalization in the 1990s gave rise to the MNCs, we believe with cross-chain interoperability, cross-chain applications will enable anyone to experience the whole ascending Web3 world seamlessly with 100X better UX!
That’s all folks!
— Thanks to Yash Agarwal for helping with key concepts and reviewing this article.
This was a deep dive into the Wormhole and how it building for the interconnected future. If you find it helpful or want to suggest anything feel free to reach out to me at @inSitesh on Twitter.
DO YOUR OWN RESEARCH. We make no representation or warranty as to the accuracy or completeness of the information contained in this report, including third-party data sources. This post may contain forward-looking statements or projections based on our current beliefs and information believed to be reasonable at the time. However, such statements necessarily involve risk and uncertainty and should not be used as the basis for investment decisions. The views expressed are as of the publication date and are subject to change at any time. Read the full disclaimer here.