Cryptographic Bridges and Cryptocurrency Thefts

What is a Blockchain Bridge?

A blockchain bridge is a service that connects two different blockchain platforms and allows them to interact with each other, bridging one of the biggest limitations of this technology: the lack of interoperability.

Crypto bridges are responsible for our ability to interconnect different blockchains and to be able to interact with them, diversifying and increasing the usability, reach, and ecosystems built around them.

For example, someone who owns Bitcoin but wants to participate in decentralized finance activities on Ethereum can use one of these “virtual bridges” without selling the cryptocurrency.

What exactly happens to tokens available only on one blockchain when they are “transferred” to another platform via a bridge?

Another example can help clarify this aspect. Suppose we use a blockchain bridge to send a Solana (SOL) to an Ethereum wallet. The cryptocurrency that reaches the wallet is not the original one, but a “wrapped” version, converted into a token compatible with the destination blockchain. In the case of the example in question, the Solana would become a generic ERC-20 token capable of operating on the Ethereum blockchain.

Cryptographic bridges can be of two types:

• Centralized

A centralized bridge is one whose management belongs to a centralized entity that takes and releases tokens between the chains supported by that entity. Basically, it works like an exchange, except that instead of exchanging pairs, it simply takes a token and sends you the same token on the destination network of your choice. An example of this type of bridge is OKex Bridge.

• Decentralized

A decentralized bridge is entirely controlled by smart contracts, and the control of funds is not entrusted to any central entity. An example of this type of bridge is Multichain.

The main difference between the two types lies in the identity of those who control the tokens used to create the resources transferred via the bridge. For example, all Wrapped Bitcoins (WBTC) are held by the trust company BitGo. The blockchain bridge in question is, therefore, centralized.

Decentralized bridges, on the other hand, are entirely controlled by smart contracts. In this case, the control of funds is not entrusted to any central entity. Examples of this type of blockchain bridge are Wormhole and Multichain.

Crypto bridges are vital in the current and future context of cryptocurrencies. Thanks to this, we can send and receive value between different blockchains without problems, making the use of this technology more flexible.

Among the main functions of bridges, we can mention:

• Enabling interoperability between chains. In this way, Ethereum users can take their tokens and send them to other chains such as BSC, without going through an exchange.
• Allowing users to switch between Layer1 and Layer2. For example, Ethereum users can take their tokens and move them from Layer1 (the Ethereum network) to Layer2 networks like Polygon, Arbitrum, xDai, among others.
• Helping to minimize operating costs since it allows the user to search for networks with better fees to carry out their operations.
• Attracting value from other networks to networks with better opportunities. A good example of this is the movement of value from BTC to Ethereum during the cryptocurrency winter. The movement was motivated by taking advantage of the emerging DeFi ecosystem and generating profits when BTC held a low value.

Some blockchain bridges are one-way and allow for transferring resources from one blockchain to another, but not back. For example, Wrapped Bitcoin allows sending bitcoin to the Ethereum blockchain, converting them into ERC-20 stablecoin, but it does not allow sending Ether to the Bitcoin blockchain. Other bridges, such as Wormhole and Multichain, are bidirectional and allow transferring resources to and from one or more blockchains.

Transferring resources from one blockchain to another can bring many benefits. For example, some blockchains are cheaper and faster than the native blockchain of a particular cryptocurrency. This is the case with Ethereum, where high fees and general slowness can make it difficult for those taking their first steps in the world of decentralized finance. Bringing one’s resources to a faster blockchain, such as Arbitrum or Polygon, can allow exchanging ERC-20 tokens for a fraction of the original cost, without any compromise. Other investors may use bridges to take advantage of existing markets only on a different blockchain from the one they usually use. For example, the decentralized finance protocol Orca is only available on Solana but also supports a “wrapped” version of ETH.

Over time, blockchain bridges are becoming easier to use. Many decentralized finance protocols integrate them internally, allowing users to trade tokens without leaving the platform. This makes the process of converting cryptocurrencies through bridges less cumbersome.

Although very useful, blockchain bridges can hide pitfalls. For example, some of the newer decentralized bridges have undergone few tests to ensure their security. Even those in circulation for longer tend to have vulnerabilities that can be exploited, as has happened in recent months with Wormhole and Qubit.

In the case of centralized blockchain bridges, the risks are different and mainly related to the possible corruption or negligence of the people working for the company that controls the tokens. It can also happen that a third party, such as the government of a country, freezes the company’s held resources.

FOCUS: Cryptographic bridge operation sequence.

A bridge can be seen as a simple information exchanger between blockchains. In other words, the main function of a bridge is to enable bidirectional exchange of information between blockchain A and blockchain B, through a protocol that allows this connection.

We can summarize the exchange of information in four steps:

• The bridge is between chain A and B, creating the basic structure for its operation.
• If you want to spend a token from A > B, go to the bridge, indicate the number of tokens you want to exchange in A and provide the destination address in B.
• You make the shipment in A, and the bridge locks this balance in a vault, then in B the exact amount of tokens is minted and sent to the B address you provided.
• The tokens in A are locked as collateral for the tokens in B, and you can only retrieve them by performing the reverse process.

Let’s take a more practical example to delve into the operation of these bridges.

Let’s imagine wanting to pass 1,000 USDT tokens from the Ethereum network to the Polygon network. Directly, despite the fact that Ethereum and Polygon addresses are identical, the reality is that their blockchain networks are different, so you cannot transfer the value directly between the two blockchains.

To do this, you must use a bridge, which will take care of completing that process.

Since Etheruem and Polygon, despite having different histories and consensus protocols, are identical in terms of programming (they are based on EVM, use Solidity, have the same address model), creating a bridge is quite simple.

To do this, the bridge creates a series of “contracts” SC (in Ethereum and Polygon) that will allow both networks to communicate in a common language through a blockchain oracle.

To do this, the bridge creates a series of SC “contracts” (in Ethereum and Polygon) that will allow both networks to communicate with a common language through a blockchain oracle.

The oracle’s task is to provide those SC “contracts” with precise information about what is happening on the other blockchain and vice versa. In this way, a two-way communication channel is created between Ethereum and Polygon.

Now, to send that ETH USDT to Polygon, we need to interact with the bridge on the ETH side.

The bridge will essentially ask for two things:

• A receiving address for the Polygon network.
• That you send the 1,000 USDT you have in ETH to a vault (also in ETH) that will be controlled by a bridge smart contract.

This step is generally transparent to the user. By completing these two steps and showing up on the ETH side, the bridge starts its work.

The first thing that happens is that the oracle detects the shipment in ETH and reports it to the smart contract on the Polygon side. With this report-communication, the amount of tokens sent “heads” towards the destination address (the one provided).

Once the ETH exchange is complete, the oracle signals it and the smart contracts on the Polygon side begin to generate 1,000 USDT and send it to the provided address.

The tokens generated by the Polygon side are the same USDT, the same amount, and with the same value.

To protect the exchange, a vault is created that constitutes the guarantee of the value of the new tokens that will be locked until the reverse operation is performed (transfer that USDT from Polygon to ETH).

The lock prevents the generation of tokens from nothing, maintaining security and economic stability between chains and the bridge. When we execute the opposite process to recover USDT in ETH, the bridge takes USDT from the Polygon side, “burns” them, and this allows the corresponding USDT to be delivered from the Ethereum side.

With this, the work of the bridge between ETH and Polygon is complete.

Crypto bridges and “rivers” of insecurity: Nomad, Wormhole, and Harmony cases.

The utility of cryptographic bridges emerges very clearly from the above reconstruction, but its use is or could certainly be undermined by problems related to computer security.

An example of these problems is represented by the events that involved the American company Nomad, which suffered a theft of about 190 million dollars in the recent past – summer 2022.

The platform provides a cross-chain messaging protocol with which users can send and receive tokens between different blockchains through the bridge.

The hacker attack would have hit exactly this “bridge,” the tool that allows the transfer of tokens.

Nomad indicated in a tweet that they are “aware of the incident” and are currently investigating and collaborating with law enforcement to understand which accounts have been involved and how to recover the money, but has not provided official figures on the amount of the theft.

PeckShield, a crypto analytics company, reported to Reuters that digital currencies worth approximately 190 million in ether and stablecoin USDC were stolen.

This would be the total value locked that Nomad held before the security incident.

The funds would have been drained in just a few hours.

Bridges are usually built to “seal” tokens in a smart contract on a blockchain and then reissue them in “wrapped” form (anchored to the value of another asset) on another blockchain. If the smart contract on which the tokens were initially deposited is hacked, the “wrapped” tokens have no asset to anchor to and lose their value, Coin Desk explains.

One of the most likely hypotheses for the theft could be found in the recent update to one of Nomad’s smart contracts, which may have made it easier to “manipulate” transactions. Unlike other bridge attacks, usually perpetrated by a single perpetrator, the security exploit against Nomad took place as a collective “copy-and-paste” action, experts explain: once a fraudulent transaction that worked was discovered, it was enough to replace the address of the legitimate token owner with their own and repeat the funds’ theft.

This is a mechanism that has already raised alarm for its ease of access; it is no coincidence that blockchain bridges are increasingly the target of security attacks. So far in 2022, over $1 billion worth of tokens have been stolen from bridges, according to London-based blockchain analytics company Elliptic.

In April, hackers stole about 615 million cryptocurrencies from Ronin Bridge, a platform used to transfer cryptocurrencies in and out of the Axie Infinity game. This is the largest decentralized finance attack ever conducted.

Among the biggest hits are also the one against Wormhole bridge, from which more than $300 million were stolen, and the one against Harmony, which revealed that it had suffered a token theft worth about $100 million from its Horizon bridge product.

In the spring of 2022, the company managing the decentralized financial platform Wormhole announced that it had detected an anomaly, specifically citing a potential exploit and the need to take the service offline to allow for technical intervention.

After conducting an analysis of the incident, the team announced that normal infrastructure operations had been restored and all managed funds were secure.

According to the reconstruction provided by Elliptic analysts (through Reuters pages), the authors of the attack would have been able to fraudulently create ETH tokens, over 94,000 of which were immediately transferred to the Ethereum blockchain. Once the incident was discovered, Wormhole would have offered a reward of $10 million to the perpetrators of the action in case of fund restitution. It is not known whether the proposal was accepted or not.

The Harmony blockchain bridge, connected to Bitcoin, Ethereum, and BNB Chain, was hacked in the summer of 2022 and saw the theft of $100 million in cryptocurrencies. In the past, the community had already expressed concern about two of the four multisigs used to protect the bridge.

In just under 20 minutes, 11 different transactions were made on the bridge, withdrawing various tokens. Then the hacker began to send these tokens to a different wallet so that they could be exchanged for ETH on the decentralized exchange Uniswap. Finally, they sent these ETH to the original wallet.

Frax (FRAX), Wrapped Ether (WETH), Aave (AAVE), Sushi (SUSHI), Frax Share (FXS), AAG (AAG), Binance USD (BUSD), Dai (DAI), Tether (USDT), Wrapped BTC (WBTC), and USD Coin (USDC) were stolen from the bridge through this exploit.

The Horizon Bridge allows token transfers between Harmony and the Ethereum, Binance Chain, and Bitcoin networks. As mentioned, the security of the Horizon multisig wallet on Ethereum had already been called into question in the past since currently only two of the four signers are needed to drain the funds.

Ape Dev, founder of the cryptocurrency-focused venture capital fund Chainstride Capital, had already warned the community over two months ago:

“Currently the bridge security is based on a multisig wallet, 0x715CdDa5e9Ad30A0cEd14940F9997EE611496De6. It has four owners, only two of whom are required to give their consent to execute an arbitrary transaction.”

Even Vitalik Buterin discussed the vulnerabilities of bridges in January 2022: in a discussion on Reddit, he explained that when a bridge is hacked, it threatens the liquidity of all connected chains. He also added that a high number of active bridges increases the risk of 51% attacks.

We are witnessing an increase in exploits against various bridges such as Meter, Axie Infinity’s Ronin Bridge, and as previously mentioned, the Wormhole Bridge, with a total estimated theft amount of around one billion dollars.