As soon as we started having multiple blockchains, be that numerous L1s or L2s, public or private, and any mix of these, the question of how they interact with each other was asked.
There are numerous types of interactions between blockchains, but a typical example is that of “the bridge”.
In short, a bridge allows you to lock up a token native to a source blockchain, and then make it available on a target blockchain. It’s important that these tokens are native to the source blockchain, because if they are not they could in theory exist across many and hence don’t need a bridge to begin with.
An example of a native token would be something like BOLD, one of my favorite stablecoins (if having favorite stablecoins is a thing). It’s a good example because the token lives only on Ethereum mainnet through immutable smart contracts, and can’t exist anywhere else without involving a bridge.
A non-native, or foreign token, would be something like USDC. USDC is issued by Circle. Because of this, there is no need to bridge USDC from Ethereum mainnet to any other chain. Instead, Circle can simply burn it on one chain and re-mint it on another chain, should there be a need to move the token. The customers of Circle can ask for their tokens to be minted where it is needed, without needing to lock up any original tokens in a bridge.
Problems with blockchain bridges
There are many well documented issues with bridges. Firstly, the tokens that are locked up on the source chain in the bridging account naturally become juicy targets for hackers. They stand out like a lighthouse, beaming their wealth for all to see.
This is perhaps not that different from a centralized exchange, but for bridges, on the destination side, the minted tokens represent a derivative of the original tokens. They come with the source token risks, but also additional technical and operational risks as they are not the same as the original token. These bridged tokens hence accumulate risk, further complicating their usage for all involved.
Liquidity fragmentation is a third major source of concern, as exchanges and their liquidity pools now need to contend with multiple sources of liquidity for the seemingly same underlying token. And I as a trader am not asking for a diversified basket consisting of derivatives of the underlying token, hence I’m getting a worse price on my trade.
It’s also a terrible business model, where you need the overhead of decentralization to avoid risk concentration in your bridge operations added to razor thin margins that only trigger on actual bridging activity. Contrary to certain stablecoin providers, I don’t know of any bridge operator that have managed to, at scale, successfully keep any token yield for themselves without passing that on to the target chain.
(BTW, keeping the yield on the underlying collateral, as some stablecoins currently do, is a short term play. Enjoy it while it lasts.)
Bridging needs are naturally reducing
RWAs, or real world assets, are not native to blockchains. They are foreign tokens, and as mentioned above, these have issuers that can mint and manage these across numerous blockchains depending on the needs of their investors.
These assets are set to grow dramatically as tokenization ramps up. And as they claim an ever growing share of the pie, the need for bridging naturally reduces. Why use a bridge with a lock-and-mint pattern when the issuer can just manage this directly?
Another important and fundamental shift in how we interact with blockchains is through intents rather than transactions. While transactions represent a single operation, intents often do more. Instead of first bridging a token and then trading it on the target chain, an intent could do both in one go.
But why even bother bridging it if the exchange can also work with assets across multiple blockchains? We are already familiar with this concept on centralized exchanges, where we might transfer a token onto the exchange before trading it for another token on another chain, say selling Bitcoin and buying Ethereum. We wouldn’t expect the freshly bought Ethereum to somehow be on the Bitcoin network.
Decentralized exchanges will gain the same capability with intents. While a decentralized exchange previously needed all activity on the same blockchain, intents allow decentralized exchanges to transcend any one chain.
This shift will fundamentally change how dApps in general are architectured, as they now natively live across numerous chains. We should probably stop referring to them as “numerous chains”, and instead just say that apps sequenced through intents can interact with numerous sources of decentralized storage.
Intents fix L2 UX but not L1 fragmentation
Intents very much solve a UX problem of L2s, as you now don’t need to care at what chain a token or dApp is deployed on. It might be tempting to assume that intents might also be a good solution across independent L1s, but this is less likely.
The reason here is that L2s share a common security framework. If it’s on an L2, the security for that is guaranteed by the L1 it is connected to. And as all L2s increasingly connect to the same L1, they all share the same security fundamentals.
This removes a major headache compared to using multiple L1s, as that, much like bridges do, accumulate risks when we interact across them. And whatever business you’re in, you don’t want to be in one that gets more risky the more diversified and well-connected you become.
With data encrypted/ZK, it is likely that everyone gets their own L2 in the future. Finally we can end the experiment that was private chains (and a bridge to nowhere).
At the extreme, each token would get its own L2, and that is fine because intents take care of moving these from account A to account B as and when needed.
(And if you’re in the bridging business, I’d suggest you get into the intent business sooner rather than later)