Optimism Bridge

What is a Bridge?

Bridges are responsible for holding assets on a layer-1 blockchain while those same assets are released on another service. This defines who has custody of the funds and the conditions that must be met before the assets can be unlocked. The withdrawal request destroys coins on the off-chain system and updates the bridge contract about the user’s entitlement to withdraw their coins back to the Layer 1 blockchain. This allows users to move their coins back and forth between the two systems without having to worry about losing any of their value.

What is Layer-2?

Layer-2 (L2) is a secondary layer built on top of a main blockchain (Layer-1 or L1) to improve its speed and scalability. It helps process transactions faster and reduce congestion on the main blockchain. Examples include the Lightning Network for Bitcoin and Optimistic Rollups for Ethereum.

How Do Blockchain Bridges Work?

There are different mechanisms by which blockchain bridges facilitate asset transfers.

Burn & Mint: One common method is the burn and mint approach. In this method, assets on the source chain are burned, meaning they are permanently removed from circulation, and an equal number of the same asset is minted on the destination chain. These newly minted assets are then transferred to the recipient.

Liquidity Pools: Another method is through liquidity pools. Users contribute to liquidity pools on both the source and destination chains. When a cross-chain bridge event occurs, assets are deposited into the asset pool on one chain and withdrawn from the same asset pool on the other chain. This ensures that the liquidity is maintained throughout the transfer process.

Proxy tokens: They are also used in some blockchain bridges. In this method, assets on one chain are locked in a smart contract, and an equivalent number of proxy tokens, also known as wrapped tokens, are minted and released on the destination chain. These proxy tokens represent the locked assets and can be freely traded or used on the destination chain.

Most blockchain bridges are decentralized and permissionless. This means that anyone can use these bridges without needing approval or permission from a central authority. The decentralized nature ensures that the bridges are trustless and secure, as they rely on the consensus of multiple participants rather than a single entity.