What is Wormhole in Crypto And How Does Blockchain Interoperability Work?

Interoperability within crypto has become essential. With so many different tokens on different blockchains, being able move them between those blockchains is essential for trading and exchanging crypto in the same way that we are able to use conventional money.

To effectively do this, you’re probably going to be looking to leverage a bridge. In simple terms, a bridge refers to a bridge that connects two different blockchain networks through a smart contract, allowing the transfer of assets and information.

Most appealingly for those that use them, bridge exchanges can be anonymous and hidden. For those that enjoy the decentralised and anonymous nature of crypto (and indeed that is one of the main reasons that people buy crypto in the first place), the privacy that is enabled by bridges allows makes it an ideal tool for unlocking interoperability in crypto.

One of the best examples of a bridge is a technology called wormhole.

One of the best examples of the wormhole technology is the Wormhold Token Bridge. The Wormhole Token Bridge is a tool that can be used as a communication bridge between over 20 major blockchains, including Solana, Ethereum, Polygon and Terra.

How does Wormhole work?

As with all bridges, wormholes create connection between blockchain networks, allowing for the transfer of assets without the need for an centralised exchange. They do this by creating “wrapped” tokens on one of the blockchains that represents an equivalent value of tokens on the other, and then monitoring both sets of tokens to ensure that the value remains equal at all times.

It’s a simple, five-step process to use a wormhole bridge:

1. The user deposits their token onto the wormhole’s smart contract on one of the blockchain networks that it supports.
   
2. The smart contract automatically creates the equivalent number of tokens on the blockchain that you wanted to move the assets to.
   
3. These newly-created tokens are now available for trading on the new blockchain. Pricing is controlled by an automated market maker (AMM) algorithm, which calculates in real time the exchange rate between the original tokens and the new ones.
   
4. The user can then trade their tokens with other users (for example, making purchases on the new blockchain) using that AMM to determine their value, with the equivalent number of tokens on the original blockchain released with the trade.
   
5. When done with trading, the user can withdraw their original tokens from the smart contract. This means they’re available for use on the original blockchain again, and the temporary tokens created on the new blockchain are erased.

For example, if you bought tokens on Solana and want to move them to another blockchain like Polygon via Wormhole, you will put the Solana tokens onto the bridge, and this would create new tokens on the Polygon blockchain. At that point, the tokens can be used as though they are Polygon tokens, but if you need to again use them as Solana tokens, you can just withdraw them from the bridge.

How is blockchain interoperability achieved?

Of course, Wormhole does not create duplicates on new blockchains to effectively double your assets. Rather, to facilitate the transfer of assets, and to allow interoperability between blockchains, the smart contract that connects both blockchains needs to be constantly monitoring the other for any updates and changes, to ensure that the balance is always maintained.

This is achieved through what is known as a ‘Decentralized oracle network’, which has been designed to reliably and securely transmit data between two blockchains on an ongoing basis. Decentralized oracle networks also allow blockchains to communicate with data from the outside world. These networks therefore form a foundational component to the ability for blockchain tokens to have real world applications and value. Non-custodial wallets like Frontier have enabled in-platform multi-chain capabilities connecting over 35+ blockchains for the user, saving a lot of time jumping between different applications.

Cross-chain Wormhole bridge

The use of Wormhole technology and bridges is not limited to cryptocurrency, though it is its core application. There are three particular use cases that highlight just how pervasive this technology is:

1)     Cross-chain exchange

Developers can build exchanges that allow deposits from any blockchain that an application like Wormhole supports. This will massively increase liquidity across all of these assets and, at the expense of some of the decentralization, allow for the fluid exchange of assets, just like other conventional financial systems.

2)     Cross-chain governance

When it comes to assets like NFTs and similar, the ability to bring all networks together will allow users across multiple chains to “vote” on proposals and such, without having to be on any specific blockchain provided they hold the necessary governance tokens.

3)     Web3 games

The potential for blockchains in games is still being explored. However, for a game to offer awards that could be transferred from game to game (with this being the key value proposition of blockchain gaming), there would need to be a wormhole to facilitate the exchange.

Security of Wormhole core layer

Security is an ongoing challenge in the crypto sector. Vendors such as Frontier offer cutting-edge and highly effective security solutions. However, hacks and breaches in other sectors of the crypto space leave the industry with a less secure reputation than it deserves.

For its part, Wormhole has been designed to be a very secure technology, combining 128-bit AES-GCM encryption with a design that promotes secure transactions. In addition to being anonymous and decentralized, third parties can't participate in the bridging process.

Another key security feature of wormhole bridges comes from the validation process. Before any transaction on Wormhole can be completed, for example, it must pass through multiple “guardians,” each of which conducts an independent validation process of the translation. A transaction cannot be completed unless there is consensus across multiple guardians.

There is also a rigorous auditing program, bug bounties, and social media monitoring, meaning the the community that supports Wormhole is constantly looking for and addressing vulnerabilities before they can exploit the bridge. However, as with any interaction online, total security is not guaranteed. There can be vulnerabilities if any bridging technology, decentralized oracle network, or smart contract is not properly designed.

There have been instances of wormholes being compromised, even on otherwise well-regarded platforms. For example, an error on GitHub, in which a security flaw was fixed but not applied to a live application in time, resulted in the theft of $325 million worth of crypto assets from Wormhole in 2022.

Lessons taken from the Wormhole hack

The Wormhole hack was a loud wake-up call for the crypto industry, because it was a highly sophisticated attack that exposed a critical part of how the modern blockchain works. It’s also a significant risk facing the industry because, as one analysis noted, there was a point where the scale of the hack was so large that it could have pulled down the entire Solana blockchain. Because the blockchains are linked via smart contracts and a “bridge” via Wormhole, there was the risk that people’s crypto could become unbacked after a hack and that could have convinced users to panic sell, which would tank the value of a currency.

The Wormhole hack taught us that any technology that connects blockchains together needs to be subject to rigorous code audits. The industry cannot simply rely on decentralization and anonymity for security.

The Future Of Wormhole Bridges

Following the high-profile hack of Wormhole, there was a concern that this would slow - or even stall - progress towards a truly interoperable environment for crypto. If users were constantly concerned about the security of their tokens when using bridges, they would be less likely to use them. However, bridges such as Wormhole are also the best tool that the crypto world has to unlocking interoperability, so if bridges lose the confidence of the community, then so too does the goal of having an system that works as seamlessly as fiat currency for exchanges.

Fortunately, confidence in Wormhole quickly returned. Early this year, for example, the Uniswap DAO voted to approve Wormhole as the designated bridge between Ethereum and the Binance Smart Chain. As more tokens and assets become compatible with bridges such as Wormhole, and they are able to facilitate an even broader range of transactions, the value of these bridges to traders will continue to grow. Furthermore, as they become a more integral part of the overall crypto ecosystem, the security of bridges will continue to be tightened and earn even greater trust from users.

Wrap Up

Wormhole, and other similar technology, is critical to the future of crypto and blockchain. Without it, creating the kind of fluid, interoperable environment for information exchange would be practically much more time consuming and difficult for the everyday user. The inflexible nature of blockchains that can’t communicate with one another would limit mainstream adoption. So, while there are some security concerns around wormhole technology, expect the crypto industry to invest heavily in addressing those, to make this critical technology underpin future innovation in crypto.Interested in investing in crypto, and take advantage of the increasing interoperability between blockchains and the ease of exchange? Get started with Frontier today!