Bitcoin Bridging

A Comparison Between Methods to Move Liquidity Off Chain

Friday, Jun 9, 2023

Introduction to Bitcoin Bridging

In the world of Bitcoin, ‘bridging’ refers to moving Bitcoin liquidity off the blockchain to participate in the features, ecosystem, and advantages of other blockchains.

Why would someone want to move liquidity off the Bitcoin blockchain? In simple terms, the Bitcoin network doesn’t support robust systems for DeFi, NFTs, or smart contracts. 

Bridging is also required to use Bitcoin for tokenization while retaining the highest level of trustlessness. 

Finally, a user may just want to take part in another blockchain’s ecosystem, but wants to store their assets in Bitcoin.

Different Methods to Bridge Bitcoin

There are several methods to move Bitcoin off-chain. Two of the simplest and most popular ones are wrapped tokens and token bridges. 

Wrapped tokens and token bridges are related by the fact that a token bridge is a mechanism that facilitates the movement and creation of wrapped tokens with a smart contract. 

A token bridge involves the use of smart contracts. When a user starts a token transfer, the bridge locks the tokens on the source blockchain or deposits them in a wallet, creating a representation or equivalent of the token on the destination blockchain. 

This representation, often referred to as a wrapped or pegged token, is then made available for use on the destination blockchain. The bridge relies on a set of validators or trusted entities that ensures the integrity and security of the transfer process. These validators verify and confirm the locking and unlocking of tokens on both sides of the bridge. Once the transfer is complete, the bridge releases the original tokens on the source blockchain and enables the user to utilize the wrapped tokens on the destination blockchain.

Wrapped Bitcoin (WBTC)

Wrapped Bitcoin (WBTC) is an ERC-20 token that represents Bitcoin on many blockchains, the most popular being WBTC on Ethereum. WBTC is backed by a reserve of Bitcoin held by custodians, ensuring a 1:1 peg to the underlying asset.

The advantage of WBTC is that it combines the liquidity and flexibility of the Ethereum network with the value and stability of Bitcoin. It enables users to access to Ethereum-based services using their Bitcoin holdings. 

Wrapped Bitcoin Scheme

However, WBTC relies on trusted custodians to hold and manage the reserve of Bitcoin. This raises concerns about counterparty risk and centralization. Token bridges have been the biggest target for hackers in DeFi for the last couple of years. $1.4 Billion was lost to token bridge attacks in 2022. 

Hackers have been able to compromise the security of custodians by engaging in social engineering and gaining access to staff accounts.

Token Bridges

When we refer to token bridges, usually these are projects that lock the tokens on the source blockchain with a smart contract and are non-custodial. This is preferable to a custodial wrapped token as it removes the need for a trusted third party.

What it doesn’t do is remove the human factor. In 2021, a hacker was able to trick the Poly Network, a token bridge between Ethereum, Ontology, and the Binance Smart Chain, into ceding control of all the locked assets to himself. 

Polynet Hack

The hack, which took place in August 2021, leveraged a vulnerability in the protocol’s digital contracts. These smart contracts facilitated the transfer of cryptocurrency between different blockchains.

The hacker exploited a weakness in the protocol’s contract calls. They manipulated the data in the contract calls to trick the platform into releasing funds they should not have been able to access.

Contract Vulnerability: The hacker identified a vulnerability in the contract permissions. Specifically, the contract was designed in such a way that it gave the hacker the ability to update the contract’s “keeper” role. A keeper in blockchain terms is an external person or team that performs maintenance on the blockchain.

Changing the Keeper: The hacker exploited this vulnerability and submitted a transaction that changed the keeper of the contract to an address they controlled. Once the hacker had control, they could manipulate the contract to do what they wanted.

Stealing Assets: With control over the keeper role, the hacker could then make the contract call the assetCrossChain function, which is normally used to move assets across chains. The hacker used this function to transfer the various cryptocurrencies to their own wallet addresses.

Polynet still stands as one of the largest hacks in DeFi. However, a large part of the funds were recovered.

Lightning Network

The Lightning Network is a Layer 2 scaling solution for Bitcoin. It enables off-chain transactions by creating payment channels between users. These channels allow multiple transactions to be conducted without every transaction being recorded on the Bitcoin blockchain. 

One of the key benefits of the Lightning Network is its ability to improve scalability and transaction speed. By moving transactions off-chain, the Lightning Network can process many transactions per second. This makes it suitable for micro transactions and everyday payments. 

However, the Lightning Network is still in its early stages of development and faces challenges, such as network liquidity and routing complexity. There are still concerns about if it could ever be a solution that works for the public. There are also concerns about attacks using channel jamming and HTLCs not working below the Bitcoin dust threshold. 

The Lightning Network is a brilliant solution for users that send regular payments between each other, but payment processing is its only feature. It doesn’t enable the exciting financial use cases that DeFi platforms like Mintlayer does.


Sidechains are separate blockchains that are interoperable with the main Bitcoin blockchain. They provide a means to move Bitcoin from the main chain to a secondary chain, where transactions can be processed more efficiently or a more robust featureset is available. 

Sidechains allow for the development of unique features and functionalities without altering the main Bitcoin protocol.

The problem is that most sidechains still use a token bridge to create wrapped tokens. In this way, they expose users to the biggest current vulnerability in cryptocurrency.

Mintlayer Network

Mintlayer is a sidechain developed specifically to offer advanced features for Bitcoin. Instead of wrapped tokens or a token bridge, Mintlayer uses atomic swaps that allow users to use their native Bitcoin to directly swap for tokens on Mintlayer. 

Most Bitcoin maximalists still believe the main chain should be used for settlement and transactions, and that use cases like NFTs and tokenization should be moved to a 2nd layer like Mintlayer. 

The atomic swaps used by Mintlayer differ from token bridge smart contracts 

Mintlayer is also superior to the inefficient on chain methods users are using to avoid moving Bitcoin liquidity off chain. For example, every mint of BRC-20 tokens requires two transactions for a single batch, and there can be tens of thousands of batches, (VMPX took 339,193 transactions to mint). You can deploy a new token on Mintlayer with a single transaction. 

Mintlayer’s Lightning Network Integration

An exciting benefit Mintlayer enjoys is heightened interoperability with Bitcoin (and by extension heightened interoperability with applications that interface with Bitcoin). 

In the future, we hope to use the Lightning Network as a Layer 2.5 system that can create channels both on Mintlayer and Bitcoin. This ecosystem will allow users to nominate channels in Bitcoin and also nominate channels in Mintlayer tokens. Users could pay for a coffee using Bitcoin, which would be exchanged at a node for a stable coin the merchant would receive. 

Combined with built-in atomic swaps, Mintlayer will support superior solutions to use your Bitcoin in any way you please. 

In conclusion, wrapped tokens and token bridges introduce serious vulnerabilities into an ecosystem. The Lightning Network works great in specific applications for payment processing, but it isn’t clear if it can ever support a global processing network. Only Mintlayer uses atomic swaps that directly trade native Bitcoin for tokens on chain, which is the optimal solution for moving liquidity off chain.