Custodial Bridge

Operated as a multi-party computation (MPC) custodial bridge. User funds were locked in source chain smart contracts, and the release on the destination chain required signatures from a threshold of nodes in the SMPC network. This distributed custody model aimed to reduce single points of failure, though it ultimately faced significant operational risks.

• Custodian Model: A network of nodes using Secure Multi-Party Computation (SMPC).
• Historical Note: Once a major cross-chain router, it highlights the counterparty risk inherent in custodial models.

The official bridge for the Arbitrum rollup uses a custodial model where Ethereum is the sole custodian. Funds are locked in a smart contract on Ethereum L1, and the Arbitrum sequencer processes the validity proof, allowing funds to be credited on L2. Users must trust the canonical bridge contract and the rollup's security model.

• Custodian Model: The Ethereum L1 blockchain itself acts as the custodian via a verified smart contract.
• Trust Assumption: Security inherits from Ethereum, plus trust in the rollup's fraud proof or validity proof system.

Platforms like Binance, Coinbase, and Kraken operate the world's most used custodial bridges via internal ledger transfers. A user deposits Asset A on Chain X, the exchange credits their internal account, and they can withdraw Asset A on Chain Y. The exchange holds all user funds in consolidated custodial wallets.

• Custodian Model: The centralized exchange is the sole custodian and operator.
• Characteristics: High liquidity, fast, but requires full trust in the exchange's solvency and security practices. Subject to regulatory oversight.

The core risk is that user funds are held by a single entity or a small multisig committee. This creates a single point of failure. If the custodian's private keys are compromised, become malicious (rug pull), or are subject to legal seizure, all bridged assets are at risk. This is fundamentally different from decentralized bridges where assets are secured by smart contracts and cryptographic proofs.

Security depends on the custodian's internal controls. Key risks include:

• Insider attacks where an employee or keyholder misappropriates funds.
• Poor key management practices, such as storing keys on internet-connected servers.
• Lack of transparency in operational security, making audits difficult.
• Business failure of the bridge operator, potentially leading to frozen or lost assets.

As a centralized service, custodial bridges are subject to jurisdiction-specific regulations (e.g., OFAC sanctions, AML/KYC). This can lead to:

• Funds freezing if a user's address is blacklisted.
• Service termination for users in certain regions.
• Forced transaction reversal by court order. These actions contradict the censorship-resistant ethos of blockchain and introduce non-technical risks.

Users cannot independently verify the solvency of the bridge (1:1 backing of wrapped assets) or the validity of individual transactions. They must trust the custodian's off-chain attestations. This lack of cryptographic proof and on-chain verification makes it impossible to audit the bridge's reserves in real-time without the custodian's cooperation.

The bridge operator acts as the counterparty to every transaction. This introduces credit risk—the risk that the custodian defaults on its obligation to release funds on the destination chain. The user's claim is not against a smart contract but against the legal entity operating the bridge, which may have limited liability or recourse options.

Understanding the risk trade-off is key. Compared to trustless bridges (using light clients, optimistic verification, or zero-knowledge proofs), custodial bridges:

• Sacrifice security for speed/cost: Transactions are often faster and cheaper.
• Centralize trust: Security is not cryptographic but legal/operational.
• Have different failure modes: Collapse is typically sudden and total (custodian failure) versus potential gradual exploitation of a smart contract bug.

A trusted bridge is a broader category that includes custodial bridges. It relies on a trusted third party or federation to validate and facilitate cross-chain transfers. The trust assumption can be based on a single entity (custodial) or a multi-signature committee. The key risk is the counterparty risk associated with the bridge operator holding user funds.

A non-custodial bridge (or trust-minimized bridge) does not take custody of user assets. Transfers are secured by cryptographic proofs and decentralized networks. Common models include:

• Light Client Bridges: Use on-chain light clients to verify the state of the origin chain.
• Liquidity Network Bridges: Use atomic swaps and liquidity pools (e.g., Connext).
• Optimistic Bridges: Use fraud proofs and a challenge period (e.g., Nomad, Across).

Many centralized exchanges like Binance and Coinbase operate internal, custodial bridges. Users deposit funds on one chain, and the exchange credits them on another within its internal ledger. This is often the simplest user experience but represents the highest degree of custodial risk, as users must fully trust the exchange's solvency and security practices.

A federated bridge is a multi-party custodial model where a committee of known entities (the federation) controls the bridge's smart contracts and wallets. Transfers require a threshold of signatures from federation members. This reduces single-point-of-failure risk compared to a solo custodian but still involves significant trust in the federation's honesty and coordination (e.g., early versions of Wrapped BTC).

The core technical operation of a custodial bridge. When assets move from Chain A to Chain B:

1. Lock & Mint: Assets are locked in a vault on Chain A, and a wrapped, synthetic version (e.g., wBTC) is minted on Chain B.
2. Burn & Release: To move back, the wrapped tokens are burned on Chain B, and the original assets are released from the vault on Chain A. The bridge operator controls the minting contract.

A wrapped asset (e.g., wBTC, wETH) is a token on a destination blockchain that represents a claim on a native asset locked in a bridge's custody. It is the primary output of a custodial bridge's minting process. The value of the wrapped token is pegged 1:1 to the underlying asset, contingent solely on the bridge operator's solvency and willingness to redeem it.