Bridges have become an integral element of the crypto world in recent years. Bridges between blockchains allow for quick liquidity transfers between different networks. However, in the case of privacy coins, bridging has become a challenge for developers. The very architecture of confidential blockchains has proven to be poorly compatible with existing approaches to building bridges. This has forced projects to seek alternative architectural solutions that would help maintain privacy within the privacy blockchain while still allowing confidential assets to be wrapped for use in DeFi protocols.
One of the approaches was proposed by the team of the confidential cryptocurrency ZANO, which figured out how to build a working bridging model even for privacy coins without abandoning the principles of confidentiality.
How bridges work between blockchains
Bridges solve the interoperability problem between blockchains. They allow liquidity to be transferred between networks based on different consensus algorithms (e.g., Proof-of-Work and Proof-of-Stake) and to use the same asset outside the native blockchain.
The most common example of bridging implementation is wrapped assets. The original asset is locked at the protocol or smart contract level in the source blockchain, and a token representation with a 1:1 binding is issued in the target network. A classic example is wrapped Bitcoin in the Ethereum network. Bitcoin does not circulate in the Ethereum blockchain and does not exist in the EVM environment, but its wrapped version allows using Bitcoin liquidity in smart contracts.
Wrapped assets have played a key role in the growth of the decentralized finance (DeFi) market. Most DeFi protocols — lending markets, DEXs, lending platforms — only work with tokens of their blockchain (e.g., ERC-20 in Ethereum). Therefore, to use their services, bridges are necessary: assets are locked in the source blockchain, and wrapped assets are used in the protocol. It is thanks to bridges that capital has flowed into DeFi protocols.
Bridges have enabled:
integrate external liquidity into DeFi protocols;
use assets from blockchains with different consensus algorithms;
scale the DeFi economy through cross-chain capital.
The bridge as a risk
But bridges have several systemic problems. First, bridges remain one of the most vulnerable parts of blockchain infrastructure. The main source of risk is related to the custody of assets locked in the source blockchain. When assets in the source blockchain are locked at a special address or in a smart contract, a point of capital concentration arises. In the event of a compromise of control, an attacker can steal the entire collateral, leaving wrapped tokens without backing. This will lead to cascading liquidations on lending platforms.
The largest bridge hacks:
Ronin (Axie Infinity), March 2022 — about $600 million. The hack of the validator nodes of the Ronin bridge, which was used to transfer assets between Ethereum and the Ronin sidechain (Axie Infinity). Hackers gained control over the private keys and withdrew 173,600 ETH and 25.5 million USDC worth hundreds of millions of dollars.
BNB Chain, October 2022 — about $550 million. A vulnerability in the cross-chain bridge BSC Token Hub allowed attackers to mint additional BNB. Some tokens were frozen by the network, but the criminals managed to withdraw and launder about $100 million.
Wormhole Bridge, February 2022 — over $320 million. The cross-chain bridge Wormhole, connecting the Solana, Ethereum, and other networks, was hacked in such a way that the attacker was able to generate 120,000 Wrapped ETH without proper backing.
To mitigate risks, many bridges use Multi-Party Computation (MPC) algorithms, where the private key is not held entirely by any single participant but is distributed among several validators, with transaction signing possible only with the agreed participation of a quorum of parties. This is one — and not the only — problem that has long prevented the use of bridges with privacy coins.
Bridging and privacy coins
The fundamental difference between privacy-oriented blockchains lies in the algorithms for verifying transactions. In classical blockchains, wallet balances and UTXOs are public, and the transaction signature directly proves the right to spend a specific output. In privacy-oriented blockchains, it is impossible to see the balance of an address, determine which specific UTXO is spent in a transaction, and the validity of the operation is confirmed not by a simple signature, but by a set of cryptographic proofs.
The technical complexity is clearly visible in the example of the cryptocurrency Monero. To validate transactions, the protocol uses CLSAG signatures, which make it impossible to determine which specific input of the transaction was spent and with which outputs it is associated. Additionally, technologies such as key images are used to prevent double spending without revealing the sender's identity, confidential transactions to conceal transfer amounts, and range proofs based on Bulletproofs that prove the correctness of values without disclosing them. As a result, the signature in privacy coins represents a complex composition of many primitives.
It is this cryptographic complexity that makes the application of MPC in the context of bridging practically unviable. MPC for CLSAG and Bulletproofs scales poorly, requires a large number of interactive rounds and significant computational resources, and any error in implementation can lead to loss of funds or compromise privacy.
The first wrapped privacy coin
In this context, the approach of the Zano project is indicative — a privacy-oriented blockchain with confidential assets at the protocol level. Instead of trying to bring all the complex cryptography of the privacy blockchain into the bridge zone, Zano has maintained a clearly defined 'entry point' for cross-chain interaction — asset management through a standard Schnorr signature. This means that all the privacy mechanisms continue to operate within the privacy blockchain itself, but when the asset exits its bounds, a familiar and well-supported signature model compatible with existing bridge infrastructure and EVM networks is used.
Such an architectural approach allows avoiding the key MPC problem in privacy coins. The bridge does not need to jointly form CLSAG signatures, work with range proofs, or participate in the generation of complex cryptographic proofs. Thus, ZANO holders receive both high privacy and access to the DeFi market without the need to first withdraw their funds into non-confidential blockchains and then wrap them through third-party bridges.
One example that uses this mechanism in Zano is the Bridgeless project. With its help, assets from EVM networks such as Solana or TON can be wrapped and transferred to the Zano privacy blockchain, where these assets acquire the same confidentiality qualities as native coins.
Bridge for the first confidential stablecoin
The same principle applies to the issuance of fUSD (Freedom Dollar) — a stablecoin created on the privacy blockchain Zano. fUSD is the first stablecoin originally designed to operate in a confidential environment rather than adapted to it after the fact. Transactions in fUSD are private, just like those of other assets circulating on the Zano blockchain. External observers cannot see balances, amounts, or assets of transactions, nor the connections between inputs and outputs. Unlike traditional centralized stablecoins (USDT, USDC), fUSD does not depend on external issuers, is not subject to censorship, and cannot be frozen or burned while it is within its home network (Zano).
fUSD maintains price stability through an over-collateralization mechanism: it is backed by ZANO, which is stored in a publicly verifiable reserve, and its price stabilization is achieved through algorithmic backing and market liquidity on decentralized markets. This allows users to use a dollar equivalent within the privacy blockchain without sacrificing its confidentiality properties and without having to resort to external systems that require identification or central control.
ZANO's approach to bridging privacy assets looks interesting, although the service itself remains new and requires careful attention from users. Undoubtedly, the demand for confidentiality in the crypto world continues to grow, which is evident from the sharp rise in the prices of privacy coins over the past year, and bridging for privacy coins will likely become a sought-after infrastructure tool. However, the challenge for such solutions remains the implementation of AML mechanisms without compromising privacy. I wish the teams working on such solutions success in finding a balance between complying with AML requirements and preserving the key properties of confidentiality without which privacy blockchains lose their meaning.
