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Guide

What is Wormhole and How Does It Work?

Ever since the inception of Bitcoin and the introduction of digital currencies by Satoshi Nakamoto, the industry has only grown in popularity and acceptance. Lots of investors these days prefer crypto investments over traditional investments. Due to the blockchain technology behind its creation, the crypto industry offers countless benefits for its investors and users alike. Moreover, since lots of companies accept crypto payments these days, people can actually use their crypto assets to buy everyday items.

Today, crypto has taken over the world, and new crypto projects are being launched every day. Some projects succeed in meeting the market demand and making room for themselves in this highly competitive market. On the other hand, some platforms and projects fade away because they fail to respond promptly to the pressure mounted on them by the whole market.

One of the biggest projects in recent times which has made a proper name in the crypto market is Wormhole. The unique interface of this blockchain is one of the main reasons why lots of investors are interested in it. The main purpose of this blockchain is to provide seamless crypto transfer services between different blockchains. It also acts as a perfect platform for developers to build upon by using DeFi features.

In this article, we will see what Wormhole actually is and how it works. So, let’s start with the definition.

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Introduction to Wormhole

Wormhole is a decentralized message transfer protocol designed which helps connect multiple blockchains. Wormhole can do much more than you think. Basically, it is a protocol that facilitates the transfer of digital currency between different blockchains seamlessly. It supports all of the popular blockchain protocols like ETH and Solana and allows their investors to effectively communicate with each other.

Blockchain technology has become viral thing quickly and has been successful in consolidating its place in the global financial market as well. Today, businesses around the globe are thinking about using blockchain to support their everyday operations transparently. Although the main area where blockchain is helpful in finance, it is showing its potential in other sectors like healthcare, supply chain, and banking as well.

Decentralization makes sure that everything is transparent and viewable to everyone. While there are lots of benefits of this technology, there are a few drawbacks as well.

First of all, whenever you have to move your crypto assets between different blockchains, you have to rely on centralized platforms to do that for you. This takes away most of your anonymity and adds hacking attempts to the mix as well.

Moreover, since there is no straightforward channel of communication between different blockchains, you have to make lots of effort in order to transfer your digital assets over to another blockchain.

Wormhole has been introduced to bridge the distance between different blockchains. With the help of this platform, you can easily transfer assets between different blockchains. The Wormhole Core layer is used to make all the features work. The whole process is done by initiating a contract on the first blockchain, which then facilitates the transfer of digital assets to the other blockchain in a seamless manner. The whole Wormhole ecosystem has 19 nodes. This ecosystem is successfully bridging the communication gap between different blockchains in a decentralized manner.

How Does Wormhole Work?

While there are lots of features provided by wormhole, its native token bridge remains the highlight feature by a huge margin. This token has the potential to facilitate transactions without any permissions within the Layer1 blockchain platforms.

Let’s see how the Wormhole Blockchain actually makes its features work.

The Wormhole ecosystem uses validator nodes. These nodes are always carefully picked by a decentralized system and are called guardians. The guardian norbs keep an eye on every transaction going on in the blockchain in order to make sure that everything goes well. One of the guardian nodes of the Wormhole is Everstake, which is one of the biggest staking platforms in the world.

Once a user initiates a transaction, guardian nodes lock the cryptocurrency to be transferred in a smart contract. After this, Wormhole mints the right amount of tokens that are to be deposited on the destination Blockchain.

On top of the Wormhole Core Layer, the V2 bridge version is built and is used by the Wormhole. However, it is not included in the system and is completely decentralized. The same system works as the main token bridge between Solana and Terra cryptocurrencies as well. The whole Wormhole Blockchain has over $1 billion Total Value Locked. This is how it helps bridge the gap between cryptocurrencies and NFTs.

Let’s see how this works.

  • User sends a message to the system.
  • The selected Guardian nodes check the transaction thoroughly.
  • Nodes reach the Quorum.
  • The transaction data is uploaded to the public ledger.
  • The transaction is completed by depositing the right amount of tokens on the destination blockchain.

Unique Features of Wormhole

Let’s take a look at a few unique features of the Wormhole.

Multiple-Blockchain Support

Wormhole maximizes its functionality by supporting multiple blockchains. The fact that you can do transactions across different blockchains without going through centralized channels helps users in exploring different platforms without relying on those channels.

As an example, if a user has some Ethereum tokens, they can quickly transfer their Ethereum through the Wormhole into another blockchain project to take advantage of the features that the project provides. This also allows investors to experiment with the features of Ethereum by transferring their tokens into ERC20 tokens. This system can also help investors who think that the Ethereum gas fees are very high. So, if you want to explore different decentralized finance projects without breaking your bank, using Wormhole is your best bet.

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Support for NFTs

NFTs have also become a big thing in the financial industry in recent years. Lots of investors showed their interest in nonfungible tokens, especially at the end of 2021. This saw a huge surge of investments from young investors and artists from around the globe. You can use Wormhole to move your NFT assets between different blockchains seamlessly. Wormhole is one of the only token bridges which supports NFTs as well.

Seamless Development

The Wormhole system also supports every app developed by using it. It uses developers to utilize the best features of different blockchains all at once. For example, it allows you to choose the best features from several different blockchains and combines them into your application to maximize the success rate and usability. Developers can use this platform to develop apps across different blockchains and create many other solutions as well.

Cross Chain Bridge

Just like every other industry, blockchain development is also fragmented. For example, big companies like Google and Microsoft offer cloud services to their users. Although these companies provide the same services, their user base differs, and they own different market shares. In Web2, projects have to choose one of these cloud providers depending on various business and other needs. Moreover, if a project needs features that are available in different cloud services, they might have to use both of them to maximize the useability and flow of their project.

Just like this, projects developed on crypto also conflict with each other in features and other legal methods. However, in Web3, the project is t hidden from the end user like in Web2. If this were the case on Web3, users using one platform won’t be able to communicate with the users on another platform if both of them were based on different infrastructures. Thankfully, this is not the case here, and projects built on different infrastructures can still communicate with each other. This way, developers are also allowed to use features from different platforms in their projects.

The same feature is being supported in Web3 with the help of cross-chain bridges. Any developer using these bridges can easily make better experiences available to their users, enjoy more liquidity and have larger communities interact with them.

Better Liquidity

One of the biggest benefits of the Wormhole is its ability to provide blockchain projects with better access to huge liquidity pools. Usually, every blockchain project only releases more tokens on the platform it is developed on. However, you can easily lock your assets on the cross bridge and move liquidity from one project to the other easily. You can then use wrapped assets on the blockchain of your choice.

For example, if you have Ethereum and you want to withdraw it, you can avoid the high gas fees by converting it into Solana (much less gas fees) and making the transaction. The blockchain whose assets are locked enjoys better usability, and the other one benefits from better liquidity.

Native cross-chain tokens are also very helpful in addition to the features mentioned above. Developers can also utilize those tokens to maximize the usability and efficiency of their projects.

Better Identity Verification

Just because developers are using multiple chains, they can easily access user data from other blockchains. For example, the ENS can be used by developers to get any type of identity-related information about any user. This way, you don’t have to provide your ID info every time you sign up with another blockchain network.

By sharing your identity across different apps, you get help in loans where banks can easily access the data related to your crypto holdings and other assets to provide you with loans. That way, you can easily make a cross-chain reputation.

Larger Community

Communities connected with every blockchain project are being combined on cross-chain Bridges like Wormhole. This way, as the individual projects mature, they can easily interact with one another and launch joint ventures without any problem. Making DAOs that are connected with one another is easily possible with the help of Wormhole.

These collaborative DAOs can be used for cross-chain voting. You can also select the blockchain from where you need the voting process to be done. This can help pave the way for a cross-chain treasury which can handle disputes and blacklist certain individuals from every blockchain at once.

Collective platforms can also help provide insurance and other services to their communities.

Benefits of Wormhole

There are lots of benefits Wormhole can provide decentralized finance users with. Let’s take a look at some of those benefits.

Improves Efficiency

With the help of cross-chain bridges like Wormhole, users can easily send and receive transactions in cryptocurrency without high transaction fees. This is more important for investors and the e-gaming industry, which usually relies on micro-transactions.

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Promotes Interoperability

The main problem of less interoperability between different blockchains has been solved with the help of Wormhole. Now, you can easily transfer your cryptocurrency from one blockchain to the other without leaving the benefits of the first blockchain behind.

Easy Scalability

Since Wormhole can easily handle large cross-blockchain transactions as well, it provides the investors with the potential for easy scalability. Users from one blockchain can enjoy the benefits of other blockchains as well without leaving their primary blockchain benefits behind. The liquidity of the original blockchain is also kept intact by Wormhole.

Cross-Chain Collateral

With the help of cross chain bridges like Wormhole, you can easily transfer your assets from a blockchain with lots of value but less decentralized features to another blockchain that has lots of decentralized applications and a large ecosystem.

Media Reports Regarding Wormhole

While there are lots of benefits of Wormhole, and the platform is known for its huge potential, it recently grabbed lots of attention from the international media for a $320 million hack. The hack focused on and exploited the bridge between Ethereum and Solana, and as a result of this attack, around 120,000 wrapped ETH was stolen from the bridge. This made the hack the biggest exploit in the history of the DeFi industry. Some of the funds were received by the hacker in the form of ETH, and some were converted to Solana and USDC.

A team of experts contacted the hacker on their ETH address and offered to pay $10 million on the condi that the hacker returned the funds. Unfortunately, the hacker turned this offer down.

Many experts labeled this hack as a red flag and suggest that it tells us a lot about the immaturity of the DeFi market, and no more development is still needed to make every decentralized finance trustable. Until then, many of the DeFi platforms should be labeled incapable of storing huge sums of value.

In the case of Wormhole, the stolen funds were returned to the platform by its backers. Jump crypto deposited 120l wrapped Ethereum back into the smart contracts, which were exploited. This was done to prove the importance of Wormhole as the pioneer in the multi-chain industry.

After this hack, Wormhole launched a bounty of $10 million for bug hunting. This project was started to provide the users on their platform with maximum security. There are lots of other security measures taken by Wormhole to prevent such exploits in the future.

This whole story tells us more about the vulnerability of even the most secure technology and how hackers are finding new bugs and errors in the DeFi system to steal millions of dollars. In a way, this helped open the eyes of every developer working on DeFi projects like Wormhole. Now, developers are focusing on making their DeFi platforms hack-proof as their top priority. All of us should also support this effort by investing more in such platforms.

Takeaway

The blockchain revolution is here, and it is all set to change the global financial industry as we know it today. Moreover, various blockchain projects focus on other sectors like banking, supply chain, and many more. However, since every blockchain platform has its own distinct features, developers have to choose one platform to build on since they can only choose to benefit from one.

However, this problem is solved by Cross Chain Bridges like Wormhole on Web3. This particular blockchain allows crypto and NFTs investors to transfer their assets across different blockchains without giving up on the benefits provided by their primary Blockchain. These bridges are most beneficial for developers who can easily incorporate their favorite features from different blockchains with the help of Wormhole without leaving their primary platform. You can store value in a popular blockchain like Bitcoin and enjoy the features provided by another blockchain like Ethereum at the same time, all thanks to Wormhole. Moreover, Wormhole is one of the few cross chain bridges working today which provides support for NFT transfers as well.

However, the massive $320 million theft from the Wormhole blockchain proves that more work is needed to be done on DeFi platforms to make them more secure. These security updates will help make those platforms good enough to store large sums of value from investors.


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Hassan Mehmood (Saudi Arabia)

Hassan is currently working as a news reporter for Tokenhell. He is a professional content writer with 2 years of experience. He has a degree in journalism.

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