The creation of cryptocurrencies and decentralised economies facilitated the innovation of various tools and programs that scale the usability of these technologies and expand their use cases.
Crypto money transfers rely on the blockchain as the backbone of decentralisation and peer-to-peer transactions, keeping track of activities on the shared network.
Bitcoin blockchain is the first decentralised ledger, logging the BTC transactions. However, the massive growth in DeFi and Web 3.0 saw the foundation of multiple blockchains and networks. These platforms communicate with each other using a crypto bridging tool.
In a nutshell, crypto bridges serve as a common ground between different blockchain ecosystems. Let’s discuss in detail what is bridging in crypto and why it is important.
Understanding Crypto Bridge
The decentralised finance consists of blockchain ecosystems, networks, applications, exchange platforms and more. These tools interact together to serve different purposes, such as money transfer, purchase of goods and services, development of programs, operating software, etc.
However, each blockchain is written in a different coding language and follows a distinct approach. For example, Ethereum utilises an advanced consensus protocol that powers the creation of multiple coins, tokens, applications, games and platforms.
On the other hand, the Bitcoin blockchain is mainly used to store and initiate BTC transactions in a safe cloud environment, ensured by sophisticated cryptography and public key infrastructure that make transfers secure.
These blockchains need to communicate together and with other networks to facilitate digital coin transfers, dApps interoperability and transaction validation. However, since they are created differently, they may face challenges in understanding each other.
Here’s where crypto bridges shine, serving as an intermediary between distinct chains and providing a common ground that connects the differences to serve the end user.
Thus, a cross-chain bridge expands the utility of blockchains and contributes to the overall efficiency of the decentralised economy.
How Do Blockchain Bridges Work?
Crypto bridges facilitate the exchange between different coins and tokens registered on different networks. For example, you want to invest in some crypto game on the Ethereum blockchain, but you own Bitcoin only.
Classically, you would need to cash out your BTC holdings to fiat money and then buy ETH with your earned fiat money. However, crypto bridges make this process simpler by simply exchanging your BTC for the equivalent of Bitcoin on the ETH network.
By doing so, bridges lock up your holdings of BTC and exchange them with Ethereum’s BTC to maintain the balance of Bitcoin supply.
Types of Crypto Bridges
Bridges in the decentralised economy serve similar purposes in different ways. Depending on the type of operations and cryptocurrencies involved, you may encounter the following tools.
Centralised Bridges
Centralised bridges are a common way to exchange virtual coins and tokens, such as crypto exchanges, allowing you to swap cryptos in simple steps.
These entities operate through different crypto pools, locking up your exchanged coins and giving you equivalent ones in the network you are interacting with. For example, they lock up your BTC and give you ETH’s BTC. This way, the spent BTC are kept out of the circulation.
Centralised bridges require high trust, and you must only deal with highly reliable platforms where you are giving away your crypto holdings in exchange for other coins without actually buying a product.
Decentralised Bridges
Decentralised bridges require less trust (also called trustless bridges) because you do not deal with a particular entity. Instead, you deal with a system of smart contracts and advanced protocols that execute operations once certain criteria are met.
Let’s say you are spending your BTCs in an Ethereum-based dApp. Decentralised bridges lock up your money and immediately release ETH’s Bitcoins in your wallet in a seamless transaction that requires less interaction and, eventually, less trust.
However, the downside here is that these networks can be exposed to security threats and crypto hacks that target transactions and redirect them in their direction, drying out wallets from millions of dollars.
Hybrid Bridges
Hybrid bridges incorporate features of centralised and decentralised bridges. For example, a multi-chain bridge may conduct transactions using the centralised method but use smart contracts to validate and broadcast the operation on the blockchain.
Federated Bridges
Federated brides are a group of trusted nodes that validate transactions between different blockchains. Each validating node is responsible for a specific network, processing operations on their designated chain.
These entities are selected based on various criteria and are usually trusted among crypto communities, facilitating smooth transactions between different chains.
Layer 2 Bridges
Layer 2 is a type of network that is created on the mainnet to offload some blockchain transactions, facilitating faster transactions and processing. These bridges aid other chains’ layer 2 networks to support the interoperability and scalability of the blockchain.
Liquidity Bridges
These solutions connect crypto holders to various virtual currency pools to exchange coins and tokens through liquidity providers rather than a centralised or decentralised bridge. Therefore, they require less trust and provide efficient liquidity and swap solutions.
Interoperability Bridges
Interoperability bridges support the exchange of digital assets and creations across different chains. These cross-chain bridges initiated operations for dApp creation or management, allowing platforms and applications to operate on more than one blockchain.
Crypto Exchanges vs Bridges
Exchanges and bridges may look similar since both facilitate the exchange of cryptocurrencies and digital assets between platforms. However, they follow a different approach.
Assume that you have Bitcoins but want to participate in an Ethereum-based staking pool because it brings some considerable APY%. You can join this opportunity in two ways: through an exchange or a crypto bridge.
With an exchange: You sell your BTC for fiat money, then purchase the desired ETH coins. Alternatively, you can exchange your Bitcoins for Ethereum and send your ETH coins to a compatible wallet.
With a bridge: You can directly join the staking campaign because the bridge will swap your original coins with Ethereum-specific (Wrapped Ethereum, WETH) to be compatible with the network.
What’s the difference between these two operations? Let’s discuss this from the blockchain trilemma perspective.
- Scalability: Using a bridge involves fewer intermediaries, making the transaction cheaper and much faster than the multiple-step approach of the exchange.
- Security: Conducting operations on an exchange requires high trust because operations are conducted on a server, which can either be compromised or be associated with coin value volatility due to the prolonged process.
- Decentralisation: Bridge transactions are more compatible with the essence of DeFi, allowing users to preserve their identity and utilise decentralised ecosystems to transfer assets or coins.
The Importance of Crypto Bridges
Bridges in cryptocurrencies are key to exploring more use cases and expanding the utility of dApps and DeFi platforms across multiple blockchain networks. Here’s what makes bridges important.
Crypto Transfers
Bridges are highly valuable in transferring crypto coins and tokens of different blockchains. For example, if you want to exchange your Ethereum coins for Binance’s BNB, bridging will help you deposit your coins and receive equivalent ETHs in the Binance Smart Chain.
This utility has great use when it comes to swapping or buying cryptocurrencies without going through multiple transactions and paying different fees. Moreover, it is faster since it is executed using a smart contract rather than a centralised platform or an off/on-ramp exchange.
Facilitating dApps
Decentralised applications are thriving elements in the crypto ecosystem, where creators develop games, tools, assets and other utilities and make them available for digital communities.
However, a particular dApp can be built over a specific blockchain. Therefore, bridges enable investing, spending and interacting with the application using different chains, coins and tokens.
Crypto Liquidity
Besides connecting users to liquidity bridges to exchange their currencies, crypto bridges help platforms scale their offerings and expand their reach, allowing users to buy and sell between different cryptocurrencies.
Therefore, it increases the number of transactions and available coins in the market.
Burning Cryptos
Bridges use smart contracts and follow a sophisticated algorithm to keep the supply of coins and tokens in equilibrium.
Thus, when you bridge between different currencies, the deposited crypto is locked up or burnt, and new bridge tokens are created to maintain the circulation level and avoid volatility fluctuations.
Validation Process
Layer 2 and interoperability bridges are used to speed up the transaction and validation process by offloading the blockchain mainnet from the massive number of ongoing operations. This way, crypto transfers and transactions are processed and finalised much faster and cheaper.
Asset Reversal
Crypto bridge platforms support reversed operations. Thus, if you want to swap back to your original cryptocurrency, these cross-chains will give you back the coins you initially deposited.
In exchange, they burn or lock up the newly created blockchain-specific tokens in special contracts and keep them off circulation.
The Process of Bridging in Cryptocurrencies
Interacting with crypto bridges is quite seamless, and in most cases, users cannot tell that they are using a crypto bridge because this term refers to a communication tool between two different blockchain networks. However, here’s how the process goes.
- A user sends coins minted on blockchain A but not compatible with blockchain B.
- The smart contracts of blockchain A process the operation and connect the bridges by locking up the deposited assets.
- Bridge A communicates the transaction details regarding the currency and amount with Bridge B.
- Bridge B initiates new cryptos equivalent to the deposited ones in the native coins on blockchain B.
Note that bridged transactions operate in both ways. Thus, if a trader wants to interact back using the new - wrapped - coins, a backward process starts by locking up the new coins and releasing the original ones.
Choosing The Right Crypto Bridge
There are several DeFi platforms and cross-chains that serve similar purposes, connecting different blockchain networks together. However, dealing with the best crypto bridges ensures the safety of your funds and identity. Here’s how you can spot a reliable DeFi bridge.
- Ease of Use: Centralised platforms are usually easier to get around because they are straightforward and promote transparency and user-friendliness as they serve a bigger user base.
- Reliability: Finding a trustworthy and reliable platform is crucial to ensure the safety of your funds and the speed of transactions. This is especially necessary since crypto transactions are immutable and have a history of hacks and breaches.
- Support: Check out the supported platforms, dApps and currencies and ensure they offer services that cover your needs, whether you want to participate in staking pools or simply exchange two cryptocurrencies.
- Fees: Bridges and swap platforms imply various fees, which are highly dependent on demand, currency and platform policies. Therefore, check out the pricing structure and ensure there are no hidden fees that may diminish the value of your digital assets.
Security Challenges of Crypto Bridges
Cybersecurity is a hot topic when it comes to cryptocurrencies and decentralised platforms. Therefore, it is important to consider the security challenges associated with DeFi platforms and bridges.
Swapping currencies with decentralised bridges is highly risky because they entail the anonymous interaction between two users, and if one party aims not to act in good faith, it means that you may deposit your funds without getting anything in return.
Moreover, be aware of crypto scam programs that feed you unrealistic expectations about a certain project or dApp, luring you to use a certain bridge before pulling the rug and vanishing with your assets.
Conclusion
Crypto bridges are decentralised tools that initiate the interaction between two chains to facilitate crypto transactions, swaps, dApps scalability and more.
Several platforms follow different approaches in how they build a blockchain bridge, whether to supply liquidity, support interoperability or speed up the validation process on multiple chains. Therefore, users interact with different bridges depending on their needs.
Bridges differ from crypto exchanges in that they are faster, cheaper, and more reliable. However, as a decentralised tool, bridging tools come with security risks, entailing a careful review before selecting the right one.
