Before the advent of the Ethereum blockchain, smart contracts, and DeFi, there was no need for users to transfer assets from one blockchain to another. However, given the variety of networks and the functionalities suited to different objectives, it's now considered restrictive to use only one blockchain — there are hundreds of layer 1 and layer 2 blockchains, and each one is unique, operating according to its own algorithms and principles.

There's a need to use different cryptocurrencies on separate blockchains, but it's currently impossible to directly transfer a token from one network to another. Also, due to incompatibility, it's impossible to run the same exchange or decentralized application on different blockchains unless it's compatible with the Ethereum Virtual Machine (EVM). So how can users easily exchange assets in this case? This is where cross-chain bridges come to the rescue.

In this article, we'll take a closer look at what blockchain bridges are and what role they play in the decentralized finance (DeFi) sector, cover the best cross-chain bridges, and examine blockchain compatibility outside of bridges by introducing cross-chain swaps.

What Is a Cross-Chain Bridge?

Blockchain bridges allow you to create a connection between blockchains and transfer cryptocurrency from one to another. A bridge is essentially a set of cryptographic tools — oracles, smart contracts, and nodes — used for asset transfer, tracking the state of the system, generating changes within blockchains, and processing incoming transactions from other systems.

To clearly show what role cross-chain bridges play, consider this example: each country has its own legal tender, so US dollars can't be used in Ukraine, and Ukrainian hryvnias can't be used in America. Currency systems are independent of each other in the same way that different blockchain ecosystems are independent — it's impossible to directly transfer assets from the Bitcoin blockchain to the Ethereum blockchain, as there's no interoperability between them.

In traditional finance, the problem of incompatibility is solved by automatic currency conversion. In the blockchain ecosystem, it's solved by cross-chain bridges, which allow users to deploy digital assets on one blockchain with dApps on another, conduct fast and low-cost token transactions on non-scalable blockchains, and implement and run dApps across multiple platforms.

Why Are Cross-Chain Bridges Important for Decentralized Finance?

The continued growth of blockchain technology will largely depend on how different blockchain networks can interact and integrate. For this reason, interoperability between blockchains is a concept by which one can finally get rid of the third parties that still dominate centralized systems. The ability of various decentralized applications to communicate with each other without intermediaries should be of great importance for the creation of a fully decentralized financial crypto sector.

Due to the explosive growth of decentralized finance since the beginning of 2020, demand for DeFi cross-chain bridges is currently high — dApps often only offer one or two chains for connection, meaning interacting with them brings the need to transfer tokens or assets.

Bridges bring effective cross-chain communication while eliminating the need for third parties. They offer flexibility, allowing a user to transfer assets and valuable data from one blockchain to another so they're not limited to the capabilities of one particular chain. They provide interoperability, connecting not just individual blockchains but also the parent chain (L1) and child chain (L2), which allows developers to implement and deploy dApps on DeFi platforms. Because bridges connect the parent and child chain, they also offer scalability, spreading the transaction load when the main chain is overloaded. And they offer efficiency — users can transfer their assets from a non-scalable blockchain and enjoy the benefits of low gas fees while taking advantage of Ethereum smart contracts.

Three Popular Bridges

Support for migrating smart contracts, tokens, and NFTs from the Ethereum main chain to different blockchains is one of the most common features of cross-chain bridges. Different networks also have varied fees, which can be volatile and change quickly.

Avalanche Bridge

The Avalanche Bridge is a two-way token bridge using ChainBridge that enables seamless transfer of ERC-20 and ERC-721 tokens between Avalanche (via the smart contract subnet, C-Chain) and Ethereum. The Avalanche Network cross-chain transaction takes just a few seconds.

If you want to use ETH in dApps on Avalanche, you can lock WETH (Wrapped ETH) in the ChainBridge contract, and in exchange, an equivalent amount of tokens will be generated on the Avalanche network. The bridge can be used either by interacting with applications that have integrated it, or with a separate application for asset exchange between the Avalanche and Ethereum networks.

Solana Wormhole

Wormhole is a cross-chain bridge between the Ethereum and Solana blockchains, employing a freeze-and-reissue mechanism. Sending a token from Ethereum to Solana happens in two steps: the token is frozen in a special account on Ethereum, and Solana issues a copy of it. For the user, this looks like a simple transfer — the token disappears from the Ethereum wallet and appears in the Solana wallet.

Solana's copy of the token is indistinguishable from the original on Ethereum, has the same value, and can return to the original blockchain at any time. For a reverse transfer, the bridge burns the copy of the token on Solana and unfreezes the original on Ethereum. In addition to transferring tokens and assets, Wormhole is also an NFT cross-chain bridge that lets you move digital art between blockchains.

Rainbow Bridge

The Rainbow Bridge is the official bridge for transferring tokens between the Ethereum, NEAR, and Aurora blockchains. It enables users to leverage NEAR's fast transaction speed and low fees. Assets can currently be transferred between NEAR and Ethereum, and users can seamlessly bridge any ERC-20 tokens and stablecoins such as USDT, TUSD, and DAI, wrapped assets such as WBTC and WETH, DEX tokens such as UNI and 1INCH, and lending tokens like AAVE and COMP. Rainbow Bridge supports MetaMask for Ethereum and Aurora, and the official NEAR Wallet for NEAR.

Beyond Bridges

In addition to cross-chain bridges for transferring cryptocurrencies from one blockchain to another, there are also cross-chain swaps, or atomic swaps — a relatively new technology, with the first transaction taking place in 2017, that developers are still working on developing and improving.

Atomic swaps enable sellers and buyers to make transactions for the purchase and sale of cryptocurrencies directly, without the participation of centralized or decentralized cryptocurrency exchanges. The mechanism is based on a Hash-Time Locked Contract (HTLC) — a smart contract that uses a complex mathematical encryption mechanism called a hash function and introduces a time limit, guaranteeing that all participants in the transaction will receive their assets or the transaction won't occur at all. Funds are returned to users if a transaction is only partially completed.

Among the main advantages of cross-chain swaps is the complete absence of intermediaries and, accordingly, transaction fees. Users or traders also don't need to download all the blockchains of their preferred coins, or wait for blockchain validators to complete transactions.

Cross-Chain Bridges Boosting DeFi Growth

The rise of blockchain bridges is largely due to the growing adoption of decentralized finance. A report on Dune Analytics found that the total value locked (TVL) in cross-chain bridges stood at $16.49 billion. Bridges allow users to seamlessly transfer assets between blockchains, increasing liquidity and the ability to use tokens for DeFi-related activities. The technology is in demand, and more new projects keep appearing, indicating great prospects — healthy competition and decentralization between projects will ensure the beneficial development of cross-chains, and keep digital asset use flexible.

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