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 their functionalities which are suitable for different objectives, it is 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 is 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 is impossible to run the same exchange or decentralized application on different blockchains unless it is 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 blog post, we will take a closer look at what blockchain bridges are and what role they play in the decentralized finance (DeFi) sector. We will talk about the best cross-chain bridges, and examine blockchain compatibilities 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 blockchain to another. In fact, the bridge is a set of cryptographic tools: oracles, smart contracts, nodes that are 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 in the blockchain, let’s look at the following example. Each country has its own legal tender; that is, US dollars cannot be used in Ukraine, and UA hryvnias cannot 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 is no interoperability between these assets.
In the traditional financial sector, the problem of incompatibility is solved by automatic currency conversion. In the blockchain ecosystem – by cross-chain bridges. They allow users to:
- Deploy digital assets on one blockchain with dApps on another;
- Conduct fast and low-cost token transactions on non-scalable blockchains;
- 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 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, the demand for DeFi cross-chain bridges is currently at a high level. This is because dApps often only offer just 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. Here are some more benefits of cross-chain technology in the DeFi ecosystem:
Flexibility – bridges allow a user to transfer assets and valuable data from one blockchain to another. Users get access to the benefits of various blockchains, and they are not limited to the capabilities of one particular chain.
Interoperability – in addition to the interaction between individual blockchains, bridges also provide a connection between the parent chain (L1) and the child chain (L2). This allows developers to implement and deploy DApps on DeFi platforms.
Scalability – due to the bridges providing a connection between the parent and child chain, they can spread the transaction load when the main chain is overloaded.
Efficiency – users can transfer their assets from the 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.
Here are some popular cross-chain bridges:
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 the ability to integrate the bridge or with a separate application for asset exchange in the Avalanche-Ethereum networks.
Wormhole is a cross-chain bridge between the Ethereum and Solana blockchains, employing a freeze and reissue mechanism. There are two steps to sending a token from Ethereum to Solana:
- The token in Ethereum is frozen in a special account.
- Solana issues a copy of this token.
For the user, this process looks like a simple transfer: the token disappears from the Ethereum wallet and appears in the Solana wallet.
Solana’s token copy is indistinguishable from the original in Ethereum. The token has the same value and can “return” to the original blockchain at any time. For a reverse transfer, the cross-chain bridge performs two actions:
- The copy of the token in Solana is burnt.
- The original token is unfrozen on Ethereum.
In addition to the transfer of tokens and assets, Wormhole is also an NFT cross-chain bridge that allows you to move digital art between blockchains.
The Rainbow Bridge is the official bridge for transferring tokens between the Ethereum, NEAR, and Aurora blockchains. The bridge enables users to leverage NEAR’s fast transaction speed and low fees. Currently, assets can be transfered between NEAR and Ethereum blockchains and users can seamlessly bridge any ERC-20 tokens and stablecoins such as USDT, TUSD, DAI, wrapped assets such as WBTC, 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.
In addition to cross-chain bridges for transferring cryptocurrencies from one blockchain to another, there are also cross-chain swaps. Cross-chain swaps, or atomic swaps, are relatively new technology — the first transaction took place in 2017 — and developers are still working on its development and improvement.
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 atomic swap mechanism is based on Hash-Time Locked Contract (HTLC). The security of the participants in the transaction is ensured by a smart contract. This contract uses a complex mathematical encryption mechanism called a hash function and introduces a time limit. It guarantees that all participants in the transaction will receive their assets or the transaction will not occur at all. In addition, funds are returned to users if the transaction has been only partially completed.
Of the main advantages of cross-chain swaps, there is a complete absence of intermediaries and, accordingly, transaction fees. Also, users or traders 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 (DeFi). A report on Dune Analytics lays out that the total value locked (TVL) in cross-chain bridges is currently $16.49 billion. Bridges allow users to seamlessly transfer assets between blockchains, increasing liquidity and the ability to use tokens for DeFi-related activities. Technologies are in demand on the market and more new projects are appearing which indicates great prospects. Healthy competition and decentralization between projects will ensure the beneficial development of cross-chains, and make sure digital asset use remains flexible.
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