Interoperability has been the most demanded feature of blockchain. The boom of Layer 1 protocols improved the structure of individual blockchains and even scalability but did not touch on interoperability. With the drastic rise in the number of distinct blockchains and their applications, people want to network across the chains even more. This is where Layer 2 solutions like blockchain bridges come in. They have been solely engineered to enable connectivity across different blockchains. In this article, let’s talk about bridges and how they work to connect different blockchains for interoperability.
- What is a Blockchain Bridge?
- Benefits of Blockchain Bridge
- How Do Bridges Help In Transferring Crypto?
- Use Cases Of Blockchain Bridges
- Some Commonly Used Blockchain Bridges
What are Blockchain Bridges?
A blockchain bridge is a protocol that enables interactions between two economically and technologically separate blockchains by connecting them. Anyone who owns Ethereum but wants to perform a DeFi action on bitcoins’ blockchain can do it without selling the ETH. Bridges are a very important invention for interoperability. Many blockchains contain distinct protocols designed specifically for each using Layer 1 solutions. We are moving on to a world with more web3 and metaverse applications, of which blockchain is one of the foundational elements. Thus, enabling easy data and asset exchange between blockchains is essential for optimum networking.
Even though the two systems have different purposes, this concept is similar to Layer 2 solutions. Layer 2 is built on top of existing blockchains to improve speed, but it does not completely solve the interoperability issue. Cross-chain bridges are also independent entities that don’t belong to any blockchain. A blockchain bridge is a neutral zone so users can easily transfer data and assets across chains. Access to multiple blockchains through the same network enhances the crypto experience for most of us.
Benefits of Blockchain Bridge
A blockchain bridge is necessary to port assets between blockchains. But why is it beneficial to transfer coins between two blockchains?
The answer could be different for different people. But commonly, every blockchain has its own limitations, and people might want to switch to another chain to carry out a transaction and would want to switch back once it’s done.
Sometimes, the blockchain to which a holder wants to transfer assets might be faster and cheaper than the native one. For instance, Ethereum has a high transaction fee and slow processing rate compared to the layer two networks. Naturally, a user might want to port the coins to a faster blockchain like Arbitrum or Polygon.
Others might use a bridge to utilize the markets that only exist in another blockchain. The DeFi protocol Orca exists only on Solana, supporting a wrapped version of ETH through bridges. Many platforms have integrated blockchain bridge which makes the transferring process even easier. Simply put, as the number of blockchains and protocols increases, so does the demand to move across the chains.
Nonetheless, all blockchains are developed as isolated environments and have varying rules and protocols that may not align with what a user wants for a particular need. Native blockchains that are strong on layer 1 consensus protocols do not allow native communication or moving tokens between other blockchains. The blockchain bridge is a solution to this problem.
In short, the blockchain bridge is beneficial for:
- Cross-chain transfer of assets
- Decentralized apps to access various blockchains to enhance their capabilities
- Users to access more platforms and chains
- Developers to collaborate and build new blockchain ecosystems
How Do Bridges Help In Transferring Crypto?
The blockchain bridge can perform several tasks like converting a smart contract and sending data. But the most common use of the bridges is to transfer coins. When a user has bitcoin and wants to transfer it with Ethereum, the blockchain bridge will hold your coin and create equivalent ETH. None of the cryptos involved moves anywhere because the BTC you want is locked in a smart contract while you get your hands on an equal amount of ETH.
The leftover ETH will be burned for converting back to BTC, and an equal amount of BTC will return to your wallet.
Use Cases of Blockchain Bridges
Low Transaction Fee
In a situation where a person who holds ETH on Ethereum Mainnent wants to explore other decentralized apps. They can do it by bridging ETH from the Mainnent to a layer 2 Ethereum rollup using bridges for low transaction fees. Thus, the blockchain bridge helps in finding ways to transact with lower fees.
Dapps On Different Blockchains
If the DeFi lending interest rate in one Dapp is higher, the user can easily transfer between other apps with the same crypto. Networking and interoperability are the core functions of a blockchain bridge; utilizing multiple Dapps according to the convenience can be done easily in less time.
The lack of interoperability is a major reason for the friction in adopting crypto for payments in mainstream financial markets. There are plenty of stores that accept payments in Bitcoin but do not support other cryptocurrencies. With a blockchain bridge, people can transfer and convert cryptocurrencies back and forth instantly for payments.
Owning Native Crypto
If a person who owns ETH wants to own BTC, one way they can do it is by buying WBTC, i.e., wrapped Bitcoin. However, WBTC will only work on Ethereum Mainnet as it is still an ERC-20 token which means it’s not the original asset on the Bitcoin blockchain but rather a version of Bitcoin on Ethereum. A bridge proves useful to own a BTC native to Bitcoin’s blockchain.
Scalability For DeFi Applications
A blockchain bridge helps relieves the pressure of a single blockchain when the transaction traffic is high. Via bridges, tokens can be moved to a sidechain.
For instance, many DeFi applications are built on the BSC blockchain. In the BSC chain, even the ERC-20 tokens of the Ethereum blockchain can be transacted using the PolyBridge by Poly-Network. PolyBridg supports Zilliqa, Binance Smart Chain, Switcheo, Huobi ECO Bitcoin, Ethereum, Neo, Ontology, and Elrond Chain.
Bridges have been helping the growth of decentralized exchanges and DeFi apps a lot by providing the advantage of scalability.
Discovering Smaller Blockchains
Blockchains that are not yet in the limelight can be found through bridges. The bridges make it quick and easy to find new blockchains with the features we are looking for. We tend to overlook many smaller blockchains that may not even appear on google searches. With bridges, Information and tokens can move less known blockchains, which may also cost less. Smaller networks can also register with blockchains to be found more by users.
Types of Blockchain Bridges
Bridges that connect blockchains have different types of architecture and designs. They generally fall into two categories: trusted and trustless bridges.
Trusted or Custodial Blockchain Bridges
- Trusted bridges are centralized as they depend on certain entities for their operations and systems.
- They have external verifiers in the system that are further away from the security of the underlying blockchain.
- Bridge operators have control over the assets once they are on the bridge.
For example, all wrapped BTC known as WBTC is held in custody by the blockchain bridge, BitGo, making it a centralized, trusted, or custodial bridge.
Trustless or Non-custodial Blockchain Bridges
- They operate using algorithms and smart contracts.
- The bridge’s security is as strong as the underlying blockchain. Thus, they are termed trustless.
- In trustless bridges, users remain in control of their assets through smart contracts.
The Wormhole bridge holds assets based on the protocols, meaning it is decentralized, trustless, or non-custodial.
One-Way Blockchain Bridges
One-way bridges allow the transfer of assets unidirectionally or one-way. You can only transfer to the target blockchain and not go back all the way around. For example, the wrapped Bitcoin lets you send BTC to Ethereum blockchain and converts BTC to ERC-20 stablecoin. But, you cannot send ETH to the Bitcoin blockchain.
Multichain Blockchain Bridges
Bridges like Wormhole and Multichain carry out bidirectional or two-way transfers. This means assets can be converted both in the target and back to the native blockchain.
Some Commonly Used Blockchain Bridges
In March 2022, there was $21.8 billion worth of crypto locked in bridges, according to DeFi Llama.
- Wrapped Bitcoin: It is the largest blockchain bridge and accounts for almost half of the market, with $10.2 billion in total value locked.
- Multichain: It is a cross-chain interface with an average transaction speed of 100 secs with about $7 billion in TVL.
- Avalanche Bridge: It has about $6 billion in TVL and is the largest Ethereum blockchain.
- Polygon: ERC tokens and non-fungible tokens (NFTs) to the Polygon sidechain through smart contracts. It has $5 billion.
- Fantom Anyswap Bridge: It works on over 95% of the chains and has about $4.2 billion TVL.
The world wide web is revolutionary as it carries the power of networking. And similarly, in blockchain ecosystems, interoperability has been dreamed of since the beginning. The blockchain bridge is critical for encouraging mass adoption with interoperability. The bridges have enabled innovations and essential services by exchanging assets between blockchains.
As we move towards web3, scalability and interoperability will be the key focus for developers. Just as the number of bridges and transactions through them are growing, so are the security solutions to address risks. The combined properties of all these give hope to an interconnected and flexible future for blockchains and blockchain-related technologies.
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