Lack of interoperability has become a major problem with the growing number of DeFi networks. How do bridges allow you to take the best from different platforms?
In the world of cryptocurrencies, there are many different networks based on blockchain technology, such as Ethereum, Binance Smart Chain, Algorand, Avalanche, Cosmos, Polkadot, Tezos, Solana and others. Each blockchain has its own features and functions. Most of them work according to different algorithms and rules for reaching consensus. Bridges are used to exchange data between different blockchains.
It is a connection between blockchains that allows you to transfer any type of data, including tokens and smart contracts, from one chain to another. Bridges connect different ecosystems and make the entire DeFi infrastructure more convenient.
Benefits of Bridges in DeFi
Bridges are useful not only for users, but also for the entire ecosystem of cryptocurrencies and decentralized finance, partly solving the problem of incompatibility and improving the interaction between networks. They have several main advantages:
- Flexibility of the entire system – with the help of bridges, participants can transfer assets and valuable data from one blockchain to another and take advantage of various technologies without limiting themselves to the capabilities of one network;
- Bridges provide interaction between parent and child networks, not just different blockchains. Thus, developers can implement decentralized applications simultaneously on several DeFi platforms, which increases the speed of project development;
- Bridges greatly improve network scalability by distributing traffic across multiple blockchains, which is advantageous for large transaction volumes, especially when the main chain is congested;
- Efficiency – With bridges, users can move their assets from a non-scalable blockchain to a high-performance blockchain and enjoy low transaction fees.
What are bridges and how do they work?
To move coins from one blockchain to another, cross (cross-chain) bridges are used, on which atomic (atomic) or cross-chain swaps are performed. Such bridges are either centralized or decentralized.
Centralized bridges
A bridge with a centralized control system is based on trust in a third party, such as a cryptocurrency exchange. For example, on Binance, you can exchange and transfer your Ethereum ERC20 on the Solana network, Binance Smart Chain and others.
These bridges are called “wrapped bridges” that issue pegged tokens that are matched one-to-one on any blockchain. The exchange blocks your coins and creates equivalents on another network. When it is necessary to return the assets back to the first network, new tokens will be burned and the old ones will be unlocked.
The most popular use case for such a bridge is to transfer bitcoins to the Ethereum blockchain in the form of Wrapped Bitcoin (WBTC).
Centralized bridges require KYC and high transaction fees.
Decentralized bridges
Decentralized bridges provide an exchange without the involvement of an intermediary or escrow of tokens. They do this using smart contracts, i.e. programs that connect two different networks and automatically perform a token exchange when certain conditions are met.
Most decentralized bridges work in a similar way to centralized ones: in fact, the tokens are not moved or sent anywhere, and the smart contract processes the transfer in two stages. The bridge blocks assets on the original blockchain and then creates an equivalent number of assets on the second blockchain.
It will be possible to get tokens back in the original network only after burning the tokens in the second blockchain. This is done to prevent the use of assets in both networks.
The total amount of circulating tokens remains the same, but is shared between both blockchains, and the value of the asset will be the same in any network, since it is tied to the value of the original tokens.
In a decentralized system, users do not need to register and there is no user data collection (KYC).
side chain bridge
In addition to cross-chain bridges, which connect two completely different networks, there is a so-called side chain bridge.
Such a bridge connects the main network with the child. The need for a bridge exists because, as a rule, parent and child networks operate according to different rules and algorithms.
The bridge operates using a smart contract programmed to request proof that the necessary actions on the network have originally taken place and the terms of the contract have been fulfilled. In this case, the program can block and unblock assets in both networks.
Using such a bridge, you can move any digital assets from one network to another without any third party. It links the blockchains and protocols of the first and second levels so that token holders can interact with dApps within the entire ecosystem.
Blockchain bridges can be used as standalone platforms, or with popular cryptocurrency wallets such as MetaMask or Trust Wallet. When transferring tokens from one network to another, wallets themselves use bridges, and the user may not even know about it. Application developers have made sure that the end user does not need to delve into complex details.
