What are they and how do they work?
A significant obstacle to blockchain technology is the need for more communication between applications and platforms. Developers are limited to building on one platform, leading to excessive transaction fees and network congestion. Fortunately, blockchain bridges are the solution to this problem.
These bridges enable token transfers across networks, such as for digital contracts, data transfers, and other commands and notifications between two separate blockchains. To learn more about blockchain bridging, click here.
What is a Blockchain Bridge?
A blockchain bridge is a connection that allows the transfer of tokens and/or data from one blockchain to another, regardless of their protocols, rules and governance models. Blockchain bridges enable interoperability and communication between different blockchain ecosystems.
Blockchain bridges can be either trust-based or trustless, depending on whether or not they rely on a central entity or federation to verify and confirm transactions. Blockchain bridges can offer benefits such as increased liquidity, scalability and innovation for blockchain users
A practical example is when a user wants to shop Bitcoin (BTC) for Ethereum (ETH). Currently, BTC cannot be sent directly from one user to another on the Ethereum blockchain. A bridge will allow this user to buy ETH or exchange some BTC for ETH instead. Compared to its fiat/credit card counterpart, this added complexity is a hindrance, and a bridge helps solve it completely.
How do Blockchain Bridges work?
Blockchain bridges allow communication across different networks such as Bitcoin and Ethereum, as well as between a parent blockchain and a side chain, which either operates under different consensus rules or inherits security from the parent blockchain.
This interoperability includes the transfer of tokens, data and even smart contract instructions between independent platforms, allowing users to:
- Distribute digital assets hosted on one blockchain to dapps on another
- Conduct fast, low-cost transactions with tokens on otherwise less scalable chains
- Run dapps across more than one platform
While some blockchain bridges remain decentralized, to preserve the security and transparency of DeFi protocols, others are centralized.
Classification of bridges based on how they move assets
Currently, there are four different ways blockchain bridges work. These approaches are well described and easy to understand. In the future, technologists may discover better and safer bridge alternatives in the future.
Lock and coin bridges provide a 1-to-1 exchange of tokens between chains. Users send their tokens to the bridge, which locks them on chain A and mints new tokens of equal value on chain B. At any time, the user can quickly redeem their original tickets back on chain A, and then the corresponding amount of tokens will be sent to a burn address in chain B.
Burn-and-mint bridging is similar to Lock-and-mint bridging, except that it is a non-reversible process. In a Burn & Mint bridge, tokens from chain A are sent to a burn address, and new tokens are issued on chain B. If users want to return the tokens to chain A, the same burn and mint process must be repeated.
Atomic swaps enable trustless peer-to-peer cryptocurrency trading between two blockchains using just two transactions. This creates a unique opportunity for traders to trade cryptocurrency directly without relying on third-party service providers.
Wrapped asset bridges are the go-to for moving non-native assets between blockchains. Creating a wrapped asset involves locking the corresponding asset on another chain and minting a new one with the same value on the other blockchain. Wrapped BTC, for example, is used to generate WBTC tokens for DeFi use and trading on Ethereum.
Benefits of Blockchain Bridges
Blockchain bridges can provide a number of benefits for businesses, such as efficient communication across different blockchains, remarkable flexibility, streamlined efficiency and scalability, allowing you to scale up quickly.
Cross-chain bridges enable communication between blockchain ecosystems, including leading and side chains. For example, Ethereum serves as the main chain for Layer 1, with Arbitrum as the official sidechain for Layer 2. By transferring tokens over a cross-chain bridge, a DApp or DeFi protocol can have a higher level of exposure.
Blockchains differ in productivity, scalability and other characteristics. When creating a DApp or protocol, it can be beneficial to take advantage of the capabilities of multiple blockchains through a cross-chain token porting solution. Issuing only one token on a particular blockchain may not expand the full range of options available to users.
The ability to transfer tokens between congested, high-fee blockchains and a low-fee, high-performance blockchain opens up many possibilities. This is particularly beneficial for Web3 gaming projects and microtransactions, which can benefit from lower fees and improved performance of such blockchains.
The bottom line
Blockchain bridges offer an efficient means of transferring data and value between different blockchains. In addition, they also provide many opportunities for DeFi protocols, decentralized applications (DApps) and Web3 gaming projects. Blockchain bridges have various risks, which should be understood so that your funds can be protected.
Also read: Top 7 Blockchain Platforms to Watch for in 2023
