Blockchain technology, since its inception, has largely been centered around decentralization. This decentralization aims to take control away from any entity and make everything blockchain-related community-owned.
However, there is one major flaw that reared its head – blockchains are essentially siloed away from each other. One chain cannot interact with the other, which means that users of one cannot interact with others in another blockchain. This brings a sense of centralization around a particular blockchain.
The need for interoperability
If you’re a dApp developer, you create your project with the aim of benefiting from the perks of the blockchain it is hosted on and interacting with users on the chain. However, this also means that you cannot enjoy the perks of a different blockchain or obtain new clientele from the users of that other network.
A good example of this is the Ethereum network. Being the first to launch with smart contract functionality, it soon became the most popular network for DeFi, dApps, and NFTs. However, the network suffers from major scalability issues, which lead to high gas fees and slow transaction throughput. By enabling interoperability, one can easily enjoy the perks of Ethereum on a much faster and cheaper platform. This is the future of decentralization. The solution? Blockchain bridges.
About blockchain bridges
In essence, each blockchain speaks its own language and has its own token standards, which are the main issues hindering interoperability. A blockchain bridge, also called a cross-chain bridge, solves this by enabling the transfer of tokens, smart contracts, data, and instructions across different chains. Though the chains are practically incompatible, the bridge provides a neutral zone so users can easily switch from one to the other.
This is especially helpful in the decentralized finance (DeFi) space, as users can now access various perks from various blockchain networks. This can all be done without leaving the safety of their host chain or incurring the costs of trading their holdings for other tokens.
How they work
We’ve established that a cross-chain bridge is a mechanism for transferring data or digital tokens from one blockchain to another. A wrapped token is one that has been transmitted from one blockchain to another. For instance, Bitcoin is not smart contract capable. You’ll need to transmit some BTC across the Bitcoin/Ethereum bridge before you can interact with dApps on the Ethereum chain. This triggers a smart contract that locks your BTC and then unlocks a similar amount of wrapped Bitcoin (WBTC) on Ethereum.
Now, WBTC is an ERC20 token, which is the standard used on Ethereum. Therefore, it can be utilized just as one would use Ether, or any other Ethereum token. This includes buying NFTs and tokens or exploring DeFi platforms on Ethereum. Wrapping a token is akin to creating stable coins. Just as stable coins are pegged to the dollar, a WBTC is pegged 1:1 to Bitcoin. If you need your Bitcoin back, you send the WBTC to the bridge, where it is burnt, and an equivalent amount of BTC is unlocked.
Types of cross-chain bridges
Some blockchains will allow one-way transfer of tokens, but not the other way around. For example, you can wrap BTC to use on Ethereum, but you can’t wrap Ether to use on the Bitcoin network. Such is called a unidirectional bridge.
There are other bridges, such as Wormhole, that allow the wrapping of tokens from either of the blockchains they connect. For instance, you could wrap ETH to use on Solana, and you could just as easily wrap SOL for use on Ethereum.
Depending on whether they are custodial or non-custodial, bridges are further classified into a federation and trustless bridges. Federation, or trust-based bridges, tend to be centralized. This is because by wrapping the original token, they require the user to lock their holdings in their custody, after which the merchant frees up the wrapped coin on the other end. The merchant only gives back the original token to the user once the wrapped coins are unwrapped. An example of this is WBTC.
Trustless bridges, on the other hand, are completely decentralized. They rely on a consensus mechanism, which mostly depends on a network of validators to verify the authenticity of transactions. However, in case of any incident, trustless bridges would not be under any obligation to fix any issues.
Perks of blockchain bridges
- They make for efficient transactions
By utilizing another blockchain, one can benefit from faster and cheaper transactions than on their host chain. As is the case with Ethereum, high gas fees and slow transaction speeds may deter many users from utilizing the blockchain. Such users may opt to bridge their assets to a layer 2 Ethereum solution such as Polygon or Arbitrum.
- They increase scalability
When one blockchain is plagued by congestion, one can bridge their assets to a more efficient chain. This way, they get to utilize the power of a new chain without compromising on the liquidity of their parent network.
- They reduce transaction fees
In the absence of bridges, one would have to sell their tokens and exchange them for a second blockchain’s tokens if they wished to utilize a new network. This introduces transaction fees at each step of the way, which may significantly eat into their funds.
- They promote privacy
By using a cross-chain bridge, you do not have to transfer funds from the safety of your own custodial wallet. You only transform the coins you need into a usable token on the target blockchain.
Cross-chain bridges are the silver bullet toward blockchain interoperability. This solves the problem of users being restricted to one chain. This way, they can enjoy the perks of other chains without necessarily having to leave the safety of their parent chain. In essence, tokens are not transferred between chains. Rather, they are wrapped, which gives them the functionality of other tokens on the new chain.