Cross-chain bridges work in a similar way to APIs in the software-based sector. Connecting two different blockchain protocols, allowing for an easy transfer of token assets, smart contracts, and other data between blockchains.
Cross-chain bridges are proving incredibly useful in making the crypto world more connected. Transferring assets and data more easily—using cross-chain bridges—should reduce gas fees, improve operational efficiency, and increase transaction speeds.
A cross-chain bridge is a blockchain-based technology solution for connecting two separate blockchain platforms/protocols. Similar to an API connecting two software products or applications.
Two blockchain platforms are likely to have disparate protocols, governance models, rules and data requirements. Connecting those with a bridge is the best way to transfer data, tokens/crypto, and smart contracts between them, quickly and securely.
Although cross-chain brides can be used for a variety of transfers, let’s look at an example everyone in the crypto world is familiar with. Say you’ve got a crypto token (ERC20 A token) on the Ethereum blockchain. You want to swap that into a different cryptocurrency (BEP20 A token), on the BSC blockchain, and this transfer will happen across a centralized exchange (CEX).
A user uploads the ERC20 A tokens from their wallet into the exchange, stating what trade they want to execute. When the ERC20 A tokens are registered, the source chain notifies the bridge to generate the equivalent value in BEP20 A tokens. This transfer may take 5 to 20 minutes, and cost up to $20, depending on the volume of transactions going through the bridge for these particular cryptocurrencies.
The majority of cross-chain bridges are Layer 2 scale-out models, built on Ethereum. At the time of writing, the four most popular are the Avalanche Bridge, Polygon Bridge, Arbitrum Bridge and Fantom Anyswap Bridge, accounting for 95% of the market. As of October 2021, $16.2 billion a month was moving across these bridges, a 72% in 30-days, according to Footprint data. No doubt, that figure has increased since then.
Cross-chain bridges serve a number of purposes and solve several important problems. Growth is created across chains, no longer trapping data and assets on one blockchain. When there are more connections to other well-connected blockchains, data, assets, tokens, and smart contracts can move more freely.
Advantages of using cross-chain bridges include:
Greater asset interoperability;
Higher levels of security;
Better asset rendition (between chains);
Lower gas fees;
Increased transaction speeds;
An enhanced user experience;
Generally speaking, cross-chain bridges are used in a number of scenarios, such as:
Transferring, or exchanging tokens between Ether and Layer 2 Networks, making assets (e.g. cryptocurrencies and tokens) interoperable across chains, accelerating the speed funds are deposited and transferred. At the same time, this reduces costs, increase withdrawal exit times, and improves operational efficiencies.
Finding quicker, cheaper routes when congestion on other bridges increases gas fees.
When assets are only supported on a single blockchain it could be argued these are “thin.” Gaining access to other blockchains improves and enhances the transferability of every blockchain that’s connected to this growing network.
Investors can gain access to other blockchain networks faster.
Cross-chain bridges facilitate arbitrage trading across DEX platforms.
Think about the financial system. You can pay for anything using a Visa or MasterCard (in a store, online, etc.), or through third-party platforms, such as PayPal or Apple Pay. The result is the same. Money, whether in the form of credit or debit, moves from one place to another.
Fees you incur, if any, are small. The time it takes is quicker than ever, despite transaction volumes being enormous, and growing. Interoperability has always been crucial to the financial services sector, and not just in recent decades.
For centuries, interoperability has ensured the success of the financial sector. When promissory notes were written by bankers and transferred across Europe by merchants, the value of a note had to be honored in another city. Otherwise, the entire medieval and early-modern system of credit and finance would have broken down. It didn’t. It worked beautifully, creating massive banks, such as the Bank of Medici, and numerous others. In time, vast international payment networks solved these transference problems.
Now it’s up to crypto-based networks to achieve the same. And in many respects, the sector has a long way to go before catching up with the financial sector and payment networks. Cross-chain bridges solve these challenges.
Unless you want to build your own cross-chain bridge, it makes sense to select one already on the market. You need to consider a number of factors:
How stable are the cross-chain mechanisms? How high is the TVL? Generally speaking, anything above $1 billion is a useful benchmark.
The execution environment should be reflected by gradual changes rather than abrupt fluctuations. It’s equally important to check the verification and management method for cross-chain funds.
Transfer costs and timescales should be reasonable, even on high-volume days (e.g. $1 to $5), with transaction speeds in the 10 to 30-minute range.
Security processes and systems are just as important, to make sure the bridge isn’t vulnerable to cyber-attacks.
Cross-chain bridges are the way forward. They increase transaction speeds, reduce costs, and make assets and tokens transferable across hundreds of blockchain networks.