What Are Blockchain Bridges and How Do They Work? | OWNRWallet
Find out what blockchain bridges are, what purposes they serve, and how they help users manage their crypto assets.
Blockchain Bridges
When you want to transfer funds from one bank to another, it requires time and certain technical capacities. The same applies to cryptocurrencies, which is why blockchain bridges appeared. One and the same token may be hosted on different networks, and you cannot just send it in a couple of clicks because you have to operate completely different, independent ecosystems. Blockchain bridges help users to send coins from one network to another. How do blockchain bridges function and when can they be useful? This ultimate guide explains everything you wanted to know about the concept of a cross chain bridge and answers a few common questions.
What Is a Blockchain Bridge?
As its name suggests, a blockchain bridge links two blockchain ecosystems, just like two places are connected with one another. By transferring data and assets, they help blockchains communicate with one another. But how do blockchain bridges work?
Here is a simple example. Suppose you are an American who is traveling to Europe. Although you have USD, you need to get EUR because dollars are not widely accepted in the EU. You may resort to a centralized exchange (bank or similar organization) to convert your USD to EUR.
But which service to use when you plan to perform a similar exchange with your cryptocurrency? Imagine that you want to convert your ETH on the Ethereum Mainnet into ETH on Binance Smart Chain. You will need a tool or a service to make a switch, same as you did with the traditional currency exchange for your USD. It’s possible with blockchain bridges. In this instance, Binance features a native blockchain bridge that enables the movement of ETH from the Mainnet to another blockchain.
Blockchain Bridge Use Cases
The applications of bridges go well beyond sending tokens over networks. Let’s take a look at how this technology can be useful for crypto owners.
Lower fees
If you hold ETH on the Ethereum Mainnet, you face very high transaction fees, which makes it expensive to perform frequent operations and test various dApps. You can significantly reduce commissions by bridging your Ethereum from the Mainnet to a sidechain called L2 rollup. The majority of popular blockchains have lower fees than Ethereum, which is why it makes sense to bridge ERC-20 tokens to other networks if you plan to perform transactions frequently.
Use dApps on other blockchains
Staking interest rates for one and the same token may differ considerably on different blockchains. For example, if you want to lend USDC on Uniswap connected to Ethereum, you may notice that the interest rate on Polygon is greater. That’s where a blockchain bridge can help.
Explore blockchain ecosystems
If you are a vetted blockchain user and want to test out blockchains’ native dApps, you may do so if you have at least some cryptocurrency on your wallet to cover transaction fees. This can also be illustrated by our previous example: you can move ETH from the Mainnet to the L1 sidechain to pay lower gas fees.
Own native crypto assets
Imagine you hold funds only on the Ether Mainnet, but want to get native Bitcoin (BTC). In this case, you may purchase Wrapped Bitcoin (WBTC) on Ethereum, which is an ERC-20 token, not the original BTC. Then you will need to send your assets from Ether to the Bitcoin blockchain in order to get native BTC.
A blockchain bridge would help you to make a transfer in the opposite direction if you have Bitcoin and wish to utilize it with Ethereum DeFi protocols. To do this, you’d need a blockchain bridge to turn BTC into WBTC, which can subsequently be utilized as an asset on Ethereum.
Types of Crypto Bridges
Depending on the technical peculiarities and possibilities, blockchain bridges can be divided into several categories. Below we describe the two most commonly used classifications, but you can find more if you search online.
Trusted Bridges
A cross-chain protocol that is managed by a central authority is called a trustworthy bridge. In this case, users do not control their assets – they are under the supervision of a centralized authority during bridging. To complete the switch, users have to rely on this entity.
In the case of trusted bridges, it is supposed that a centralized institution will always safeguard users’ finances from thieves and keep their assets secure. A well-known example of a reliable blockchain bridge is the solution by Binance.
For those who put focus on speed and reduced gas fees rather than decentralization and privacy, trusted bridges are a better option.
Trustless Bridges
Trustless bridges operate without any central authority, as opposed to their trusted counterparts. What makes such blockchain bridges safe is their reliance on smart contracts and code for performing an exchange. Since there is no single entity to manage users' finances, they have to take care of their funds.
Trustless bridges are far more decentralized than services by centralized providers. Despite being less affordable than their alternatives, trustless bridges are more secure because of the smart contract that keeps track of transaction records. This is why such bridges are used in DeFi apps.
Unidirectional Bridges
Unidirectional bridges, as their name suggests, can only guarantee permanent asset transfers from one network to another. Only one-way transactions are possible with these kinds of bridges – you will not be able to send your assets back to the previous chain.
Bidirectional Bridges
A completely opposite thing is a bidirectional bridge: it assures smooth asset and data flow between two blockchain ecosystems. In other words, it allows sending coins from one blockchain to another and back.
Popular Blockchain Bridge Examples
There are not so many cross chain bridges around; however, their number keeps growing month by month to establish easy token flow and save users the burden of heavy transaction fees and middlemen. Below we observe a couple of well-known, frequently used blockchain bridges.
Binance Bridge
This centralized bridge connects the Ethereum Mainnet and the Binance Smart Chain. For packaging token assets, it also makes use of certain capabilities of the Ethereum-compatible BNB Smart Chain. As a result, it is used for moving assets from Binance to Ethereum. By switching the standard to BEP-20, Binance’s trusted bridge enables users of the BSC to employ ERC-20 assets.
Avalanche Bridge
This blockchain bridge connects the Avalanche and Ethereum networks, facilitating the two-way transfer of NFTs and tokens of ERC-721 and ERC-20 standards. In June 2022, the developers released an upgrade for the blockchain bridge that supported asset transfers to and from the Bitcoin native blockchain.
Risks of Blockchain Bridges
While blockchain bridges prove to be one of the most useful Web-3 technologies, they have certain drawbacks. They are still in the early phases of development, just like the entire crypto sector. Web-3 programmers claim that the ideal architecture for a decentralized blockchain bridge has not been created yet. Furthermore, the hazards associated with decentralized bridges vary and have adverse effects on consumers and the blockchain community.
For instance, a trusted blockchain bridge raises concerns about censorship because of centralized management. Additionally, users may be impacted by the custodial risks of exposing assets to fraudulent blockchain bridge operators. Meanwhile, a trustless blockchain bridge puts the smart contract code at danger from malware or other bugs. A trustless blockchain bridge also gives users accountability for assets, raising the chance that they might lose money because of human error.
Conclusion
With blockchain technology gaining immense traction, there are hundreds of networks appearing on the horizon – a few dozen are becoming widely adopted by the community. Blockchain bridge users flawlessly send tokens from one network to another, without the need for middlemen and third-party services. This is a great opportunity for users to explore other networks, avoid hefty fees, and try different dApps. However, blockchain bridges are still not not perfect: trustless ones put users’ assets at risk, while trusted ones may potentially disclose users’ identities and take privacy out of the equation. Hence, if you decide to use such a service, make sure to work with well-known bridges from reliable developers.
FAQ
What does a blockchain bridge do?
One of the biggest problems with Web-3 networks is the lack of interoperability. A blockchain bridge is a service that enables you to migrate assets from one network to another.
Due to the fact that blockchain assets are frequently incompatible, bridges produce synthetic derivatives that stand in for an asset from another network.
What are the most used blockchain bridges?
The list of popular cross chain bridges includes Binance Bridge, Avalanche Bridge, Synapse Bridge, Multichain Bridge, Polygon Bridge, and Tezos Wrap Protocol.
What are the different types of blockchain bridges?
Depending on the direction, there are unidirectional and bidirectional bridges. Depending on the decentraliation, there are trusted and trustless bridges. There are also sidechain bridges (they allow operating within a single network) and federated ones.
What is a bridge contract blockchain?
This is a smart contract that facilitates interoperability between two separate decentralized networks. It acts as a connector, enabling the transfer of assets or data between separate blockchain networks, which allows users to try various decentralized finance applications and manage crypto without middlemen.
Is Polkadot a blockchain bridge?
Polkadot is not a cross chain bridge itself, but it may be connected to any blockchain network that supports smart contracts thanks to its Turing-complete smart contract languages. It provides connectivity in a variety of methods through its parachains.
How to build a blockchain bridge?
To build a cross chain bridge, you need to establish a connection between two different blockchain networks. This involves creating a mechanism for interoperability, such as implementing compatible protocols, consensus mechanisms, and communication channels that allow for the seamless transfer of assets or data between the two blockchains.
DISCLAIMER: None of the authors, contributors, administrators, or editors connected to OWNR Wallet encourage readers to invest in Litecoin or Ethereum without doing proper research on their own. This article is purely for educational purposes only.