What are crypto cross-chain bridges?
A cross-chain bridge is a service, typically implemented as a decentralized application (dApp), that enables the transfer of crypto assets and data between different blockchain networks.
It can be compared to a physical bridge connecting two sides of a river, where each side possesses its own unique goods, currency, and resources. For mutual development, the bridge facilitates the exchange and transport of these assets, fostering collaboration and growth. Similarly, a cross-chain bridge establishes communication between blockchains, enabling the seamless transfer of tokens, data, and value to create a more connected and interoperable ecosystem.
What Is the purpose of cross-chain bridges?
The main problem that cross-chain bridges solve is the absence of compatibility between blockchains, which in turn enables developers and users to access a broader range of tools in the crypto market and gain various benefits—all of which we will explore below.
- Enhance liquidity across networks: provide developers and users access to aggregated liquidity across blockchains, which is essential for decentralized exchanges (DEXs), lending protocols, and other DeFi platforms. Aggregated liquidity means combining liquidity pools from different chains into one accessible resource, allowing for more efficient transactions.
- Cheap and fast transactions: cross-chain bridges enable users to move assets to blockchains with lower fees and higher transaction speeds. For example, decentralized trading on the Ethereum network can be quite expensive, but you can transfer the same assets to a chain like Arbitrum, where transaction fees are significantly lower, and transactions are processed much faster.
- Flexibility: Developers can build decentralized applications (dApps) that operate simultaneously on multiple blockchains, making the ecosystem more interconnected and offering a broader range of beneficial interaction options for users. For instance, a protocol could offer 2% returns on the USDT stablecoin in the Ethereum network, while providing 5% in the Binance Smart Chain network, allowing users to choose the most advantageous option.
How does a cross-chain bridge work?
Bridges may vary in their technical implementations, but they typically rely on a few core mechanisms to execute cross-chain transactions. Below are the three primary methods cross-chain bridges use to transfer assets between blockchains.
- Lock and unlock. When you exchange tokens, such as USDC, between blockchains, the equivalent amount of USDC is locked on the source chain. At the same time, the same amount is withdrawn for you from a liquidity pool on the destination chain. This method relies on liquidity providers to maintain balance across chains, and bridges often offer incentives like fee sharing or staking rewards to attract liquidity. To make the reverse exchange, tokens on the destination chain are returned to the pool, and the original tokens are unlocked on the source chain.
- Burn and mint. During a token transfer, tokens on the source chain are destroyed, also known as ‘burned,’ and then the same amount of tokens is minted on the destination chain. To make the reverse exchange, the tokens on the destination chain are burned, and the original tokens are re-minted on the source chain, ensuring balance and avoiding inflation of the token supply.
- Lock and Mint. During the transfer, your tokens on the source chain are locked, and an equivalent amount of tokens is minted on the destination blockchain as so-called wrapped tokens. Wrapped tokens solve the problem of moving assets between incompatible blockchains. For example, Bitcoin cannot natively exist on Ethereum due to their different structures, but wrapping allows Bitcoin to be represented as an ERC-20 token (e.g., wBTC) on Ethereum. These wrapped tokens can be used like native tokens on the destination chain. To make the reverse exchange, the wrapped tokens are burned, and the original tokens are unlocked on the source chain.
How to choose a cross-chain bridge?
Choosing a cross-chain bridge for transferring tokens or NFTs should primarily depend on your particular needs. Ensure the bridge supports both the source and destination networks you want to use, especially the specific route for exchanging tokens. Additionally, prioritize bridges with a strong reputation for security, fast transaction speeds, and reasonable fees to ensure a safe and efficient cross-chain swap experience.
Conclusion
Cross-chain bridges play an important role in the whole crypto ecosystem by eliminating barriers between different blockchain networks. Before the advent of cross-chain bridges, blockchains were significantly limited in their ability to communicate with one another. Now, blockchains can be compatible and function as an interconnected ecosystem. With BeInCrypto’s Top Picks, you can choose the bridge that best suits your needs, ensuring a seamless and efficient way to interact with multiple blockchains and perform cross-chain swaps.
FAQ
Crypto cross-chain bridges are protocols that connect different blockchains, allowing the transfer of assets, tokens, or data between them.
Cross-chain bridges can be safe if they have audited smart contracts, a strong security model, and clear documentation of how they operate. However, even the smart contracts of major cross-chain bridges have been successfully exploited in the past. To reduce risks, regularly review the approvals in your wallet and revoke outdated or unnecessary permissions to protect your crypto assets.
- The speed of a blockchain bridge depends on the networks involved. Stargate and Synapse Protocol are examples of fast bridges, but performance varies depending on the specific chains being bridged.
The best bridge for Solana depends on your needs. Portal is great for transferring NFTs, while Stargate offers customizable options for swaps, making it versatile for various transfers.
Slippage is the difference between the expected and actual amount of tokens you receive during a cross-chain swap, caused by price changes while the transaction is happening. It happens because the value of the asset can change between the time you initiate and complete the swap. Platforms like Stargate or Thorswap allow users to set a slippage tolerance to help prevent significant losses.
Fees during cross-chain transfers are typically charged only on the source chain where the transaction is initiated. For example, if you transfer from Ethereum to Solana, you’ll pay ETH as the transaction fee for sending your tokens.
All bridges in our top picks support ETH transfers, so the choice depends on your interface preferences and the required destination chain.