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One of the most exciting areas in the blockchain ecosystem is decentralized finance (DeFi). It promises a world where people can move their money without the transaction fees of banks and the hassles that come with it. But anyone who tries to convert BNB to ETH or vice versa knows that it is not as simple as it seems.
The gas fees (especially on the Ethereum blockchain) make cross-chain transactions very expensive, hindering the free flow of cryptocurrency assets. It is obvious why cross-chain bridges recorded massive growth in recent years. Due to their increasing importance cross-chain bridges experienced an 89% surge in growth at the end of 2021.
What is a cross-chain bridge
A cross-chain bridge is a tool designed to enable the transfer of tokens, smart contract instructions, assets or data between two blockchains. They solve the interoperability problem that previously plagued the blockchain ecosystem.
Since blockchain assets aren’t compatible, cross-chain bridges create synthetic derivatives representing an asset from another blockchain. Two blockchains may have different protocols, governance models and rules but a cross-chain bridge connects them by interoperating securely.
A cross-chain bridge enables users to
- Move assets across various blockchains fast and easily
- Enjoy low operational difficulty
- Leverage the lower transaction fees available on the non-scalable networks
- Implement decentralized applications across multiple platforms
How do cross-chain bridges work
Cross-chain bridges work by exchanging information remotely or locally. They communicate and share value with other networks. When remote bridging occurs between two blockchains say ‘Chain A’ and ‘Chain B’ the bridge locks the assets in Chain A and generates new assets in Chain B. When the owner of the assets in Chain B wants to recover the assets, they will have to burn those on Chain B and then unlock them on Chain A. However, keep in mind that the amount and value of the tokens remain constant in this model.
Types of cross-chain bridges
There are two major types of bridges currently available.
Unidirectional bridges
These bridges are also called one-way bridges, and they allow users to transfer assets only to the target blockchain. Once the assets have been transferred to the target blockchain, they can’t be returned. An example of this is Wrapped Bitcoin, which allows you to send BTC to the Ethereum blockchain but doesn’t allow you to return the asset to the Bitcoin blockchain.
Bi-directional bridges
They allow users to freely convert assets to and from blockchains. With Solana, you can send SOL to the Ethereum blockchain and send ETH to Solana.
The benefits of cross-chain bridges for DeFi users
Blockchain bridges provide various functions and have numerous benefits for DeFi users.
- Interoperability Cross-chains solve the problem of interoperability within the blockchain ecosystem, and users can transfer assets to other blockchains without sacrificing the advantages of the host network.
- Cross-chain collateral This feature enables DeFi users to transfer assets from a blockchain with value but little decentralized applications (such as Bitcoin) to another blockchain with a developed ecosystem (like Ethereum, Cardano or others).
- Scalability Blockchain bridges designed to handle high transaction volumes ensure greater scalability. The scalability makes it possible for DeFi developers to deploy their applications and users to enjoy such services without giving up the original blockchain’s liquidity and network effect.
- Efficiency DeFi users can make and receive micro-transfers faster with cross-chain bridges without paying high transaction fees. This is especially important for the blockchain gaming and ecommerce experience.
Final thoughts
Cross-chain bridges solve various problems within the DeFi ecosystem by allowing communication between blockchains. They have numerous advantages that allow users to quickly and efficiently transfer their assets between multiple networks. The cryptocurrency space recognizes the importance of these cross-chain bridges, which is why most exchanges and blockchains are allowing networks to communicate with each other without the need for intermediaries.
Egor Volotkovich, working as an executive director at cross-chain solutions EVODeFi, implements business plans and goals, establishes new partnerships and defines long-term development strategies. He has extensive experience in creating fintech products and bringing them to the market, which he acquired working in several successful startup projects, performing the functions of a product and project manager.
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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.
Featured Image: Shutterstock/Anton-Burakov
The post Cross-Chain Bridges in DeFi – Why Are They So Important? appeared first on The Daily Hodl.
