Decentralized finance is one of the most exciting sectors of the blockchain ecosystem (Defi). It promises a world in which people may move their money without having to pay bank transaction fees or deal with the headaches that come with them.
Gas fees (particularly on the Ethereum blockchain) make cross-chain transactions prohibitively expensive, impeding the free flow of cryptocurrency assets. It’s easy to see why cross-chain bridges have seen such rapid expansion in recent years. Cross-chain bridges had an 89 percent increase in growth at the end of 2021 as a result of their rising relevance.
However, everyone who has attempted to convert BNB to ETH or vice versa understands that it is not as straightforward as it appears.
What exactly is a cross-chain bridge?
A cross-chain bridge is a tool that allows tokens, smart contract instructions, assets, or data to be transferred between two blockchains. They overcome the prior blockchain ecosystem’s interoperability problem.
Due to the incompatibility of blockchain assets, cross-chain bridges generate synthetic derivatives that reflect an asset from another blockchain. A cross-chain bridge joins two blockchains that have different protocols, governance structures, and regulations – but they interoperate securely.
Advantages of Cross-chain bridges
Blockchain bridges perform a variety of activities and provide multiple benefits to Defi customers.
- Interoperability — Cross-chains address the issue of interoperability within the blockchain ecosystem, allowing users to transfer assets to other blockchains without losing the benefits of the host network.
- Efficiency — Defi users can use cross-chain bridges to send and receive micro-transfers faster and without paying hefty transaction fees. This is especially crucial for blockchain gaming and retail.
- Scalability is enhanced via blockchain bridges intended to manage high transaction volumes. Because of the scalability, Defi developers can deploy their applications, and customers can enjoy such services without sacrificing the original blockchain’s liquidity and network effect.
- Cross-chain collateral enables Defi users to move assets from a blockchain with value but few decentralized apps (such as Bitcoin) to another blockchain with a developed ecosystem (like Ethereum, Cardano, or others).
- Cross-chain bridges facilitate communication across blockchains, which solves a variety of difficulties inside the Defi ecosystem. They have various features that allow users to transfer assets between networks swiftly and efficiently.
How do cross-chain bridges function?
Cross-chain bridges function by sharing data remotely or locally. They communicate with other networks and share value. When two blockchains – say, ‘Chain A’ and ‘Chain B’ – cross remotely, 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 them, they must first burn them on Chain B before unlocking them on Chain A. Keep in mind, however, that the number and value of tokens stay constant in this approach.
Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.