Crypto Bridges
Introduction
As web3 space is getting more and more attention existing blockchain solutions like Bitcoin and Ethereum should support large number of transactions per second at a very low gas price, thus the need for scalability solutions has increased and hence multiple L2 (blockchain solutions) solution providing projects are being developed.
As these more and more L1/L2 solution projects are developed the need to move assets between these chains has also increased and this is where crypto bridges come to play.
To understand crypto bridges we can take a simple example of fiat balances of a user Alice. Lets say Alice is travelling from one country (India) to another (USA), then for Alice to make any purchase transactions in USA, she would need to exchange Indian currency(Rupees) with US dollars which she can spend in USA for any purchases she wants to do. For this she would need to convert some money from INR to USD using a bank or she can use an international card that enables her to pay in USD. One thing to note here these currency exchange will cost Alice a standard fee.
Above scenario is simple in the current financial setting of banks but a lot more difficult in the current world of blockchains, since every blockchain have their own configuration in terms of consensus algorithms and other rules of blockchain. In crypto world similar to above example one would need to exchange Ether from Ethereum Mainnet to Polygon POS chain to use Ether on Polygon POS chain. For this exchange Polygon provides its own POS bridge to bridge these assets at very minimal fees.
So in short crypto bridge is a simple connection that allows to transfer tokens or other data from one chain to another chain which then allows to interact with dApp or any services present on that chain.
Need for crypto bridges
Every blockchain has its own advantages and offers different solutions for scalability, transaction throughput etc. All these blockchains are a closed isolated environment i.e. one chain cannot communicate directly to external world in that case not even some other chain like Polygon, Polkadot etc. since each one is built with different rules and consensus mechanisms inside each network.
This is where crypto bridges help in connecting these isolated blockchains together. Crypto bridges also allow users to experience various DeFi applications as well as other web3 services available across various chains where user can just deposit their native currency they are holding currently and redeem corresponding assets on other blockchain and then interact with web3 services or DeFi applications. Thus the need for crypto bridges ensures scalability and connectivity between two different chains.
Also various ERC tokens present on decentralized exchanges are native to blockchains and contracts where they are initially minted, i.e. when we buy tokens on these exchanges they provide WETH on Polygon (a representation on chain) and not actual ETH on Polygon.
Further transaction prices on Ethereum are very high at the same time Polygon transaction prices are relatively cheaper, so bridges can be used here to get WETH on these networks and access web3 services on it.
Types of crypto bridges
There are two types of crypto bridges described below:
- Trusted Bridges
- Trusted bridges are similar to private or permissioned network where a central entity manages and oversees bridge transactions and responsible for submitting transactions to the destination chain.
- Trusted bridges operate in an environment under a central entity (a bridge operator)that operates full bridge functioning.
- Bridge operator is solely responsible for managing bridge contracts and funds that user deposits on source chain and releasing of funds on destination chain incase of transaction failure.
- PolyNetwork and PoS Bridge are examples of Trusted Bridges.
2. Trustless Bridges
- Trustless bridge operates with smart contract and uses underlying blockchain security like consensus mechanism
- Central authority is no longer required to relay transactions to destination chain anymore as this is handled with smart contracts eliminating trust on central authority
- Syscoin bridge is an example of a trustless bridge.
Applications of crypto bridges
- Aave is a lending and borrowing platform which allows any investor to lend out crypto currency in return to earn interest on it. So if a lender lends his crypto currency on Ethereum and lets say he earns about 1% interest at the same time if he lends Ethereum on Polygon and earns about 3% interest as return. So here bridges can play its role where it can help investor on Ethereum to move his crypto currency to Polygon where he will get WETH token (representation of ETH) on Polygon and then investor can use it on Aave to get higher interest.
- L2 solutions developed have much cheaper transaction costs thus one can bridge its ETH from Ethereum Mainnet to L2 chain and use web3 services on that chain.
- One can own native currencies, so a user can buy WBTC from decentralized exchanges and then using BTC bridge you can then transfer BTC back to its native chain to own actual bitcoin.
- Bitcoin is a network with no smart contract capability so any investor interested in lending/borrowing can just get wrapped version of these coins on a network that does allow smart contract like Ethereum network.
Conclusion
Bridges however seems to be a good solution with various applications discussed above, but there are some issues like most of existing bridges are centralized, also some bridges takes minutes or even hours to transfer assets. It is still early days and the optimal designs have likely not yet been discovered which would fix all trust issues thus removing centralization at the same time providing security to users of bridge.
