Let’s say you want to go and spend a week in Africa with your wife and her family. So you put together a to-do list and make sure that all of the essential items that need to be done beforehand are completed.
For the sake of this blog post, there’s one thing left; exchanging currency. In most countries, that is really easy, though, because there’s already a system set up where you can go to a kiosk or a bank and quickly exchange your dollars.
But what do you do when you want to, say, trade your bitcoin for Ethereum?
Well, this is the dilemma that cryptocurrency is having. But more on that in this article.
Welcome to Shavuna, where we spend a lot of time and resources creating these fantastic blog posts so that you can sit back, relax and hopefully understand this topic with the help of our analogy stories and examples.
Let’s get started.
What is a Blockchain Bridge?
A blockchain bridge is a connection that allows the transfer of tokens or other data from one chain or network to another chain or network, enabling the ability to interact with another chain’s decentralized applications.
Before we get into this, you need to realize something significant. All coins have their blockchain. Tokens, however, are virtual versions of an asset built on another coin’s blockchain.
So let’s break this down, there are actually many different cryptocurrencies networks.
These coins all have their separate networks.
Now the Ethereum’s network is obviously built using Ethereum as the leading coin.
However, for all these other networks, you can have an Ethereum token on the Binance smart chain and have Ethereum on the polygon network.
These coins are represented as tokens on the other coins networks. They use specific mechanisms so that the prices trade the same.
Now that you know each coin has its network and that each coin can be represented on another coin’s network, you can hopefully understand the reason for a blockchain bridge.
Why Use Blockchain Bridge?
Let’s go over a straightforward example as to why you would want to use a blockchain bridge. AAVE is a very powerful and popular lending and borrowing platform that allows you to lend out your cryptocurrency in turn for earning interest on it.
For example, if I lend out Ethereum on the Ethereum network, I can earn around half of a percent right now.
However, if I lend out basically the same asset Ethereum on the polygon network, I can earn three percent which is six times the returns.
Suppose I take my Ethereum on the Ethereum network and move it over to the polygon network. In that case, I
can get a polygon representation of the Ethereum coin and then use it on AAVE to earn higher interest.
Or maybe I want to move my Tether (USDT) from polygon to Ethereum, or perhaps I want to transfer my USDC from Binance smart chain to polygon.
All of these cross-network transfers can be performed through a blockchain bridge.
You might be wondering why are these needed?
Well, bridges are currently needed for three big reasons:
1. Most of the erc20 tokens that you buy right now are native to the Ethereum network. This means even if you purchase polygon or Matic on Binance, they give you an Ethereum version of polygon instead of the actual polygon token on the polygon network.
In other words, major cryptocurrency brokers literally do not sell native tokens. Instead, they sell tokens on the Ethereum network. This means you’re not getting the actual coin.
2. The second big reason you would switch your native Ethereum on the Ethereum network to the polygon network is because a transaction on the Ethereum network right now is very high. In contrast, a transaction on the polygon network is so cheap. You can perform fifty thousand transactions for two dollars on polygon.
In fact, polygon was created as a way to scale Ethereum. However, it currently doesn’t have the same security that Ethereum does.
This is simply because, by nature, polygon is a bit more centralized. Bridges are needed so that regular people can more easily access new networks, and they’re also required because some networks are cheaper, faster, or maybe safer than other networks.
3. Lastly, we need bridges for progression. In the current state, the responsibility is on each of the different blockchains to innovate, solve security issues, and be able to scale.
For example, what bitcoin brings to the table Ethereum cannot really use to make it better. Now, this is where bridging will come in.
In turn, it’ll turn cryptocurrencies into more of a team sport working all together to make crypto a more comprehensive solution to the problems that it’s trying to solve.
Issues/ Problems With Crypto Bridges
Now, let’s go over some of the issues with bridges.
Because one of the issues is that they cannot be 100% trusted. Unlike a decentralized application that uses code and programming language as a backbone, a blockchain bridge generally must have an entity or a person or a company behind it.
In other words, a majority of bridges currently being used are centralized.
Along with that issue, another issue is that they are usually quite slow. Some transfers take minutes, others take hours and some even take multiple days.
To give you an idea of how long this takes, most transactions on any of the big networks can be completed in less than 10 minutes.
Hod Do Crypto Bridges Work?
Now we’re into the nitty-gritty. Let’s get into how they work.
There seem to be two main ways that a cryptocurrency bridge works. Now I’ve done some research and if you find a third way, definitely drop a comment below, and we will try to cover it.
1. Alright, so the first method is very centralized, and it’s essentially an extension of any other exchange. In a sense, there is a large pool of Ethereum Tether and a large pool of polygon Tether. Both are tether representations on each network.
Now you should know here, sometimes instead of a pool, it’s literally a company or a person, but usually, it’s a pool .
When you go to deposit your Ethereum Tether, it gets added to the Ethereum Tether pool. Then the centralized authority will send you an equivalent amount of polygon tether, which actually gets taken out of that pool.
Of course, there is a fee that you pay that gets taken out and given to the centralized authority or the liquidity providers, but it’s usually a minimal fee, and you’re pretty happy paying it because there’s not really any other way to get on the network.
One of the issues is that you must trust that the central authority doesn’t steal your money in the process, especially if this process takes days.
Along with that, this method only works if people keep trading back and forth.
I actually ran into this problem when I tried to transfer some of a stable coin from the Binance smart chain to the polygon network and the polygon network had no stable coin to give me the. The pool was literally empty. I had to wait around four hours for someone else to make the reverse transactions so that the pool that I needed to have access to was filled with their funds.
2. The second way that a cryptocurrency bridge or a blockchain bridge works is through smart contracts.
This one is very complicated and could be its own blog post. But we’re gonna summarize it really quick.
Whenever you bridge your crypto, the current asset that you are sending is actually frozen in a smart contract. Then once your assets are frozen, you’re given a copy of that token on the new network that you wish to move to.
The smart contract literally mints you more of that token, and it’s okay doing that because it knows that you burned or you froze that token on the other network.
It should also be assumed that this smart contract method is usually used for coins that don’t have their own smart contract capability.
For example, Bitcoin Bitcoin cash and Dogecoin are three big coins that people love investing in, but they cannot lend, borrow, and AAVE.
Instead, you can simply get representations of these coins on a network that does allow smart contract interaction like Ethereum.
In fact, renBTC is an Ethereum token that allows you to hold a token that is pegged to bitcoin’s price.
Essentially, it is bitcoin, but since it’s on the Ethereum network, it gives you the capability to do things like lend it and interact with other decentralized applications.
Examples of Crypto Bridges.
Here are a few current examples of crypto bridges.
1. xPollinate. Now, xPollinate is powered by two companies that are actually unaffiliated with the blockchains that they are allowing you to bridge to.
They have probably created this bridge to collect fees paid by the traders. This is actually the bridge that I mentioned earlier that had zero liquidity. I had to wait four hours, but it worked.
2. Matic Bridge. The Matic or the polygon team developed this bridge to help get more people onto the true polygon network instead of polygon on the Ethereum network.
3. Lastly, we have the Binance bridge. This bridge was actually created by the Binance company to also help onboard people from other cryptocurrencies to move to the Binance smart chain.
There are many other bridges, but I highly recommend checking reviews and doing your research on whatever bridge you plan on sending your assets to.
One quick trick that I recommend is to google xPollinate reviews Reddit, and then you’ll get a ton of personal reviews.
In this case, replace x-pollinate with whatever bridge you plan to use. If that bridge decides to start scamming or rug pulling, it’ll likely quickly show up on Reddit.
Now that we tried to educate you on the topic of crypto bridges, we want to hear from you. Have you guys used any of the crypto bridges before, and if so, what was your experience?
Please let us know in the comments below.
As always, thanks for reading our blog post. I hope that you enjoyed it. Feel free to subscribe to our newsletter below. We really hope that you learned something, and most importantly, we hope to see you in the next article.