The crypto realm is no longer confined to the two top dogs, Bitcoin and Ethereum. Over the years, many blockchains have entered the arena and are putting strong competition to both Bitcoin and Ethereum. The thriving ecosystem of blockchains offers unique features in the form of assets, functions, and communities.

However, this vast number of blockchains has given birth to a new problem. The blockchain-to-blockchain interoperability. Data and values need to be moved between different blockchains that have no similarities. However, no matter how demanding this task is, it is equally important to achieve it. The centralized systems have this problem already sorted out since they are obviously “centralized”. This problem was causing the decentralized ecosystem many problems and was an area where decentralized systems looked impractical and too cluttered compared to centralized systems.

Cross-chain bridges were the innovation that saved the decentralized ecosystem from this mortal peril. The innovation behind the cross-chain bridges ensures that the communication and transfer of both data and assets, respectively, can take place between two totally different blockchains.

What Is A Cross-Chain Bridge?

Cross-Chain bridges are the entities that allows two separate blockchains with no independent interoperability facilities to communicate with each other. This communication involves the secure transfer of data and assets back and forth between these blockchains. At the central point of Cross-Chain bridges lies a mechanism that employs a messaging system, which allows these blockchains to communicate with each other and mutually verify and add blocks to each of the blockchains.

However, there are no centralized intermediaries present in between this exchange of information and assets; instead, a trustless and decentralized bridge is used. These bridges are automated software that are situated on each blockchain; they exchange information and assets independently and verify these transactions. This approach is central to the decentralized concept of blockchains, as bridges do not compromise the anonymity and security of both blockchains in the entire transfer process.

The Workings Of A Cross-Chain Bridge

While the core principles remain the same, the workings of a bridge may be different from another based on its application. By looking at a hypothetical scenario, we will try and understand the basic working principle of a cross-chain bridge. In this scenario, we will try to look at a two-way transaction, one where an asset is sent from Ethereum to the Solana network and its reverse transaction.

The two-way transfer has two main steps and several sub-steps. The two main steps are:

1. Locking and Minting Process
2. Unlocking and Burning Process (Reverse)

Locking and Minting Process

1. The initial step of the locking and minting process is the “transfer initiation on the source chain”. The asset that is supposed to be sent from the Ethereum network to the Solana network is first sent to an Ethereum bridge contract. This contract locks the asset in place.
2. The Ethereum bridge contract has a counterpart on the Solana network, and the locked asset is sent to this counterpart on the Solana network.
3. Once the asset has reached the counterpart contract on the Solana network, a copy of the sent asset is created, which is known as a wrapped asset. This wrapped asset is the representation of the asset from the Ethereum network originally, which behaves as if it is native to the Solana network.

Unlocking and Burning Process

1. When you want to reverse the transaction, you send the wrapped asset to the Solana bridge contract. This removes the wrapped asset from circulation on the Solana network. This process is known as burning. Without the burning process, there would be a copy of the asset on the Solana chain, which is not feasible.
2. The Solana bridge contract will then proceed to register the burned wrapped asset. This message is then communicated to its counterpart contract on the Ethereum network. This process is what confirms the removal of the asset from the Solana network.
3. Once the burn message reaches the counterpart contract on the Ethereum network, the Ethereum network unlocks the previously locked asset and sends it to the designated address.

Use Cases Of Cross-Chain Bridges

Interoperability is the major use case of Cross-Chain bridges. By unlocking the possibility of communication between two or more distinct blockchain networks, Cross-Chain bridges essentially open up the network to a wider application by making use of the strengths of two or more blockchains.

Enhanced DeFi opportunities are the second most important use case of Cross-Chain bridges. The bridging essentially allows investors from one network to explore the untapped potential of trading, staking, lending, and borrowing on another network.

Decentralized applications can benefit immensely from the Cross-Chain bridges as they get a much bigger user base. Users inherently part of a blockchain network can now access a dApp registered on another blockchain network through the Cross-Chain bridges.

The flexibility offered to users is the third important use case of Cross-Chain bridges. Users can now stay on one blockchain network and enjoy the benefits of reduced fees, higher APYs, and lower interest rates of another blockchain network.

Conclusion

Cross-chain bridges are creating new opportunities in the DeFi ecosystem by allowing transactions from two distinct blockchains to pass through them. With the problem of interoperability solved, decentralized networks are no longer restricted to one blockchain and its constraints. Users can freely explore the untapped potential of one blockchain while not sacrificing the benefits they get from another blockchain.

FAQs

This depends on your jurisdiction, as if the authority deems the bridged trades as taxable, you will have to pay taxes on the bridged transactions as well.

As far as the operation is concerned, bridging is safe. However, external attacks and system problems may cause trouble on bridges.

The cost for crypto bridging depends on the networks involved, the gas fee, and the network congestion. So it can become costly and economically non-viable at the same time.

No, certain cryptocurrencies have bans or restrictions upon them in certain jurisdictions, and receiving such cryptocurrencies into the said jurisdiction can cause legal problems. Do it at your own risk.

Crypto bridged arbitrage is a lucrative arbitrage strategy that leverages the price differences of assets across two different blockchain networks. However, this type of arbitrage requires bots for speed and is prone to smart contract failures.