Cryptocurrency bridge: What they are and how they work

A cryptocurrency bridge (or bridge in Spanish) are protocols that allow us to migrate cryptocurrencies between different blockchains. These solutions allow us to solve one of the biggest problems that blockchains face; scalability. Although they are a great tool for migrating tokens between different blockchains, there are also a number of factors to take into account. Let's see then what cryptocurrency bridges are, how they work and the factors to take into account when using them.

What is a cryptocurrency bridge

A cryptocurrency bridge (or bridge in Spanish) are protocols that allow us allow cryptocurrencies to be migrated between different blockchains. Just like We explain in the article about the concept of multichain and cross-chain, one of the main problems that cryptocurrencies face is scalability between networks. What these solutions allow is to solve this problem, allowing the transfer of cryptocurrencies between blockchains in exchange for paying a commission. A common use of a bridge is to move from Ethereum to Ethereum-compatible Layer 2. But these cryptocurrency bridges can also be used to move assets across completely unrelated networks, such as Ethereum to Solana or Bitcoin to Ethereum.

graphic 1

Operation of a cryptocurrency bridge. Source: MDTA Academy.

How a cryptocurrency bridge works

Cryptocurrency bridges usually work freezing the asset we want to exchange and issuing or distributing equivalent tokens on the target blockchain. What you get in exchange is a “wrapped” token. Wrapped tokens represent the actual cryptocurrency or token, but can be used on other blockchains. For example, if we want to move some ETH to the Polygon blockchain, the bridge freezes the ETH we deposit. This renders the original ETH useless and prevents supply from increasing when equivalent tokens (Wrapped ETH or WETH) are issued to you on the Polygon blockchain. We have two primary ways to migrate tokens between blockchains:

  1. Locking and coining: When we want to move a token from chain A to chain B, the tokens do not actually leave the origin blockchain (chain A), but instead are locked into a smart contract on the origin chain, and a “wrapped” representation or version is minted of the tokens on the receiving chain (chain B). Since tokens wrapped on chain B are locked as collateral on chain A, a process managed by the interchain bridge, The original tokens are subject to bridge risk. For example, if the collateral locked in a bridge's smart contract is stolen as a result of a hack, the wrapped tokens will become worthless.
  2. Liquidity networks: Cross-chain protocols using liquidity networks are based on liquidity pools that already exist in both the sending and receiving chains, so there is no minting of assets involved. Instead, users deposit liquidity at the bottom of the source chain and then, receive assets from the receiving chain fund. Although cross-chain bridges using liquidity networks are more secure, their functionality and scale are more limited since liquidity is required on both blockchains.
graphic 2

How WBTC token minting works. Source: Crypto Plaza.

Types of cryptocurrency bridges

We can mainly differentiate two types of bridges in the cryptocurrency ecosystem:

  • Trust-based or centralized bridges: They have intermediaries, that is, people, a company or a federation in the middle of the transaction. This bridging method is “trust-based” because you trust people to handle the exchange without making mistakes, mismanaging funds, or taking your crypto. In some cases, like WBTC, you can't even bridge tokens directly. Instead, you have to go through an approved merchant.
  • Trustless or decentralized bridges: They use smart contracts (computer programs) to lock the deposited asset and issue equivalent tokens on the target blockchain. This method is called trustless because you don't have to trust anyone at all. The code is usually open source, so anyone can take a look at how they work.

Benefits and risks of cryptocurrency bridges

Like any innovation within the cryptocurrency ecosystem, cryptocurrency bridges also have their benefits and disadvantages, which we will list below:

Benefits:

Mainly, cryptocurrency bridges They allow us to transfer cryptocurrencies or tokens to other blockchains. This allows us, for example, to use DeFi protocols to make a cryptocurrency profitable that may not have been available on the blockchain in which we wish to carry out the transaction. In turn, the use of these solutions They are less expensive than selling our cryptocurrencies. This is because selling cryptocurrencies involves more steps and, therefore, more commission payments. On the other hand, with cryptocurrency bridges we only carry out one step that requires a single commission payment.

Disadvantages:

One of the main disadvantages of using cryptocurrency bridges is that They are quite exposed to hacker attacks. This is because these criminals are dedicated to looking for flaws in the code of the smart contract in question to try to drain the funds present in the bridges. At the same time we also face trust problems, given that we must carefully verify if the bridge solution we are using is trustworthy, since we can try to carry out the exchange and then the bridge between blockchains is not made. It is also possible that When using these solutions we are exposed to network risksThat is, if, for example, we migrate our tokens from the Ethereum blockchain to the Solana blockchain and the second (as usually happens) paralyzes transactions, our transaction will also be paralyzed until activity is resumed. Finally, there is also the issue of pricing, given that wrapped tokens often differ from the original price of the token they represent. For example, perhaps ETH is at $1.800 and the WETH wrapped token is at $1.785.

graphic 3

Cross chain liquidity between blockchain networks. Source: Medium.

Best cryptocurrency bridges

In the context of cryptocurrency bridges we can find different types of bridges. Some are limited to carrying out token exchanges between two blockchains and others enable the option to different blockchains. Let's see what are the best options to carry out exchanges between blockchains:

  • Arbitrum Bridge: Abritrum has become one of the best scalability solutions because it handles its Layer 2 responsibilities with less help from Ethereum. The result is much lower transaction costs than Ethereum. Costs can also be up to 90% lower than similar L2s like Optimism. Abritrum also supports the native Ethereum blockchain, so you don't need to wrap and unwrap tokens.
  • Polygon Bridge: Like Arbitrum, Polygon is known for its fast, affordable transactions and compatibility with Ethereum, making it one of the best options in the DeFi space. Polygon offers two bridges, one for standard wallets and one for the Gnosis Safe multi-signature wallet, both internal projects. Most users choose the easy-to-use standard bridge, which supports popular ERC-20 tokens and ERC-721 non-fungible tokens (NFT).
  • Token Bridge Portal: can handle any transaction with ease, and can even move ERC-721 NFTs between supported networks. It's like a Swiss Army knife for cryptocurrencies. Support for 22 total blockchains makes it easy to perform most cross-blockchain transfers.
  • Across: Across Bridge uses liquidity pools to manage cross-chain transfers, but primarily draws from one pool. But liquidity pools can cause slippage (price mismatch) if demand increases. Across uses some clever tricks to avoid this, such as scanning incoming activity on the chain which would allow trading without dipping into pools. Across also uses relays, investors that can “fulfill orders” faster than the blockchain in many cases.
  • Multichain: Previously known as Anyswap, Multichain lives up to both names. We have 79 supported blockchains, including Bitcoin, Solana, and more Ethereum-compatible networks than you can shake a stick at. However, you may be limited as to where you can transfer. For example, Bitcoin can connect to Ethereum using the multiBTC token but cannot connect to Arbitrum or Optimism. Bridge transfers are affordable on Multichain, but can take up to 30 minutes to complete.

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