Lack of interoperability has become a serious problem with the growing number of DeFi networks. How do firewalls allow you to take the best from different platforms?
There are many different blockchain-based networks in the cryptocurrency world, such as Ethereum, Binance Smart Chain, Algorand, Avalanche, Cosmos, Polkadot, Tezos, Solana and others. Each blockchain has its own features and functions. Most of them operate on different algorithms and consensus rules. Bridges are used to exchange data between different blockchains.
They are a connection between blockchains that allows any type of data, including tokens and smart contracts, to be transferred from one blockchain to another. Bridges connect different ecosystems and make the entire DeFi infrastructure more convenient.
The benefits of bridges in DeFi
Bridges are not only useful to users, but to the entire ecosystem of cryptocurrency and decentralized finance, in part by solving the problem of incompatibilities and improving interoperability between networks. They have several major advantages:
System-wide flexibility – With bridges, participants can move assets and valuable data from one blockchain to another and take advantage of different technologies without being constrained by a single network;
Bridges enable interaction between parent and child networks, not just different blockchains. In this way, developers can deploy decentralized applications simultaneously on multiple DeFi platforms, increasing the speed of project development;
Bridges significantly improve network scalability by distributing traffic across multiple blockchains, which is beneficial when transaction volumes are high, especially when the main chain is overloaded;
Efficiency – With bridges, users can move their assets from an unscalable blockchain to a high-performance one and enjoy low transaction fees.
What are bridges and how do they work?
Cross-chain bridges are used to move coins from one blockchain to another by performing atomic or cross-chain swaps. Such bridges can be centralized or decentralized.
Centralized bridges
A bridge with a centralized system is based on trusting a third party, such as a cryptocurrency exchange. For example, at Binance, you can exchange and transfer your Ethereum ERC20 to Solana, Binance Smart Chain and others.
These bridges are called “wrapped bridges,” which give away tethered tokens matched one to one on any blockchain. The exchange locks your coins and creates equivalent ones on another network. When assets need to be returned back to the first network, the new tokens will be burned and the old ones will be unlocked.
The most popular use of such a bridge is to transfer bitcoins to the Ethereum blockchain as Wrapped Bitcoin (WBTC).
Centralized bridges imply the need to go through a KYC procedure and high transaction fees.
Decentralized Bridges
Decentralized bridges provide exchange without an intermediary or token escrow. They do this using smart contracts, which are programs that connect two different networks and automatically exchange tokens when certain conditions are met.
Most decentralized bridges work on a similar principle to centralized bridges: in fact, tokens are not moved or sent anywhere, and a smart contract handles the transfer in two steps. The bridge locks assets in the original blockchain and then creates an equivalent amount of assets in the second blockchain.
It will only be possible to get tokens back in the original network after the tokens in the second blockchain are burned. This is done to make it impossible to use the assets in both networks.
The total volume of circulating tokens remains the same, but is shared between both blockchains, and the value of the asset will be the same in either network because it is tied to the value of the original tokens.
In a decentralized system, users do not need to register and there is no collection of user data (KYC).
Side-chain bridging
In addition to cross-chain bridges, which connect two completely different networks, there is the so-called side-chain bridge.
A side-chain bridge connects a parent network to a child network. A bridge is necessary because usually the parent and child networks follow different rules and algorithms.
The bridge works by using a smart contract programmed to ask for proof that the necessary actions in the network originally occurred and the conditions of the contract are fulfilled. The program can then block and unblock assets on both networks.
Using such a bridge, it is possible to move any digital assets from one network to another without any third party. It bridges blockchains and layer one and layer two protocols so that token holders can interact with dApps within the entire ecosystem.
Blockchain bridges can be used as separate platforms, or with popular cryptocurrency wallets such as MetaMask or Trust Wallet. When transferring tokens from one network to another, the wallets themselves use bridges, and the user may not even be aware of it. Application developers have made sure that the end user doesn’t have to go into complicated details.
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