🌉Crypto Bridges: What Are They & How Do They Work?🌉
Just like a physical bridge connects two physical locations, a blockchain bridge connects two blockchain ecosystems. Blockchain bridges enable what is called interoperability, meaning that digital assets and data hosted on one blockchain can interact with another.
🔺How Crypto Bridges Work
How does a blockchain bridge function? Well, the most common use case for a blockchain bridge is token transfer. For example, let’s say that you want to transfer your bitcoin BTC to the Ethereum network. One way is, of course, to sell your BTC and then purchase ETH. However, this would incur transaction fees and expose you to price volatility.
Luckily, you can achieve the same objective by using a blockchain bridge & it doesn’t take selling your crypto! When you bridge 1 BTC to an Ethereum wallet, a blockchain bridge contract will lock your BTC and create an equivalent amount of Wrapped BTC (WBTC), which is an ERC20 token, compatible with the Ethereum network. The amount of BTC you want to port gets locked in a smart contract, and the equivalent tokens on the destination blockchain network are issued or minted.
💥Bridges also enable:
- cross-chain transfer of assets and information
- dapps to access the strengths of various blockchains — thus enhancing their capabilities (as protocols now have more design space for innovation).
- users to access new platforms and leverage the benefits of different chains.
- developers from different blockchain ecosystems to collaborate and build new platforms for the users.
✔Custodial vs. Non-Custodial Bridges
We can roughly divide blockchain bridges into two kinds: custodial (centralized) and non-custodial (decentralized). Custodial bridges require users to place their trust in a central entity to properly and safely operate the system. Users should do extensive research to ensure that this entity is trustworthy.
Non-custodial bridges, on the other hand, operate in a decentralized manner, relying on smart contracts to manage the crypto locking and minting processes, removing the need to trust a bridge operator. In this case, the system’s security is as good as the underlying code.
The largest blockchain bridge is currently Wrapped Bitcoin, accounting for almost half of the bridge market, with $10.2 billion in total value locked (TVL). DeFi Llama pegs Multichain as the largest cross-chain bridge, with about $7 billion in TVL.
A dashboard on Dune Analytics shows that the Avalanche Bridge is the largest Ethereum bridge, with about $6 billion in TVL, followed by Polygon ($5 billion TVL) and the Fantom Anyswap Bridge ($4.2 billion TVL).
These bridges are great, but we at BXH also got something up our sleeve! Find out all about BXH bridges in our next article!
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