Imagine that you have saved enough money and plan to visit the alps of Switzerland. You have updated your winter clothing collection. Your newly purchased shades are packed. While you are brushing your skiing skills while watching that YT video, you realize, that you are yet to sort out the currency exchange. Yes, the medium of exchange in Switzerland is going to be Swiss Francs and not INR, YEN, EURO etc.
Let’s try to find blockchain analogy of this scenario. Think of any blockchain like Ethereum, as a city. The standard (ERC20) for that blockchain (city) is it’s currency. You cannot interact with dApps (Local vendors) until you have ERC20 tokens.
Since each blockchain has it’s own standard (eg. Binance has BEP20), it is important to convert assets (currency) native to one blockchain to the other. This is exactly what a bridge helps you accomplish.
Simply put, a blockchain bridge is a connection that allows transfer of tokens from one bridge to another. These bridges can or cannot follow the same standard.
Why are Bridges Important Part of Crypto Ecosystem?
The next obvious question is why do we need a bridge for crypto assets? Agreed that it helps in interoperability, but why is it needed at all? Let’s discuss that:
A. Flexible DeFi:
In a hypothetical example, let’s assume that Aave only supports Ethereum blockchain. The APY for depositing your ETH on Aave is around 0.5%. However, if you deposit WETH, you can fetch up to 3% APY which is 6 times than the former case.
The real power of Decentralized Finance lies in the fact that a user is only bound by their own imagination. Since you are not constrained by banks and their norms, you can innovate with your assets.
This innovation requires movement of assets across chains as demonstrated above.
B. Transaction Fees:
Gas fees on Ethereum is exorbitantly high for a retail investor. This means if you plan to transact on a regular basis, you might have to use a L2 solution (polygon etc.) or some other blockchain altogether.
For example, you could move your assets from or to Ethereum for Polygon using this link. It is a bridge developed by Polygon team.
C. Future Readiness:
Interoperability is a key pillar of a truly decentralized world. For example Bitcoin, the largest cryptocurrency by market cap isn’t capable of running smart contracts. This means I cannot perform tasks like borrowing, lending on BTC. However, if BTC is bridged to another chain like BTC, it opens up a whole set of possibilities.
D. Owning a real asset:
Whenever you buy any token from a centralized exchange like CoinDCX, it may not necessarily belong to it’s native chain. For example, when you buy MATIC from WazirX, you get a wrapped version of MATIC in ERC20. This means that MATIC is made compatible with Ethereum blockchain and NOT the original polygon chain.
There’s no harm in owning such assets but there can be security glitches due to the way they are wrapped. So ideally, one needs bridges to move back to the original chain of the asset.
Issues With Bridges:
While bridges are an integral part of the ecosystem, there are still a lot of BUIDLing that needs to happen. These issues can be categorized into two categories:
A. Centralization:
Most crypto bridges out there are centralized in nature. Generally, there is an organization in the middle which receives your crypto and issues a similar crypto on the other network. For example, you might want to convert tether from Ethereum to Polygon Blockchain. In that case a pool of these assets will be possessed by this organization. This creates the problem of trust. What if these organizations were to run away with your money?
With that being said, there are decentralized counterparts of these bridges too. They way they work is by freezing your assets from one network and burning them. It then prints (generates) an equal amount of the asset on a different network.
For example BTC is one of my favorite investment tools. However, it lacks the smart contract capability so I cannot borrow/stake it in protocols like AAVE, Compound. Which is why it is often bridged to ETH in the form of renBTC. One can use renBTC to perform all of the aforementioned tasks.
B. Speed:
Bridges are often slow and unreliable. They can sometimes take up to hours and days in some cases to deliver your assets. Compare this with blockchain transactions that take no more than 10 minutes to execute.
Conclusion:
A few examples of bridges are xPollinate, Matic Bridge, Binance Bridge. While this was pretty much about how bridges work, I wanted to hear from you guys. Have you ever used a bridge before? Was it a smooth experience or a rocky road?
Got questions? Want to take it to the next level? Reach out to me using your preferred platform from the links below
Until next time..
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