Understanding Cross-Chain Bridges In Crypto Ecosystems by Sarah Kutu

Since the Bitcoin network pioneered the cryptocurrency ecosystem, over a thousand more blockchains have been created. These networks have their unique use cases, structures, security frameworks, and operational models. However, two blockchains cannot speak to one another naturally, making a solution that allows interoperability essential. 

To solve the challenge of blockchains being unable to communicate on their own, cross-chain bridges came to life. These blockchain solutions bridge the gap between one network and another, making it possible for them to communicate and work hand-in-hand for faster transactions, stronger security, and better accessibility. 

This article breaks down cross-chain bridges, their importance, and the different types to examine how they address various limitations in the crypto world.

What is a Cross-Chain Bridge? 

A cross-chain bridge is a solution or software application that allows different blockchain networks to connect, communicate, and transact seamlessly. These platforms understand that cryptocurrency users may need to transfer coins or tokens from one network to another, so they step in as the intermediary to facilitate a successful connection and transaction. 

For instance, if you want to use your $100 worth of USDT in your ETH wallet that operates on the Ethereum blockchain to buy MATIC on the Polygon network, you naturally won’t be able to. However, with a cross-chain bridge, you can easily send the USDT from your Ethereum wallet to the Polygon wallet. 

That means with cross-chain bridges, you don’t necessarily need to own or manage multiple assets. Instead, you can unlock the value of every crypto asset you own and use it for various purposes across different blockchains.

So, how do cross-chain bridges work? Typically, they use a cross-chain communication or messaging protocol to let different blockchains speak to one another. Their key components include:

• Smart contracts for validating and automating transactions across different chains to make them secure. For this to work, an asset is locked in a smart contract on its native blockchain network and another asset with an equivalent value is minted on another network. Afterward, the system switches the assets for cross-chain transactions. 

• Consensus mechanisms that combine proof-of-stake (PoS), proof-of-work (PoW), proof-of-authority (PoA), proof-of-history (PoH), and others to create agreements between blockchain networks. 

• Oracles or Bridges that connect external transactions with the smart contract codes to ensure accurate and seamless execution. 

The Importance of Cross-Chain Bridges in Crypto

As stated earlier, no two blockchains were built to speak to each other naturally. Neither can they understand each other or work together. For instance, the Bitcoin blockchain doesn’t understand what is happening on the Ethereum blockchain, and vice versa. 

This is because each network has its native programming, structure, design, and features that don’t align with the other. So, as more blockchains started entering the crypto space, the need to collaborate and solve each other’s problems was crucial to make transactions and other activities more accessible for users. Hence, the need for blockchain bridges to mix and match their various strengths for better results, especially as the decentralized finance (DeFi) ecosystem needs them to speak together. 

Now, let’s assess the importance of these bridges to cryptocurrency developers and users. 

Interoperability and Scalability

The most significant role of cross-chain bridges is their ability to facilitate seamless communication across multiple blockchain networks. This is referred to as interoperability. With more networks being able to communicate through bridges, the Web3 ecosystem can expand, as more networks rely on each other’s strengths to build a stronger and unified environment. 

For example, a blockchain network with limited transaction throughput can leverage the strengths of another with fast transaction speed to scale up. 

Better Liquidity 

The cryptocurrency market needs strong liquidity to operate seamlessly and facilitate the multiple transactions that users initiate per second. Without blockchain bridges, these users will be limited to a specific number of assets, which may result in a thin market and high price volatility. 

But since blockchain bridges allow cross-chain operations, you can easily buy, sell, or swap one asset for another on cryptocurrency exchanges or DeFi platforms with lower volatility risks. 

Seamless Cross-Chain Transactions

You can transfer crypto from one network to another without having to sell your owned asset or buy the other asset because of cross-chain bridges. For instance, if you own BTC and want to stake ETH or another ERC-20 token on a staking platform, you can use a cross-chain bridge for direct conversion. 

Improved Accessibility 

Blockchain bridges make cryptocurrency transactions and other activities more accessible for traders and investors. They eliminate the need to have multiple cryptocurrency wallets or trading accounts, making it easier for you to manage your assets across multiple networks. 

For instance, you don’t need to have a Bitcoin and Ethereum wallet separately for their compatible crypto asset custody. Instead, you can use a cross-chain bridge to convert them or transact without hassles. 

DeFi Expansion

The opportunities in the DeFi space are massive, and cross-chain bridges play a pivotal role in helping users attain them. Both decentralized app (dApp) developers and DeFi investors can access various assets, liquidity pools, and other opportunities because cross-chain bridges integrate multiple platforms to enhance liquidity and functionality. 

So, dApps can operate on multiple blockchains simultaneously to reach more users, and investors can also access various investment opportunities like staking, DeFi lending and borrowing, and yield farming for passive income. 

Better Diversification 

Investment diversification is one of the effective ways to manage risks in the crypto market. Since market prices are volatile, an upward trend on one blockchain may trigger a downward trend on another. 

But with the asset diversification across multiple blockchains that cross-chain bridges offer, you can balance risks and rewards to mitigate potential losses of holding or investing in assets on a single network. 

Enhanced Security 

Besides making networks more scalable, cross-chain bridges allow interoperating blockchains to leverage each other’s strengths. So, a network trying to attain better security can connect to a more secure network to offer its users safe and secure crypto transactions. 

So, investors worried about the crypto security on a single blockchain could potentially reconsider it if they know it integrates with a more secure platform to facilitate transactions. 

Arbitrage Opportunities 

Blockchain bridges create the opportunity for arbitrage traders to profit from the price differences from one liquidity pool to another. Since various liquidity pools have different annual percentage yields (APYs), a DeFi trader can find options with high yields to maximize profits. 

For instance, if Ethereum staking offers 4% APY and Fantom staking offers 11%, a trader can bridge their ETH tokens over to the Fantom liquidity pool, get extra profits, and bridge the coins back to the original Ethereum blockchain. 

With just a single move, such a trader would make a profit from two liquidity pools. This would not have been possible without cross-chain bridges that seamlessly let the two networks communicate and execute seamless transactions. 

So, bridges do not only let developers integrate multiple blockchain features into their dApps. They also provide active investors with earning opportunities in the DeFi world. 

Current Challenges and Future Considerations 

Despite their significant achievements and exciting outlook, several challenges must be addressed for cross-chain bridges to achieve maximum potential. 

First, there are questions about security when cross-chain transactions happen. Though these transactions are smart contract-enabled, making them relatively secure, transactions are more risky when taking place on different blockchains simultaneously. 

For instance, a cross-chain transaction between a highly secure and less secure blockchain may expose users to security risks like hacking and cyberattacks compared to when it takes place on a single blockchain. In other words, a secure network has to compromise its security for a cross-chain transaction to happen. 

Furthermore, different blockchains connect through scaling solutions for different reasons, including speed, decentralization, and security. Unfortunately, there’s not one cross-chain bridge that combines all of these qualities, making it necessary for blockchains to demand multiple bridges to solve different issues. The more cross-chain connections, the bigger the security risks. 

Moreover, there are insecure bridges that can leave users vulnerable to security attacks. These bridge attacks make up a great part of the DeFi security exploits, making it imperative for developers and investors to research properly and prioritize security when designing or using a cross-chain bridge. 

Ultimately, you should consider a cross-chain bridge’s security protocol and other measures in place to ensure cross-chain messaging is secure and won’t put you at risk of bridge attacks or other vulnerabilities. 

Zypto is Enabling Secure Web3 Developments

The demand for secure cross-chain bridging will continue increasing as more blockchains are built in the Web3 space. This is why Zypto is offering developers the opportunity to build Web3 cross-chain solutions with end-to-end security to offer crypto users safe and secure cross-chain transactions. 

The Zypto Crypto Development Team is on standby to help turn your Web3 cross-chain ideas into reality. So, whether you want to develop the next-generation cross-chain solution, crypto products like Bitcoin wallets and crypto cards, or need a white-label solution to speed up your market entry, there’s something for you at Zypto. 

Visit the Zypto website or contact us to tell us your needs and let us bring your ideas to an exciting fruition. 

What do you think about cross-chain bridges? Will their security and other issues be solved in the future? Share your thoughts with us in the comment section below.

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