Cross-chain bridges and their importance in DeFi

What are cross-chain bridges?

Cross-chain bridges enable token transfers and smart contract executions between blockchain networks. They also allow users to carry out quick and easy transactions, as well as implement decentralised apps (dapps) across multiple platforms.

A cross-chain bridge connects two blockchain networks to enable interpretability and intercommunication. While there are several cross-chain bridges out there, they are usually divided into two groups – centralised and decentralised.

Centralised bridges rely on third-party trust to operate. This kind of bridge can be appealing for anyone who is new to crypto and hasn’t yet built up the skillset or confidence to use decentralised networks.

On the other hand, decentralised cross-chain bridges are based on cryptography and mathematical trust. They involve a group of computer nodes working together to reach a certain consensus, based on the rules written in the code. As a result, an open-source, transparent system is created, which almost entirely relies on a blockchain’s framework.

How do they work?

Interestingly, when crypto assets are transferred from one blockchain to another through a decentralised cross-chain bridge, they aren’t actually transferred or relocated elsewhere. Here’s how it works:

  • A user transfers their crypto assets from Blockchain A to Blockchain B.

  • Blockchain A temporarily locks these tokens, while the same amount is minted and unlocked on Blockchain B.

  • If a user wishes to redeem their tokens, they can burn them from Blockchain B and then unlock them on Blockchain A.

This process is known as “lock and mint” and “burn and release”, and it’s what enables the amount and cost of tokens sent between networks to remain the same.

Why are they beneficial?

When more and more projects and dapps are continually built on top of a blockchain, the network can quickly become overloaded, resulting in high fees and slower block processing times.

Cross-chain bridges were designed to tackle these issues by forming a link that allows tokens and data to travel to and from one chain to another (hence the “bridge”).

Even if they have different protocols and governance models, users are still able to oversee fast and low-cost transactions on otherwise less scalable chains, as well as execute dapps on more than one platform.

What are sidechain bridges?

Sidechain bridges are a little different from regular cross-chain bridges in that they are independent networks with their own mechanisms, nodes and infrastructures.

For instance, xDai is an Ethereum-based sidechain that is secured by a set of validators. The xDai bridge and the Omnibridge work together to connect xDai to the main Ethereum network, allowing quick and easy token transfers.

A cross-chain bridge between Cardano and Ethereum opens

In October 2021, Input Output Global (developers of the Cardano blockchain) teamed up with NFT solutions provider Bondly to create a cross-chain bridge to connect the Ethereum and Cardano networks.

The bridge is anticipated for release in early 2022 and will enable NFT creators to easily move their assets from Ethereum to Cardano. It will also provide creators with an eco-friendly solution for their NFTs, particularly as Cardano uses significantly less energy compared to Ethereum’s proof-of-work (PoW) protocol.

On top of that, Cardano offers price predictability and stability for transaction costs, meaning creators can mint or transfer NFTs without the risk of lost transactions or sudden cost increases.

Charles Hoskinson, founder of the Cardano blockchain, commented: “We built Cardano with energy efficiency in mind, which is why this partnership with Bondly is so crucial, as it will allow NFT creators access to a leading solution for token creation which doesn’t compromise on environmental credentials.”

Cross-chain bridges have become increasingly popular in DeFi, and it’s easy to see why. Not only do they provide good interpretability and intercommunication between blockchain networks, they also address the current problems of capital flow and high transaction costs.