We previously wrote about the technology of wrapped tokens, a cross-chain solution to combat against the proliferation of non-interoperable blockchains today. Another solution is blockchain bridges.
Why do we need blockchain bridges?
Decentralized applications (DApps) are generally built on one blockchain - though there is an increasing shift to multi-chain in recent years. The lack of interoperability between blockchains makes it difficult for the user to transfer assets if they want to capitalize on opportunities elsewhere. For example, users may want to transfer BTC to the Ethereum blockchain, which has a vibrant DeFi ecosystem.
Before blockchain bridges, users had to do it in a centralized way. They would transfer or buy BTC through a centralized exchange, sell it for ETH and transfer ETH into their decentralized wallets. This process is tedious and time-consuming.
Thus, a blockchain bridge is a cross-chain solution that allows for the compatible transfer of tokens and data between two chains at a low cost.
How do blockchain bridges work?
Let’s say Amy wants to transfer ETH from the Ethereum blockchain to BNB Chain, using a decentralized bridge like cBridge. She would have to deposit ETH onto cBridge and select BNB Chain as the recipient network. The transfer will be done in 5-20 minutes with a small gas fee.
The transfer from Ethereum to BNB Chain doesn’t mean that Amy’s ETH is sent through the bridge or relocated. Instead, her ETH on Ethereum would be frozen on the blockchain using a smart contract. The corresponding amount of ETH is then created on BNB Chain. If Amy were to transfer ETH back to the Ethereum blockchain, whatever ETH she had left on BNB Chain would be burned and the remaining amount goes back into her wallet.
As BNB Chain is EVM-compatible, Amy is able to receive ETH through this transfer. For non EVM-compatible blockchains, Amy would receive wrapped Ether (wETH).
Perhaps up-and-coming as an even more convenient solution is the cross-chain DEX. Cross-chain DEXes are decentralized exchanges providing fast swaps among different blockchains. They source liquidity across many DEXes, DEX aggregators and automated market makers. This also solves the inconvenience of wrapped tokens, which have to be unwrapped.
Using a cross-chain DEX like ChainHop — built on cBridge — Amy could deposit BUSD and select to withdraw in ETH easily.
Chainhop on cBridge
Blockchain bridges are efficient and low-cost, and provide users with cross-chain collateral. However, DeFi is susceptible to exploits, so traders should always do their due diligence before depositing any funds — even if it’s just for a short transfer. With the rise of cross-chain DEXes, we may also see a shift in user adoption in coming years.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
Risk Reminder: Crypto and NFT trading carries a risk. All trading activities are done at your discretion and at your own risk. The information here should not be regarded as financial or investment advice from ApolloX. ApolloX will not be liable for any loss that might arise from your use of any financial product.
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