Have you ever wondered how to use stablecoin like USDT and USDC on Solana since you only have them on Ethereum? Cross-chain bridges can help you move assets to any blockchains. Let’s explore what a cross-chain bridge is and what makes it useful for investors.
Some key insights about cross-chain bridges:
- Cross-chain bridges can transfer assets across blockchain platforms.
- Two main ways to build bridges: Using smart contracts or liquidity pools.
- Cross-chain bridges fill the gap between blockchains and improve user experience.
- There are many cross-chain bridges. Use the one that offers the best service and fee rate.
- There are many challenges for cross-chain bridges such as duration, fees, hacks/ exploits, etc.
What is a Cross-chain Bridge?
A cross-chain bridge is the communication route between blockchain platforms to exchange cryptos, tokens, NFTs, or block information. Its goal is to bridge the interoperability gap between separate blockchains.
Without a cross-chain bridge, it is possible to convert crypto assets between different blockchains using various manual methods.
For example, to use ETH on Polygon (MATIC), investors can sell their ERC20 ETH on Ethereum for fiat money, then purchase ETH in the PRC20 token standard via on-ramp payments. Using this method requires many manual steps, time, and paying transaction fees.
Another example without the use of cross-chain bridges is that users can send their crypto assets to centralized exchanges and then withdraw them to the crypto wallets of blockchains that you want to use. Using this method requires paying transaction fees and withdrawal fees.
The two mentioned exchange methods are time-consuming and quite expensive. Cross-chain bridges exist to solve the interoperability of blockchains, which creates a seamless experience for users.
Other than coins and tokens, cross-chain bridges can transfer NFTs and information between blockchains.
How does a cross-chain bridge work?
There are two ways to build a cross-chain bridge using smart contracts or liquidity pools. The former is more widely used than the latter thanks to its simplicity and capital efficiency.
In simple terms, the bridged token is conditionally locked into smart contracts on one blockchain and smart contracts on the destination blockchain will issue and send the same amount of tokens to users. The newly minted token is called a wrapped token. For example, users can use wrapped Bitcoin on Ethereum by bridging BTC to the Ethereum network and its symbol is WBTC.
The bridge service provider is the middleman to write smart contracts for users. Users lock their crypto assets and the bridge will mint the equivalent amount of wrapped tokens for them. The name of wrapped tokens depends on the bridge owner. There is no universal term or standard for naming convention.
As a result, we might see similar ticker symbols issued by different smart contracts.
For example, aaUSDT is a wrapped stablecoin of USDT which is bridged from Ethereum to Solana via Allbridge. At the same time, aeUSDT is bridged from Avalanche to Solana via the same bridge.
Despite their equivalent value, they are two different tokens due to different smart contracts. However, investors are able to directly exchange wrapped tokens or swap for other tokens with supported liquidity.
Liquidity pools of cross-chain bridges are single-asset exposure. This means those liquidity pools do not expose users to Impermanent Loss. Users can deposit their crypto assets in one blockchain environment and receive them on another blockchain.
Investors can provide liquidity into those pools to earn token rewards from bridging fees paid by the users. However, to create a liquidity pool, they often have to have permission from the service provider. In contrast, some bridges allow users to create liquidity pools permissionlessly.
Why are bridges important?
At the time of writing, two popular crypto data websites, CoinMarketCap and CoinGecko are now tracking over 20,000 tokens and 13,000 tokens, respectively. As time goes on, the number only increases. Besides the tokens on only one blockchain, there are tokens that are available in multiple token standards of blockchain platforms.
For example, USDT is available on around 40 blockchain platforms in various token standards such as ERC20, BEP20, PRC20, etc.
Cross-chain bridge projects can fill the gap between blockchains by providing wrapped tokens. In crypto market selloffs, investors might want to swap their assets for stablecoins to avoid losses. Instead of cashing out in fiat money, they can swap their tokens for wrapped stablecoins.
Bridges facilitate the crypto transfer among blockchains by solving the problem of cross-chain. Bridge users only have to do a few clicks to have tokens ready for usage rather than transferring back and forth between exchanges to complete the same task. This affects users’ experience a lot.
Scalability, security, and decentralization are the blockchain trilemma, but interoperability might be the fourth one. Polkadot and Cosmos might be the leading names that build a world of interconnected blockchains. Cross-chain bridges are developed to connect unconnected blockchains.
Not limited to token transfer, bridges are able to transfer NFTs, smart contracts, and block information that is useful for interoperability.
Some crypto bridges
Celer cBridge (CELR) is a decentralized asset bridge that can bridge not only token assets but also information and NFT. However, transferring tokens across blockchain platforms is the most-used feature on Celer cBridge.
Multichain, formerly Anyswap, is a fully decentralized cross-chain swap protocol for various tokens with an automated pricing and liquidity system. It enables users to swap any coin on almost any blockchain, including Bitcoin, Ethereum, BSC, Fantom, Polygon, and many other platforms.
Here are some notes for Multichain usage:
- The cross-chain fee is 0.00 % but AnySwap takes a fixed gas fee of 1 USDC.
- The minimum bridged amount is 12 USDC.
- The maximum amount is 20,000,000 USDC.
- The estimated bridging time is 10-30 minutes, depending on the network’s status.
- Bridging amounts of > 5,000,000 USDC could take up to 12 hours.
Allbridge is a blockchain bridge that allows users to transfer tokens between EVM and non-EVM blockchains. Its goal is to provide simple and reliable token transfer service across blockchains to users.
Other than that, it is building an integration framework to cover the token transfer between Layer 2s such as Arbitrum and Optimism. In addition, NFT transfer is also included in the upcoming plan of Allbridge.
- Support EVM and non-EVM chains
- No transfer limits
- The dynamic fee system allows ABR stakers to reduce transfer fees.
- 4-step system: Connect wallet A, send assets, connect wallet B, and receive assets.
Other than bridges that allow tokens to move across multiple blockchain ecosystems, there are specific bridges that focus on transferring tokens to a certain platform.
For example, Optimism Bridge, developed by the Optimism developer team, is a chain-specific bridge that transfers tokens from other blockchains to Optimism. It supports Polygon, BSC, Arbitrum, Gnosis Chain, on-ramp, and CEXs like Binance and Coinbase.
At the same time, there are other chain-specific bridges that are operating in the world of blockchains. Some notable names are Arbitrum Bridge, Polygon Bridge, Near Rainbow, Avalanche Bridge, etc.
Coin98 SpaceGate is a cross-chain bridge developed by Coin98 Labs, which is integrated into the Coin98 Super App. It supports bidirectional token transfers between blockchains, including:
- Ethereum <> Optimism
- Ethereum <> Arbitrum
- Ethereum <> Boba Network
- Ethereum <> Solana
- Avalanche C-Chain <> Avalanche X-Chain
Limitations of bridges
One of the biggest drawbacks of cross-chain bridges is the fee. When it comes to bridging tokens across blockchains, it is inevitable that users have to pay fees. Bridging fees are affected by many factors, including:
- Gas fees: Bridging tokens includes many steps that require gas fees to complete. Depositing, minting, and smart contract establishment all require certain amounts of gas fees.
- Platform fees: Each bridge project takes a specific amount of fees for the service, often depending on the total bridged amount. For example, Allbridge offers a fixed fee which is 0.3% of the transfer amount while AnySwap takes 0.01% of the total cross-chain bridged amount.
- Liquidity providers (liquidity pools): Liquidity providers receive token rewards extracted from the fees paid by bridge users.
Due to congestion, the gas fee of some blockchains might peak. For instance, the Ethereum network had several congestions in 2021 due to exceeded demand. The gas fee has been surging since 2020 and it could spike to 300 - 400 Gwei, which made the bridging cost go over a few hundred dollars.
Therefore, users should choose an appropriate time period to conduct the cross-chain token transfer. In general, bridging costs more than token transfer and token exchange.
Besides the unlikely burden of bridging fees, users might have to wait long before receiving the wrapped token on the desired blockchain. During network congestion, users have to wait for an extra long period of time before getting the wrapped tokens through bridges. Furthermore, due to the blockchain architecture of some Layer 2s using Optimistic Rollups or Plasma, users have to wait up to 1 week to transfer tokens from Ethereum to their L2s.
The long duration of exchange can cause investors big losses since they are unable to interact with the assets during bridging. Imagine the opportunity slips when your ETH is in a 5-hour bridging process.
Liquidity is one of the most important metrics to measure the status of each blockchain ecosystem and how valuable the assets are. At the moment, there are hundreds of blockchains running. Even though cross-chain bridges are developed to connect those blockchains, assets on each blockchain are somehow separated.
Top blockchain ecosystems like Ethereum and BSC own billions of dollars of TVL while other smaller chains only own a few tens of millions of dollars in TVL. This creates an imbalance between blockchains and affects the experience of users.
Reaching utter equilibrium is still a big challenge for cross-chain bridges to solve.
Hacks and exploits
In short, bridges are built on top of smart contracts, which is where the risks lie. Since the advent of smart contracts, there have been hacks and exploits that caused millions of dollars in damage.
Ronin Network and Wormhole account for two of the biggest cross-chain bridge hacks/exploits in the crypto space. Wormhole was audited while Ronin Network was not. However, both were hacked, resulting in hundreds of millions of dollars of crypto being lost.
Therefore, locking assets in smart contracts is potentially risky. Users should be aware of the fact that unaudited and audited smart contracts are still potential targets for hackers.
Should we invest in bridges’ tokens?
Until now, bridges are a crucial lego part of the blockchain world. They bridge the gap between decentralized blockchains like Ethereum, Avalanche, Layer 2s, Solana, etc. As investors, how can we invest in those projects besides being service users? Are bridges’ tokens good enough to invest in?
How bridges’ tokens capture value
The most obvious use case of governance tokens of cross-chain bridges is fee reduction. Service fees are the primary source of revenue for those bridges. The token holders can get a fee discount while bridging their tokens, increasing the demand. The bridge tokens might have other utilities other than fee reduction.
Tokenomics is also a critical factor that has a huge impact on the state of the token. Read more about it here: What is Tokenomics?
Are cross-chain bridges safe?
Bridges use blockchain technology to create trustless token transfer across blockchains. With the use of smart contracts, bridges lock tokens on one blockchain to issue equivalent wrapped tokens on the destination blockchain.
In the past, there was the Wormhole bridge hack, raising caution for other bridges. Therefore, we should understand the drawbacks of cross-chain bridges before using them.
Last but not least, we should do our own research and be responsible for our investments. All information is solely for reference purposes, not investment advice.
Cross-chain bridges can transfer tokens, NFT, information, and so on, filling the gap between any blockchain platforms. Other than bridges, there are alternative options to transfer tokens using CEXs or a medium of exchange that take many manual steps to complete. We are just in the early phase of cross-chain bridges since they are facing many big obstacles.