What are crypto bridges and why do people use them?
Cryptocurrency has fans around the globe because – among many useful applications – it allows for the nearly instantaneous transfer of funds across borders. But there might be one underlying issue with cryptocurrencies that isn’t discussed very often: these digital assets are created on one blockchain, and while they still hold value, they aren’t necessarily applicable across other blockchains. In other words, all that ETH that you’re scooping up in anticipation of The Merge cannot be spent as SOL to purchase some sweet digital sneakers. If that last sentence made no sense to you whatsoever, don’t panic.
This post will walk you through an added technical layer that can basically migrate your crypto from one blockchain to another. They can also migrate smart contracts, NFTs, and other information from one blockchain environment to another.
These methods of migrating, duplicating, or swapping digital assets across different blockchains are known as crypto bridges.
How do crypto bridges work?
Here are the basic concepts about blockchain bridges that matter to the average crypto investor:
The cryptocurrency industry is populated by numerous blockchains that generate value and utility for investors, but these blockchains operate independently of one another.
Crypto bridges are the solution for investors who want to take digital assets from one chain and spend, swap, or invest those assets on another blockchain.
Some cross-chain bridges accomplish this by creating a “wrapped” token out of the crypto from the starting chain, making it compatible with its destination.
If you have a digital wallet, then you can swipe around and visit the various coins or tokens that make up your crypto holdings. But what if you want to take some of your best-performing assets and use that as collateral to get into another blockchain project? Will your ETH be spendable on another blockchain like solana (SOL)? That’s where a cross-chain application, more commonly known as a crypto bridge, comes into play.
One method of migrating digital assets’ value from one blockchain to another is by employing “wrapped” tokens. The asset you start with is set aside into something like a digital vault, where it is nicely wrapped and put away. Think of it like a safe deposit box. Then, a new token gets minted so it will be applicable on other networks. These wrapped tokens give assets generated on different blockchains the ability to function on any blockchain. Wrapped tokens are in and of themselves a kind of crypto bridge.
There are other examples of cross-chain bridges at work in the crypto ecosystem today. A popular one is the solana-based app StepN. StepN gives users a chance to earn cryptocurrency based on their step count. App users wear a pair of digital sneakers while they exercise and they get rewarded with crypto. This is referred to as a move-to-earn health app, but a more basic explanation would be thinking of it as a kind of digital step counter with game mechanics baked in.
But the StepN app is more than just a novel way to earn crypto by moving your feet; it also boasts a built-in interoperability bridge. The team at Multichain, a cross-chain swap protocol, announced in early August 2022 that StepN users can now apply their earned crypto rewards across multiple blockchains, including binance (BNB), USD coin (USDC), and ethereum (ETH).
Do blockchain bridges have any downside?
Applications that act as blockchain bridges have tremendous potential for the world of cryptocurrency. The flexibility of transferring digital assets from one siloed environment to another opens up many avenues for staking, lending, or liquidity purposes. But the one asterisk to this upside might be the troubling history of major hacks that have hit crypto bridges in recent years. Sadly, the amount of assets stored in cross-chain bridges makes them appealing targets for hackers.
In February of 2022, the blockchain bridge Wormhole was targeted by a massive exploit that resulted in the loss of funds totaling nearly $330 million. And in August of 2022, the popular crypto bridge Nomad was hit by hackers who made away with nearly $200 million worth of crypto.
What’s even more troubling to consider is that many in the crypto space viewed these platforms as some of the best crypto bridges out there. Nevertheless, Web 3 and crypto supporters might take the view that hackers will inevitably try their hand at cracking into any digital vault, so at least there’s value in knowing where things need to be patched or security needs to be tightened to prevent theft in the future.
What does the future hold for crypto bridges?
Down the road, users may encounter more cross-chain applications that allow them to use their tokens on one blockchain as collateral for acquiring assets on another blockchain. In other words, a cross-chain lending application.
Entrepreneurs may have more exposure to crypto bridges in the future as well. If startup founders are looking for investors to finance their blockchain-based projects, then cross-chain liquidity pools may take the place of traditional venture capital firms or angel investors in funding rounds for companies.
Where do crypto bridges come into play at the moment? Mostly as liquidity bridges for assets to operate on different blockchains. The way crypto bridges grow and develop over time will certainly be interesting to watch. The known security vulnerabilities of crypto bridges may give some crypto investors pause, but at least these weak points are well documented, so there is hope that future iterations will be safer for investors who store their assets on them.
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