In our lesson on chain interoperability, we learned that blockchains are currently siloed ecosystems that can’t yet effectively communicate and share data with one another. However, cross-chain bridges are one of the already available solutions that can connect various blockchains and ecosystems.
Let’s say you are a loyal user of the applications on the Ethereum blockchain but one day, you find out that another blockchain allows you to earn tokens in new ways, such as through play-to-earn (P2E) games.
Since you already hold ETH and don’t want to use your hard-earned fiat to purchase other layer-1 tokens, you can use cross-chain bridges to bring your ETH tokens to that blockchain.
Read the following lessons for more DeFi knowledge:
- What is a decentralized exchange (dex)?
- What are liquidity pools?
- How to connect Huobi Wallet to DeFi protocols?
- Huobi Futures: Driving DeFi legitimacy
- What is DeFi?
- How to protect yourself from DeFi hackers
What is a cross-chain bridge?
A cross-chain bridge is a protocol that enables users to transfer their tokens from one network to another. You can think of it as a ‘middleman’ that connects two blockchains and allow users to transfer tokens, utilize smart contracts, exchange data, and employ other functionalities of interoperable chains. For example, you could use a cross-chain bridge to transfer your BTC to the Ethereum network and utilize smart contracts unavailable on Bitcoin.
The inability to cooperate is a major issue when it comes to blockchains. Even though blockchains decentralize many real-world tasks in industries such as finance, social media, and data storage, they have experienced limitations in offering these solutions outside their ecosystems.
In short, cross-chain bridges strive to bring the seamless experience enjoyed in traditional markets to crypto.
While cross-chain bridges represent a step forward for interoperability, they are constantly developing and, as such, sometimes suffer exploits and contain code vulnerabilities. In fact, Ethereum co-founder Vitalik Buterin has raised concerns about cross-chain bridges inadvertently allowing hackers to cross-chain 51% attacks.
How does a cross-chain bridge work?
How cross-chain bridges function can be likened to changing fiat money for chips at a casino. Let’s say a user holds Token A on Blockchain A and wants to move their Token A holdings to Blockchain B, which has a native token, Token B.
To do this, they send their Token A holdings to a cross-chain bridge, which will simultaneously hold them and create an equivalent amount of Token B for the user on Blockchain B. The user’s Token A holdings are not actually transferred from Blockchain A to Blockchain B but are instead locked in a smart contract that grants them access to the same amount of holdings in Token B.
The same happens when the user wants to convert their Token B holdings on Blockchain B to Token A on Blockchain A. The smart contract will burn (destroy tokens) or release from custody the amount of Token B the user has and create an equivalent amount of Token A.
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