Last Updated on January 31, 2024 by Ameer Hamza
As a crypto investor, there are high chances that, at some point, you would have attempted to transfer your crypto assets from one blockchain to another blockchain, either for trading purposes or for some other reason. However, the ability to conduct such transfers is not so straightforward. It is only made possible by applications that are called blockchain bridges.
What are Blockchain Bridges?
Blockchain bridges are tools that enable cryptocurrency users to transfer assets from one blockchain network to another network. For example, suppose you need to send a Solana coin to a Bitcoin blockchain. In that case, a blockchain bridge is applied to process the transaction such that your Solana coin will automatically become usable on the Bitcoin blockchain.
Blockchain bridges are used because blockchain technology generally lacks interoperability. This means that blockchain networks are not connected in a way that enables them to share data, tokens, or information. As such, the Solana blockchain stands alone and can rarely have any form of communication with any external network.
How Do Blockchain Bridges Work?
As earlier stated, blockchain networks lack any form of inter-connection. Blockchain bridges solve this problem by converting assets to a “wrapped” version. This wrapped version adopts the network’s standard to make the coin acceptable on the other network.
For example, if a blockchain bridge were to process a transfer of a Solana coin to the Ethereum network, the bridge would transform the Solana coin into a wrapped version that adopts the ERC-20 token standard. You will then use this wrapped version on the Ethereum blockchain. According to reports, over $21.8 billion worth of crypto is currently locked in blockchain bridges. There are many blockchain bridges on the market. The largest blockchain bridge is Wrapped Bitcoin, which takes up about half of the entire blockchain bridge market with a Total Value Locked (TVL) of over $10 billion. Other blockchain bridges include MultiChain and Avalanche Bridge.
Types of Blockchain Bridges
The types of blockchain bridges vary by function. However, there are generally two types of bridges: custodial and non-custodial bridges.
Custodial bridges are centralized bridges. They are bridges that a single organization controls. The controlling organization is responsible for holding users’ funds, keeping the funds safe, and conducting transactions. On the other hand, non-custodial bridges are decentralized. Blockchain protocols hold users’ funds. Also, similar to mining, users are paid to validate transactions on the bridge.
Other forms of bridges include unidirectional bridges and bidirectional bridges. Unidirectional bridges enable users to only transfer assets to another blockchain. In this case, assets are not transferrable to the initial blockchain. However, bidirectional bridges enable users to transfer assets to another blockchain and back to the initial blockchain. Wrapped Bitcoin is an example of a unidirectional blockchain, while MultiChain is an example of a bidirectional blockchain.
As more transactions are being conducted on the blockchain, the demand for inter-chain transfers will increase. As a result, the usefulness of crypto bridges is set to get even larger in the coming years.