Cryptocurrency bridges: Transfer tokens from one blockchain to another.
What is a cryptocurrency bridge
A cryptocurrency bridge is a DeFi protocol that allows you to transfer tokens or cryptocurrencies between different blockchains or blockchain networks.
It is a way to connect different blockchain ecosystems and enable users to securely and reliably move their assets from one network to another.
How cryptocurrency bridges work
Cryptocurrency bridges work by creating smart contracts on the different blockchains that need to be connected. These smart contracts act as a bridge, allowing tokens to be locked on one blockchain and issued on another. Users can then transfer tokens or cryptocurrencies between different blockchains, and the smart contracts ensure that the transactions are secure and reliable.
We want to emphasize that the tokens are locked. That is, if you want to transfer tokens from Ethereum to the Binance Smart Chain, ether tokens would be locked on the Ethereum blockchain and the same number of ether tokens would be issued on the Binance Smart Chain blockchain.
In other words, no new Ether is actually being issued, as that could alter its total supply. By being locked, these tokens are not accessible by anyone and would not affect the total capitalization of Ethereum.
The bridge can be used to return the tokens to the Ethereum network. In this case, the smart contract burns the Ether tokens on the Binance Smart Chain blockchain and releases the corresponding number of tokens on the Ethereum network.
Commonly, tokens that are on a non-native network are known as synthetic tokens. This is not entirely true, as they are actually cryptocurrencies or tokens backed by other assets. However, due to the widespread use of this term and for simplicity, in this article we will also refer to them as synthetic tokens.
In our example, ether is native to the Ethereum network and becomes synthetic tokens (or tokens backed by other assets) when you perform the bridge and they are issued on the BSC.
Advantages and disadvantages of blockchain bridges
The advantages of a cryptocurrency bridge include:
- Interoperability: Bridges allow assets to move between different blockchains, increasing interoperability and connectivity of blockchain ecosystems.
- Flexibility: Users can choose the blockchain that best suits their needs and easily switch based on circumstances.
- Diversification: Bridges enable users to take advantage of investment opportunities in different blockchains and increase diversification of their cryptocurrency portfolios.
- Fees: Bridges may have transaction and gas fees that can be costly, especially with frequent use.
- Security: Transferring assets between different blockchains can involve certain security risks, such as the possibility of errors or malicious attacks.
- Speed: The speed of asset transfers can vary depending on network congestion, which can affect efficiency and quickness of the process. However, involving two blockchains generally takes longer than a regular transaction.
Disadvantages of a cryptocurrency bridge include:
Security should be highlighted as a significant disadvantage. Having synthetic tokens carries more risks than having them in their native network. Bridges lock the native tokens, but these DeFi protocols are exposed to hacks. In fact, hacks on cryptocurrency bridges are one of the most common types of hacks.
If you use a bridge to issue tokens on another blockchain and the bridge is hacked, the synthetic tokens will lose all their value, while the value of the native token may not be affected.
People often transfer tokens to another blockchain to take advantage of opportunities in DeFi. For example, many people transfer bitcoins to Ethereum to earn extra money in a liquidity pool or lending platform, as these protocols are not natively available in Bitcoin because Bitcoin cannot execute smart contracts.
These advantages are not trivial: There are currently over 10 billion dollars locked in Bridge-type protocols.
However, if your intention is to hold or keep your cryptocurrencies, you should do so in their native blockchain for security reasons.
What are the best bridges for cryptocurrencies
Due to the multitude of existing blockchains, the large number of bridge protocols, and the multiple factors to classify a bridge as the best (speed, fees, security...), it is very difficult to choose one as the best.
But there is an indicator that will help you find the best bridges to transfer tokens to another blockchain: The TVL or Total Value Locked. This metric indicates the dollar value of all tokens that a protocol has locked. In the case of Bridge-type protocols, it indicates the value of all native tokens that users have transferred to another blockchain.
If this value is very high, it means that many people are trusting that protocol. In addition, to achieve high TVL, the protocols must have been in operation for a certain period of time, so they must have withstood hacking attempts, which also provides confidence in the security of their smart contracts.
The best way to check how much value a protocol has locked and compare it with others is through defillama.
To view the Bridge-type protocols, expand the "DeFi" tab in the left panel of defillama and click on "Categories". On the next page, click on "Bridges". You can also access it directly through this link.
In this screen, you can see all the cryptocurrency bridges, compare them, and see their TVL. You can also filter by blockchain to find a bridge that you can use.
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