Everything about cross chain bridges and their meaning
While DeFi promises a world where anyone can transfer money without the hassle and high transaction fees of banks, anyone who’s recently tried converting ETH to BNB knows what it is.
Gas fees make cross-chain transactions expensive and impede the free flow of cryptocurrencies. So it’s not surprising that cross-chain bridges have grown at an unprecedented rate – 89% increase in Total Value Locked (TVL) in October – while DeFi’s transaction volume is booming.
However, did you know that cross-chain bridges solve other problems besides (essential) transaction fees for cryptocurrencies?
As multi-chain projects and interoperability become an important part of the industry, DeFi investors need to understand how these cross-chain bridges work.
TVL in DeFi from January 2021 | Source: Footprint Analytics
DeFi TVL Rating from BlockChain from January 2021 | Source: Footprint Analytics
This article looks at the nature of cross chain bridging, specifically:
- How does the cross-chain bridge work?
- Market performance of cross-chain bridges.
- The problems are solved by cross-chain bridges.
- Select a cross-chain bridge.
What is a cross chain bridge?
A cross-chain bridge or blockchain bridge enables the transfer of assets, smart contract guidelines or data between blockchains. Two chains can have different protocols, rules, and governance models, but a cross-chain bridge connects different blockchains through secure interaction.
A cross-chain bridge enables users to:
- Deliver transactions with digital assets quickly and easily.
- Enjoy low operating difficulties.
- Benefit from lower transfer fees with non-scalable blockchains.
- Deploy dApps on multiple platforms.
Here is an example of how cross-chain assets are passed using a bridge:
When a user needs to convert an asset like ERC20 A token on Ethereum to another asset like BEP20 A token on BSC chain via AnySwap, ERC20 A will be blocked on the source chain and then notify the bridge, BEP20 A on the BSC chain to generate before sending to the user.
In this example, the entire cross-chain bridge operation takes about 5 to 20 minutes, with an estimated gas charge of between US $ 10 and US $ 20, depending on the reservoir condition. ) in the Ether network at this time.
The market is currently dominated by cross-chain bridges with Layer 2 scaling, mainly based on Ethereum for better connectivity and interoperability.
According to Footprint, the TVL of cross-chain bridges was $ 16.2 billion as of October 26, an increase of more than 72.25% in the last 30 days. The four largest cross-chain bridges are Avalanche Bridge, Polygon Bridge, Arbitrum Bridge, and Fantom Anyswap Bridge, which make up 95.61% of all cross-chain bridges, with the highest monthly increase of 401.23% last month.
Data from CoinTofu’s Cross-ChainBridge tool shows that these four cross-chain bridges also have excellent user experience ratings.
TVL Distribution & Cross-Chain Bridge Market Share as of April 2021 | Source: footprint
Ethereum Bridge TVL Review and Amendment | Source: Footprint Analytics
The graph above shows that Optimism has had the most active deposits since early September, followed by Avalanche. Transfer fees are currently only $ 0.25 (per L2 fees) and your transfer fees are subject to change, but with relatively small changes.
One daily payer for the Ethereum Bridge from June 2021 | Source: Footprint Analytics
The main asset traded on cross-chain bridges is ETH (WETH), with a total of ETH locked across 15 cross-chain bridges worth $ 6,882 billion as of October 26th. This equates to around 42.6% of the total locked-in value and the most widely used assets by investors, followed by WBTC and stablecoin USDC.
Asset Distribution – Tree Map | Source: Footprint Analytics
Cross-chain bridging solves nWhat is the problem??
Cross-chain bridging generates cross-chain growth (which is reflected in Fantom and Avalanche prices – which drop 12% and 12% respectively in the first week of November.
Without a bridge, investors have to go through different exchanges and instead incur higher fees.
Cross-chain bridges also solve the following problems:
- Reduce gas costs with increased transaction speed.
- User resources can be freely interacted with for better user experience.
- Improve the productivity and usefulness of existing crypto assets.
- Better security, better privacy.
Cross-chain bridging is suitable in the following situations:
- Transfer tokens between the Ether network and the Layer 2 network with interoperable assets across chains, such as:
- High fees and usage during the crowded times of Ether.
- High volatility assets are backed by individual chains and more assets are backed by cross-chain bridges.
- Investors can use a cross-chain bridge when investing in a new chain to get to the first mine faster, but it is necessary to evaluate the whole mechanism of the new chain and its safety.
- Arbitrage trading on DEX based on optimism, arbitrum and polygon etc.
How to choose the right cross chain bridge
When choosing a cross-chain bridge, consider the following criteria:
- TVL’s $ 1 billion stability with an optimized cross-chain mechanism and a reliable execution environment is reflected in gradual changes rather than sudden fluctuations. The cross-chain information review method and the cross-chain fund management method must also be considered.
- Reasonable conversion costs (from $ 1 to $ 5) across the chain and engagement speed with an estimated time of arrival of 10 to 30 minutes.
- The level of security guaranteed against hackers who exploit vulnerabilities.
With the development of the DeFi industry, cross-chain bridges have become more popular than traditional exchanges. They enable interoperability and interoperability in blockchain applications to support project owners, various blockchains and investors while solving capital flow problems and reducing transaction costs.
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According to Cryptoslate