Published: June 25th, 2021
The latest figures from CoinMarketCap show there are over 10,000 cryptocurrencies in circulation. Most are built on the Ethereum blockchain, but a growing number aren’t.
To access opportunities stored on all those networks, crypto traders have to use exchanges. While that’s fine in theory, the most popular exchanges have a highly centralised technical infrastructure. It makes them easy to use, but it also makes them incredibly powerful intermediaries, controlling much of the wealth moving through the crypto ecosystem.
All that may be about to change.
Several new blockchain projects are building cross-chain bridges that enable trades to happen across blockchains and without anyone exchange taking custody of crypto assets. They're creating new digital pathways for crypto that allow money, data, and dapps to move seamlessly from one blockchain to the next.
The plan is to unleash crypto traders from centralised exchanges so they won’t have to cede control over their assets or be limited by where they trade, creating a web of inter-linked blockchains with few barriers between them.
Blockchains enable the creation of digital currencies and applications that rely on a distributed ledger for privacy and verifiability, but in financial trading terms, they are like walled gardens. Crypto assets and data can move more or less freely within the garden, but find it very difficult to leave.
Take Bitcoin and Ethereum as examples. While both make on-chain data viewable to outsiders, the data itself is locked to each chain. The reason is easy to understand. For the distributed ledger that records all transactions to be secure and accurate, every participant must follow established network rules.
That creates siloed systems that keep networks secure, but also cause chokepoints as transaction volume and activity grows. While Ethereum boasts the largest blockchain ecosystem, the cryptos and dapps built upon it must follow Ethereum’s rules.
So, for example, if a new project wanted to reduce the fees it pays to move data through the network, there’s zero opportunity or capability to do that. If it wanted to accelerate how Ethereum’s underlying infrastructure validates new blocks, it can’t.
To answer that problem, many other ecosystems and blockchains have been working hard to overcome the challenges faced by startups who want to innovate on Ethereum by simplifying and speeding up how data, tokens, and traders operate. That’s where cross-chain bridges come into play.
Blockchain bridges are technical gateways that enable different blockchains to interoperate. A bridge might connect one blockchain to another, or it might allow a blockchain and a side chain to operate in tandem. The bridge is essentially a parallel blockchain that mimics aspects of a native or Mother chain like Ethereum in order to create a connection, but still operates under a different set of rules.
That’s the kind of interoperability crypto traders need if they want to buy from, or sell to, crypto traders using a different blockchain. The cross-chain bridge enables the transfer of tokens, data, and even smart-contract instructions between platforms that would otherwise be wholly separate and independent.
It's a potentially massive development, promising to free up liquidity by letting new projects share digital assets hosted on one blockchain with trading dapps or decentralised exchanges (DEXs) hosted on another. It could also mean faster, cheaper transactions where tokens leap from one chain to the next and dapps that can operate on more than one platform simultaneously.
While a number of different approaches to overcoming the problem of blockchain interoperability are being experimented with, so far, there are two that dominate: centralised and decentralised.
Centralised solutions manage the creation of new assets themselves. One example would be Wrapped Bitcoin (wBTC). It gives Bitcoin holders access to the Ethereum ecosystem through the mechanism of a token swap.
Under the system, users place their BTC into wallets controlled by a centralised custodian. Once the BTC has been stored, the system ‘mints’ an equivalent value in wBTC tokens on Ethereum.
Those wBTC tokens then become usable inside Ethereum dapps like the Uniswap decreased crypto trading exchange. If you were using Bitcoin on its own, that would be impossible.
Decentralised cross-chain bridges operate differently. When an asset is ready to jump chains, a smart contract freezes it on the blockchain it's leaving. An equal amount in tokens is then created and deposited into the user’s wallet. If they want to move their assets in the reverse direction, the tokens are shredded, and the original assets are unfrozen.
Polkadot is arguably the highest-profile project tackling the challenges of cross-chain bridges. Its objective is to create a ‘blockchain of blockchains’ that would enable new, independent blockchains, ‘parachains’ in Polkadot’s language, to interoperate with other projects. If it succeeds, there will be a bridge between Bitcoin and Ethereum, potentially opening up a host of new trading opportunities.
Another project trying to enable more links between networks is Cosmos. Its founders have devised several working bridges to date, including one that allows digital asset holders to make DeFi investments.
A project called NEAR is looking to help Ethereum developers build faster and cheaper applications using cross-chain bridges. Its Rainbow protocol lets projects execute transactions on NEAR, even if they're based on Ethereum.
There are also projects aiming to create a web of cross-chain bridges that link multiple networks but remain blockchain agnostic, e.g. they aren’t established on anyone chain themselves. Conflux’s ShuttleFlow, for example, is a cross-bridge that enables digital asset swaps between Ethereum, Huobi ECO Chain, Binance Smart Chain, and OKex Chain.
While cross-chain tech is still relatively new, it promises to set the foundations for a multifaceted digital ecosystem similar to the modern internet. In the beginning, multiple networks, including ARPANET, CYCLADES, and Merit, all had their own ways of moving data around a network.
It wasn’t until the Internet Protocol (IP) was developed that those disparity networks could start talking to one another. Perhaps cross-chain bridges will bring that future to the world of crypto.