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Crypto: Cross-Chain Bridges in DeFi are Important

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#crypto #cryptocurrency #DeFi #CrossChain #bridges #blockchain

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“An exciting area in the blockchain ecosystem is DeFi, as it promises a world where people can move their money without the transaction fees of banks” — Paul Ebeling

A cross-chain bridge is a tool designed to enable the transfer of tokens, smart contract instructions, assets or data between 2 blockchains. They solve the interoperability problem that previously plagued the blockchain ecosystem.

Since blockchain assets are not compatible, cross-chain bridges create synthetic derivatives representing an asset from another blockchain. Two blockchains may have different protocols, governance models and rules, but a cross-chain bridge connects them by interoperating securely.

A cross-chain bridge enables users to:

  • Move assets across various blockchains fast and easily
  • Enjoy low operational difficulty
  • Leverage the lower transaction fees available on the non-scalable networks
  • Implement decentralized applications across multiple platforms

How do cross-chain bridges work

Cross-chain bridges work by exchanging information remotely or locally. They communicate and share value with other networks. When remote bridging occurs between 2 blockchains, say ‘Chain A’ and ‘Chain B’ the bridge locks the assets in Chain A and generates new assets in Chain B. When the owner of the assets in Chain B wants to recover the assets, they will have to burn those on Chain B and then unlock them on Chain A. But, keep in mind that the amount and value of the tokens remain constant in this model.

Types of cross-chain bridges:

There are 2 major types of bridges currently available.

Unidirectional bridges

These bridges are also called 1 way bridges, and they allow users to transfer assets only to the target blockchain. Once the assets have been transferred to the target blockchain, they cannot be returned. An example of this is Wrapped Bitcoin, which allows you to send BTC to the Ethereum blockchain but does not allow you to return the asset to the Bitcoin blockchain.

Bi-directional bridges

They allow users to freely convert assets to and from blockchains. With Solana, you can send SOL to the Ethereum blockchain and send ETH to Solana.

The benefits of cross-chain bridges for DeFi users:

Blockchain bridges provide various functions and have numerous benefits for DeFi users.

  • Interoperability – Cross-chains solve the problem of interoperability within the blockchain ecosystem, and users can transfer assets to other blockchains without sacrificing the advantages of the host network.
  • Cross-chain collateral – This feature enables DeFi users to transfer assets from a blockchain with value but little decentralized applications (such as Bitcoin) to another blockchain with a developed ecosystem like Ethereum, Cardano or others.
  • Scalability – Blockchain bridges designed to handle high transaction volumes ensure greater scalability. The scalability makes it possible for DeFi developers to deploy their applications and users to enjoy such services without giving up the original blockchain’s liquidity and network effect.
  • Efficiency – DeFi users can make and receive micro-transfers faster with cross-chain bridges without paying high transaction fees. This is especially important for the blockchain gaming and ecommerce experience.

Cross-chain bridges solve various problems within the DeFi ecosystem by allowing communication between blockchains. They have numerous advantages that allow users to quickly and efficiently transfer their assets between multiple networks.

The cryptocurrency space recognizes the importance of these cross-chain bridges, which is why most exchanges and blockchains are allowing networks to communicate with each other without the need for intermediaries.

Have a happy prosperous week, Keep the Faith!

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Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.