What are cross chain bridges? | CryptoNewsHerald

What are cross chain bridges?

These are decentralized applications that allow you to transfer the same asset between different blockchains.

Cross-chain bridges allow you to move tokens of various standards (ERC-20, BEP-20 and others) between blockchains. There are also cross-chain bridges that allow you to transfer funds between blockchains built on different technologies (Bitcoin, Ethereum, Litecoin, Dogecoin), as well as between second-level scaling solutions (Arbitrum, Optimism).

To make transfers between blockchains, wrapped assets can be created, liquidity pools can be used in several ecosystems. Also, the transfer of funds can be carried out by relay nodes that have liquidity in different blockchains.

To use a cross-chain bridge, you need to connect to it using a Web3 wallet, such as MetaMask. After sending funds through a decentralized application, they will go to the sender’s address, but in a different blockchain. At the same time, a cross-chain transfer operation does not differ significantly from a swap within the same blockchain using non-custodial exchanges.

Why are cross-chain bridges difficult to implement?

An exchange operation between users, one of which wants to buy asset A, and the other to sell it for asset B, in the absence of trust between them, requires the presence of a third party (guarantor). The guarantor will receive asset A from the seller, as well as funds from the buyer (asset B). After receiving funds from both users, the guarantor will transfer funds to each of them, completing the exchange operation.

Such an algorithm can be used for any exchange operations. The stock exchange can act as a guarantor. When exchanging assets within the same blockchain, a smart contract can act as a guarantor.

The smart contract ensures the asynchronous blocking of the funds of each user, and after sending, they are unlocked and the required assets are transferred to each user. Until recently, this method of exchange was not widely used, since it required the simultaneous presence of a seller and a buyer, ready at the current time to exchange funds in the same amount.

Existing non-custodial exchanges require liquidity providers (LPs) to block funds for exchanges. When making exchange transactions, the user’s funds enter the liquidity pool in one asset, in return, the user receives funds in another asset. All of these operations are carried out using smart contracts and do not require a guarantor.

But smart contracts can only be executed within one blockchain (for example, Ethereum). If it is necessary to move assets to another ecosystem, such an algorithm will not work, since the smart contract does not allow interaction with it.

Cross-chain transfers require special algorithms to interact with multiple blockchains. It also requires liquidity providers in different systems. To implement these algorithms, second-level scaling solutions are widely used.

Smart contracts of L2 solutions allow you to receive information from other ecosystems, including information about completed transactions in the blockchains of Bitcoin, Ethereum, Binance Smart Chain (BSC) and others. They can also interact with external data, receiving information from analytical Internet resources through oracles.

How to use wrapped tokens for cross-chain transfers?

One solution for moving assets between blockchains requires the use of wrapped tokens. Assets are moved using two paired operations: coin blocking – issuance of wrapped coins And burning coins – unlocking coinsas well as combinations of these operations.

A similar approach is implemented in the project Ren. It is well suited for moving assets between different blockchains. Let’s take a closer look at the cross-chain bridge between Bitcoin and Ethereum in the Ren project.

For cross-chain transfer, the user sends BTC to a bitcoin address generated by a decentralized application, while indicating his address in the Ethereum blockchain. The sent funds are blocked, and in return, the user receives wrapped Ethereum renBTC tokens. The latter are coins of the ERC-20 standard and are pegged in value to the price of the underlying asset. They can be freely exchanged and transferred to any other user.

Any holder of renBTC can receive for them the underlying assets in the source blockchain (in this case, bitcoin). To receive funds in BTC, the user needs to send renBTC to the address generated by the application. After that, the burning of coins will be performed, and the funds will be transferred to the user to his address in the bitcoin blockchain.

Using wrapped assets to transfer stablecoins between EVM-compatible blockchains is not practical due to the existence of more advanced solutions. The implementation of the transfer of USDC from Ethereum to BSC by issuing renUSDC will not be required, since the USDC token already exists on this network.

How does a blockchain intermediary enable a cross-chain bridge to be implemented?

A promising way to transfer assets between different networks is to use a specialized blockchain.

A similar mechanism is implemented in the project THORChain, using the native RUNE token. The technology requires liquidity providers who contribute their funds to the pool and receive income from this.

The algorithm involves depositing funds into liquidity pools in two blockchains, one of which is THORChain. At the same time, most of the funds are deposited in RUNE tokens and act as collateral, while the other part is used to perform exchange operations. The project allows you to exchange assets from various blockchains that differ in value.

The exchange operation takes place in two stages using a decentralized application. First, an asset is exchanged from the source blockchain for the RUNE token, using funds from the first liquidity pool.

In the second step, the RUNE token is exchanged for an asset on the destination blockchain, using the second liquidity pool.

Let’s take a closer look at the exchange of BTC for ETH. This operation requires two liquidity providers, one of which provides BTC and RUNE, and the other provides ETH and RUNE.

All operations are carried out through a decentralized application. After the user submits a request for funds transfer and specifies the address in the Ethereum destination blockchain, he needs to transfer BTC to the address specified by the application.

BTC goes to the first liquidity provider, which transfers the corresponding amount in RUNE to the second LP. The second liquidity provider, having received funds in RUNE, transfers ETH in the Ethereum blockchain to the address specified by the user.

These operations are carried out by liquidity providers in an automatic mode, and LP’s honesty is guaranteed by collateral funds that exceed in value the funds used for exchange transactions. The presence of two liquidity pools allows you to exchange assets in the forward and reverse directions.

THORChain allows you to transfer stablecoins (USDT, USDC and others) between EVMcompatible blockchains – Ethereum, BSC, Huobi ECO Chain (HECO), etc. There are no restrictions on the types of assets and blockchains between which exchange operations can be carried out. The only requirement is the existence of appropriate liquidity pools.

How is the transfer between EVM compatible blockchains performed?

To transfer assets between With EVM-compatible blockchains, it is advisable to use L2 solutions. By interacting with the main networks using smart contracts, they can ensure the rapid transfer of assets, as well as the exchange between systems of both the first and second levels.

L2 solutions allow you to create a universal algorithm for transferring funds between blockchains. If there are liquidity providers in the source blockchain and the destination blockchain, the transfer of assets is carried out only between these systems using the funds of one liquidity provider.

In the absence of a single LP holding assets on both the source and destination blockchains, one or more intermediate chains may be used. Blockchain of the first and second levels can act as an intermediary. In each of them, channels for the transfer of assets will be formed.

As a generalized example, consider the algorithm for transferring funds using an intermediate blockchain using the cBridge cross-chain bridge from Celer Network.

Node A is a user holding funds on chain 1 who wishes to transfer those funds to node D on chain 3 (to transfer assets, the same user must be represented by address A on chain 1 and on chain 3 by address D).

In the absence of a liquidity provider that owns assets on chains 1 and 3, the dapp selects two relay nodes B and C. Relay node B owns the asset on chains 1 and 2 and is the liquidity provider when conducting exchange transactions between these chains.

Relay node C similarly connects chains 2 and 3. To implement the cross-chain transfer, smart contracts are used, which are deployed in three chains and form three asset transfer channels connecting nodes A, B, C and D.

Relay nodes B and C are liquidity providers and also provide payment routing. They are rewarded for providing these services.

Unlike the traditional model of interaction with liquidity providers used on non-custodial exchanges, funds provided by relay nodes are not blocked for a long time. They will be blocked only during the exchange operation in the amount required for its implementation.

To implement this algorithm, cBridge uses smart contracts with temporary blocking of funds – Hashed Time Lock. When making cross-chain transfers, funds are transferred from the user to the liquidity provider using a smart contract that provides for the blocking of assets for a certain period of time. During this time, the relay node needs to transfer assets to the user on the destination blockchain.

If during this time the node does not complete the transfer, the blocked funds will be returned back to the user.

The architecture of the Celer Network is implemented using open source software, which allows anyone to create such a relay node. But the considered algorithm based on smart contracts provides protection for the user from loss of funds in case the relay node turns out to be malicious.

What are cross-chain bridges?

Following the rapid development of DeFi and non-custodial exchanges, decentralized applications that implement cross-chain transfers began to appear. Most have a similar interface, but the algorithms for their work can differ significantly. The most popular cross-chain bridges:

• cBridge. Project specializing in L2 solution using smart contracts for cross-chain transfers. Provides the ability to move stablecoins, as well as a limited number of tokens based on Ethereum, BSC, HECO and other ecosystems, as well as between different second-tier networks (Arbitrum, Polygon, etc.).

• Hop Exchange. This L2 solution uses smart contracts to transfer assets between second layer blockchains (Arbitrum, Polygon, etc.). Operations are carried out in stablecoins.

• xpollinate. The cross-chain bridge uses smart contracts to transfer stablecoins between BSC and second-tier solutions (Arbitrum, Polygon, etc.).

• THORChain. The project is a blockchain intermediary and allows you to exchange BTC, LTC, BCH and other assets. The exchange is carried out between the respective blockchains, as well as Ethereum and Binance Chain. A large number of ERC-20, BEP-20 tokens, including native coins, are also available for exchange.

• AnySwap. The project uses several cross-chain transfer technologies. Provides the ability to exchange a large number of tokens in the Ethereum, BSC, HECO, OKExChain blockchains, as well as between various L2 solutions.
• Ren. The cross-chain bridge allows you to transfer BTC, BCH, DOGE, ZEC and other assets from the respective blockchains by creating wrapped tokens, as well as perform reverse transfers. Destination blockchains: Ethereum, BSC, Polygon, Arbitrum and others.

How to use the cBridge cross-chain bridge?

Moving an asset between two blockchains is a lot like swapping within the same blockchain. Let’s take as an example the transfer of USDC token from Arbitrum to Binance Smart Chain using cBridge.

In the case of swaps on the same blockchain, you need to connect to the cross-chain bridge using a Web3 wallet like MetaMask. After that, the selected blockchain and your address will appear in the upper right corner.

The interface that allows cross-chain transfers is quite simple. You must specify the source and destination blockchain, as well as the asset itself.

In our case, we will choose Arbitrum as the source and Binance Smart Chain as the destination, the asset is USDC.

Before the exchange, you need to make sure that there is enough liquidity to carry out the operation. The latter in some areas may be absent or it may not be enough.

After selecting the main parameters, enter the transfer amount (for example, 50 USDC). If the direction is active (there is a relay node for this direction) and there is enough liquidity for the transfer, you will see the amount receivable (49.6 USDC) and the commission (0.39 USDC) in the lower window. If all the parameters suit you, you can click Transfer.

The next step will require confirmation of the use of the USDC token from MetaMask. This step only needs to be done once, subsequent USDC transfers from Arbitrum will not require confirmation. Next, you need to send a request for a cross-chain transfer.

The application will ask you to confirm the interaction with the smart contract, for which a fee is charged. After confirming in MetaMask, you need to wait a while until the transaction is confirmed at the blockchain level.

After sending a transfer request, the relay node needs to wait a while for it to respond. After that, you need to transfer funds by clicking the appropriate button and confirming the operation in MetaMask.

After the funds are transferred, the relay node will send the assets to your account on the destination blockchain. Upon completion of the exchange, you will see information about a successful cross-chain transfer.

It remains only to switch the blockchain in MetaMask to the destination blockchain and check the account. You can find out the details of the transaction using the blockchain browser.

Detailed instructions for using the cross-chain bridge cBridge from Celer Network.

What are the prospects for cross-chain bridges?

Existing trends show that a scenario in which one of the blockchains becomes dominant and crowds out other solutions is unlikely. Despite the wide possibilities of Ethereum, there are L2 solutions that allow you to get significant benefits – high transaction speed, lower fees, greater flexibility and functionality.

A number of ecosystems based on EVM-compatible blockchains are rapidly developing (Binance Smart Chain, Huobi ECO Chain and others). The existence of many competing blockchains necessitates cross-chain transfers.

Stablecoins are widely used in such operations. These assets exist on different blockchains and are not subject to significant price fluctuations. It is convenient to store value in stablecoins for a long time.

Due to the significant development of the DeFi industry, cross-chain bridges are becoming more and more popular compared to conventional exchanges. Technologies are in demand on the market, more and more new projects are appearing, which indicates the prospects of this direction.