The latest financial innovation available in the world is Blockchain. Blockchains have introduced DeFi or decentralized finance networks that can perform automated and trusted transactions. As per earthweb.com, there are around 1000 blockchains in the world today. A single blockchain is often considered a standalone transaction network.
However, developers are working on creating para-chains, side-chains, or cross-chains that allow investors to exchange data and transactions interchange between two or more blockchains.
What is Blockchain?
A blockchain is a network of cryptocurrency transfer channels that allow investors to perform verified transactions. Blockchains can perform automated transactions. The protocols such as mining and crypto staking allow blockchains to verify the transactions without the presence of any centralized authority.
Furthermore, when a person is using blockchain they can perform transactions across the globe. Blockchains have introduced an encrypted form of money called cryptocurrencies. Other important products from blockchains are NFTs, stablecoins, Web 3.0, digital securities, etc.
Origin of Blockchain
The first ever Blockchain was introduced by a group or individual called Satoshi Nakamoto called Bitcoin. Bitcoin made its debut on the world stage in 2009.
Today, Bitcoin is the largest blockchain by market capitalization and also the most popular cryptocurrency. Before, Bitcoin many developers were working on introducing a type of money that was useful for digital transactions.
However, the main reason behind the success of Bitcoin was its decentralized model. Bitcoin blockchain integrated the PoW consensus model that allowed miners to verify the transactions without needing personal information from the users.
Types of Blockchains
It is important to take a brief note of the types of blockchain before diving into the topic of blockchain bridges. Here are some of the most important types of blockchains in the world today:
Public and Private Blockchains
Public Blockchains are networks where the underlying mechanism is wholly decentralized. It means that the ownership of the blockchain is not under any private or government institution.
Furthermore, the rules and regulations in the blockchains are decided by voting among the community members. Public blockchains allow everyone to participate without the need for verification or approval.
Public blockchain data is copied and saved by every computer that is participating. Public Blockchains are also known as trusted networks.
Private Blockchains are under the ownership of a private enterprise. They are not decentralized networks like public blockchains. They require approval from the appointed authority for participation.
Private Blockchains often comply with the financial regulations imposed by the government. Private Blockchains also do not grant full data autonomy to their users. Private Blockchain does not offer data transparency for all users.
Hybrid Blockchains are made using some components from both public and private blockchains. A specified part of a Hybrid Blockchain is owned by a private firm while the remaining part is under the ownership of the community members.
A mixture of permissioned and permissionless blockchain protocols are used in Hybrid Blockchains. The users on a Hybrid Blockchain can access nodes and data on the network using smart contracts.
Hybrid blockchains grant governance rights to the primary users however the ownership is reserved under one enterprise.
Consortium Blockchains are also known as Federated Blockchains. These blockchains serve the need for enterprise users or commercial adoption of blockchain technology. The Consortium Blockchain can validate, initiate, or receive transactions. This type of blockchain is also partially private and public network based.
Commercial users who wish to adopt blockchain infrastructure for performing different digital functions often adopt this option. The most important aspect of this type of blockchain network is the data privacy that is ideal for commercial users.
Permissioned and Permissionless Blockchains
Permissioned networks are blockchain that does not require any special approval for participation. Anyone with a working internet connection and a suitable operating system can participate in the network.
Permissioned blockchains make all the data public on them to make sure transparency. All users on a permissioned network have equal authority and governance rights on the network. Anyone can create a new account or several accounts on a permissioned blockchain using any moniker.
Permissionless networks are often private blockchains. These blockchains do not allow everyone to participate and require approval for entrance. The data on a permission-less blockchain is hidden from the public users.
The existing users on the permission-less blockchain can only access the amount of data that has been authorized at their level. The ownership of permission-less blockchains is with a private enterprise. Permission-less blockchain often require user verifications.
What is a Blockchain Bridge?
A Blockchain Bridge is a type of computer program that allows the users present on two or more blockchains to share data. The shared data can be in the form of communication or even cryptocurrencies. Every blockchain user needs to learn about blockchain bridges since they can reduce the cryptocurrency transfer fee reduce by many folds.
Usually, when blockchain users have to change one cryptocurrency to another crypto token, they need to use several third-party applications. However, with blockchain bridges, users can interchange cryptocurrencies without a lot of hassle and delays. The reader should keep in mind that Blockchain bridges are also known as para-chains or cross-chains.
Working Mechanism of Blockchain Bridge
The underlying technology that allows the blockchain bridges to transfer data and cryptocurrencies is a conversion of their local smart contracts. Take for example the two largest cryptocurrencies by market value in the marketplace namely Bitcoin and Ethereum.
Without the presence of a Blockchain Bridge, a Bitcoin holder can’t convert their reserves into Ethereum directly from the blockchains. The native blockchains of Bitcoin and Ethereum have no way of connecting.
However, a Blockchain Bridge solves this issue and allows cryptocurrency traders to interchange their cryptocurrency reserves directly from their blockchain wallets. It means that the user present on the Bitcoin network can select the available Blockchain Bridge and send BTC to the Ethereum network for an equal amount of ETH transfer in return.
Without the presence of this Blockchain Bridge, the BTC holder will need to download several third-party applications and spend a considerable amount of transfer fees and time for ETH conversion.
At its base, a Blockchain Bridge enables the interchange of currencies by taking into account the underlying value of cryptocurrencies on both ends. It means that the cryptocurrency reserves on the initiating blockchain are halted or blocked and the same number of tokens is created on the secondary blockchain.
The additional number of tokens is burned on the secondary network and the transfer takes place to the primary blockchain. Furthermore, the underlying value of the exchanged cryptocurrencies is not affected since it is pegged to the native token of the transfer protocol.
Types of Blockchain Bridges
Blockchain Bridges are divided into several types based on their architecture and functions. Here are some of the most important types of Blockchain Bridges:
A Centralized Bridge is a type of blockchain para-chain that is regulated by a centralized authority. This type of bridge enables the trades to exchange cryptocurrencies on a 1:1 ratio basis. Centralized bridges also require the verification of the users to implement the regulations universally on the network. At the same time, the transfer fees on the centralized bridges are often high.
Decentralized Bridges do not require the users to perform verification of their account credentials. These networks also have a smaller transfer fee. Rather than a centralized authority to verify the transfers or exchanges, there are smart contracts.
These smart contracts automate the task of interchanging cryptocurrency for others when specific conditions are met. Furthermore, the speed of the transfer is also faster as it does not require any wait for approval of the interchange by a centralized authority.
Side chains follow the same technical infrastructure and function as all Blockchain Bridges. However, side chains are distinct from other bridges because they work as an intermediary between the first and second-class blockchains.
Take for example Bitcoin and Ethereum networks. Both of these blockchains are the first versions of the blockchains that can also be called primary networks.
On the other hand, the Lightening Network is a second-tier or secondary blockchain layer operating on the Bitcoin network. Therefore, a side-chain is a transfer channel between a primary network e.g. Bitcoin, and a secondary network i.e. the Lightening Network.
Traditionally, most Blockchain Bridges allow investors to interchange their cryptocurrency tokens with a singular designated blockchain. However, developers have managed to upgrade blockchain bridges so that they can facilitate the transfer of more than one type of cryptocurrency.
It means that Multichain Bridges allow the investors to connect with more than one blockchain for the investors using the same intermediary protocol. At the same time, some Multichain Bridges allow users to connect with several cryptocurrency wallet accounts.
Trust-based Bridges are also centralized transfer channels. However, this classification highlights the uniqueness of the bridge from a different perspective. Usually, a trusted bridge will require the users to lock their cryptocurrency reserves in a transfer protocol based on trust from the secondary party.
Take, for example, wrapped Bitcoin or wBTC. When the users are sending their BTC in exchange for Ethereum their BTC is going to be wrapped in an ERC-20 transfer contract converting it into wrapped coins.
Trusted networks are ideal for large-scale cryptocurrency transfers as they are faster and more economical. However, they are not suitable for retail and small-scale investors as they can carry a considerable amount of risk.
Trustless Bridges are also sometimes known as decentralized bridges. The main objective of trustless bridges is to ensure the safety of the fund transfers for users at every scale. A trustless network often operates as a full-fledged Blockchain network to ensure transaction verification.
However, most Trustless bridges depend on freelance node validators. Therefore, they also carry a considerable amount of risk for investors. The ideal way to ensure a safe transfer is to use the protocols that fix the whole transfer contract rather than only catering to the processing request for primary applicants.
Custodial and Non-Custodial Bridges
Custodial Bridges are usually centralized transfer channels. These channels offer verified custodial services for the transfer of their funds. These networks are highly secure for investors. Non-custodial bridges operate as decentralized entities.
They do not offer any verified custodial accounts to enable the transfer of cryptocurrencies or data between blockchains. Non-custodial bridges also depend on smart contracts for node validation and transfer verification.
Unidirectional and Bidirectional Bridges
Unidirectional bridges are the most basic form of the cryptocurrency transfer protocol. These channels only allow one-way capital flow for cryptocurrency users.
Meanwhile, Bidirectional channels enable two-way cryptocurrency and data transfers for blockchain protocols. When a user is on a unidirectional channel, they can only send the cryptocurrencies from the primary blockchain to the secondary blockchain.
However, secondary blockchain users can’t exchange their cryptocurrency reserves with primary tokens. In contrast, the users on both connected blockchains on a Bidirectional bridge can act as secondary and primary blockchain networks based on the initiation of the project.
How to Identify the Best Blockchain Bridges?
The number of Blockchain Bridges is increasing with time. Therefore, investors need to identify the main characteristics that allow them to identify the best blockchain Bridges options to maximize their profits. Here are some of the key factors that every investor should consider before selecting a new Blockchain Bridge:
It is important to check and research the developers who are providing the bridge services. If they have glaring reviews and a good reputation it means that their services can be trustworthy. Otherwise, users should refrain from taking unwarranted risks.
The second most important factor that users should worry about it how the mechanism of the data transfers on the network. The transfer protocol is ideally secure, fast, scalable, and decentralized.
The third most important factor on a bridge is stacking. Stacking means the distribution of transferring material into smaller components. Bridges with better stacking options make the transfer more rapid, smooth, and hassle-free.
The investors should also look beforehand at the emergency response mechanism. It means that they should investigate how the bridge responds to mishaps and scams.
Blockchain Bridges with Rollups are considered the most secure transfer protocols. They can use consensus models, game theory, staked value, or zero-knowledge technology for verification of the transactions or exchanges.
Advantages of Blockchain Bridges
The most important advantage of a blockchain bridge is that it improves the interoperability of the network. It refers to the ability of a blockchain network for interacting with other similar protocols reciprocally.
Bridges also allow the users to connect directly between the primary and secondary blockchain networks in the form of side chains.
Blockchain Bridges complement the scalability of a network. The core Blockchain network can keep becoming more scalable by establishing connections for related dApps and DEXs using blockchain bridges.
Blockchain Bridges also play an important role in enabling mainstream adoption of the DeFi ecosystem by connecting lending platforms, liquidity pools, and dApps.
Blockchain Bridges are also complementing the growth and development of the Web3 option by allowing users to use materials from one dApp in another dApps.
Limitations of Blockchain Bridges
The free flow of capital between different Blockchain networks outside of a centralized channel poses a considerable amount of risk for the investors.
There is a lack of backup support and troubleshooting protocols for Blockchain Bridges in case anything goes wrong.
Blockchain Bridges have a massive margin for technical errors. Therefore, they require a very high capacity of technical skills, experience, and technical audit which makes it difficult to create, use, and implement such protocols.
The Future of Blockchain Bridges
Many Blockchain developers believe that Blockchain Bridges play an important role in the development and progress of the DeFi protocols. With Web 2.0, users cannot use the tools or apparatus present in one application in another application.
However, Blockchain Bridges have made it possible for the first time that users can transfer and implement protocols from another gaming or dApp platform in a multitude of platforms.
The future of Blockchain can become more universal and adaptable with the help of Blockchain Bridges. Furthermore, developers likely introduce simplified construction tools for blockchain bridge development that will allow more programmers to learn and deploy these platforms.
Blockchain Bridges are one of the most important components in the DeFi network. Without Blockchain Bridges, most networks will remain standalone protocols. By learning about the intricacies involved in Blockchain Bridges, cryptocurrency investors at all levels can increase their proficiency in the space and upgrade their skills and understanding.
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