Cross-Chain Bridges Explained
Cross-chain bridges are software applications that enable transactions to occur between various blockchains. If someone wants to transfer cryptocurrency, non-fungible tokens (NFTs), or other digital assets between blockchain networks, cross-chain bridges are an essential part of the process. While most digital assets are tied to a specific blockchain, cross-chain bridges enable inter-network transactions powering a much broader digital ecosystem. Using cross-chain bridges, cryptocurrency owners can unlock the value held in their crypto portfolios for a wider range of real-life uses.
Cross-chain bridges enable many innovative processes, but security concerns surround them, as these apps have experienced hacking losses. Due to the technical aspects of cross-chain bridges, it’s best to use them only if you understand how they work and what you’re doing, so that you don’t encounter unexpected crypto losses.
- Cross-chain bridges enable transactions across blockchain networks.
- The software behind cross-chain bridges works with cryptocurrencies and other digital assets.
- Cross-chain bridges are vulnerable to hacking and security threats.
Understanding Cross-Chain Bridges
Blockchains are distributed databases containing an undisputed record of all transactions in the history of that specific blockchain network. While there are many benefits to using blockchains, they are effectively self-contained systems that don’t typically interact with other blockchains. Cross-chain bridges allow for interactions between various blockchain networks.
To better understand cross-chain bridges, consider several top cryptocurrency blockchains today. Ethereum is one of the best-known smart-contract networks, enabling NFTs, cross-chain bridges, and other blockchain features. For example, if you have $1,000 in USD Coin in your Ethereum (ETH) wallet and need to use it for a purchase with your Polygon (MATIC) wallet, a cross-chain bridge could help you send the USD Coin from your Ethereum wallet to your Polygon wallet.
The potential for cross-chain bridges is extensive. As the number and type of digital assets expand to include other asset classes, such as real estate or shares of stock, cross-chain bridges could become as important to your finances as Automated Clearing House (ACH) transactions between bank accounts.
While cross-chain bridges are mostly used for good purposes, cybercriminals and hackers target cross-chain bridges for vulnerabilities. Users should be cautious of the risks inherent in cross-chain bridge software.
Example of a Cross-Chain Bridge
The largest cryptocurrency by market capitalization is Bitcoin (BTC). As a popular and widely used digital currency, some crypto investors and users may want the option to hold BTC outside the Bitcoin blockchain. But, as discussed, users can’t transfer cryptocurrency between blockchains. If you want to buy an NFT on the Ethereum blockchain but only have bitcoin, you can use a cross-chain bridge to conduct the transaction.
To send your bitcoin to your Ethereum wallet, you can use Wrapped Bitcoin (WBTC). Wrapped Bitcoin is a cross-chain bridge that creates a new WBTC token on the Ethereum network and holds a bitcoin in a smart contract on the Bitcoin network. The number of WBTC is always equal to the number of bitcoin in the WBTC cross-chain bridge smart contract. After using the cross-chain bridge, you have a Bitcoin-backed ERC-20 token that you can use on the Ethereum network.
What cryptocurrencies work with cross-chain bridges?
Cross-chain bridges are not limited to any specific cryptocurrency or network. Any blockchain network may be compatible with cross-chain bridges if software developers with the right skills and knowledge create one.
Are cross-chain bridges safe?
Cross-chain bridges come with unique risks compared with other blockchain applications. As a software program built on top of other blockchains, a vulnerability in either the blockchain software or smart contract behind the cross-chain bridge poses a risk of a hack.
Can a cross-chain bridge work with multiple blockchain networks?
Cross-chain bridge software can interact with any blockchain if the software is designed to be compatible. However, more complex blockchains may be at a higher risk of security incidents.
The Bottom Line
Cross-chain bridges are an important cryptocurrency and digital asset management tool, but they are not without risks. When used as intended, cross-chain bridges enable a vast upgrade to blockchain network capabilities. When combined with other smart-contract features, cross-chain bridges can amplify the capabilities of blockchains, cryptocurrencies, NFTs, and more.