11 min read
Liquidity has no loyalty, said Andre Cronje, creator of Yearn Finance, Fantom and influential personality in the DeFi world, and there are plenty of examples of how his phrase came true.
Beyond fanaticism and maximalism, “crypto-users” pursue profit maximization. And these are achieved with high returns, low entry costs and security.
Blockchain bridges allow, in a decentralized manner, users to move between different networks to maximize their returns.
I invite you to learn more about this tool that today we take for granted, but that only in the last year has become part of the mainstream of our ecosystem.
What is the role of blockchain bridges?
It is possible to define these powerful connectors very simply by describing their function. As their name suggests, they are responsible for connecting blockchains that by definition are separated or excluded from each other.
This connection through them allows sending tokens from one specific chain to another and gives a new meaning to Andre Cronje’s phrase.
Using a bridge, commonly known as “bridges“, any user can move their liquidity from one blockchain to another in a permissive manner, without the need to provide their data and for a low cost. But, before we get fully involved with bridges, let’s stop to review in which world, very different from today’s, they landed.
The pre-bridge era
The title does not allude to such a distant time, although as one of my mentors says “a week in DeFi, is months in the real world”, so talking about early 2020 sounds like a decade ago.
We often read that validators, in Proof of Stake networks, and miners, in Proof of Work networks, are in charge of validating and creating blocks, but also of providing security. Understanding this point is vital to give magnitude to the work that bridges do.
Blockchains are isolated, with no direct connection to the outside world, and this feature provides them with a high standard of security. Those who participate in them abide by rigid and clear rules, previously established in the block creation and validation consensus. These rules eliminate the need for a third party to certify each movement.
Having each actor subject to “the law” established by the code, results in users trusting each other, interacting not with each other, but with an address established in the blockchain. “Opening” a blockchain to the outside world can be dangerous, as agents who do not abide by these rules could act maliciously. This is the origin of secure external connections.
Connecting the blockchain to the ecosystem
Two solutions were born here, the oracles and the bridges, which are the focus of this article.
Oracles are decentralized developments within a blockchain that, through their powerful APIs, are responsible for querying data from the outside world and sharing it securely with the blockchain. The classic example is the price of a non “crypto-native” asset, for example the price of gold. A token tracking the price of gold would obtain this by means of an oracle that queries the information on the internet and delivers it to the blockchain in a secure manner, complying with the necessary protocols.
But it is not only necessary to connect blockchains with the outside world, but also with each other. And here, bridges appear, saving blockchains from disconnection between peers.
Types of bridges
So far, we have discovered the function of bridges, which is clear, precise and simple to understand. Now it’s time to see how they do their job.
You probably think that sending cryptos from one blockchain to another is not a simple task. If you have thought about it, you are right.
Each blockchain, beyond the compatibility it may have with other networks, has its own structure and, above all, its own encoding. So, for example, the Ethereum blockchain is not prepared to read, understand or process a Bitcoin or a coin from the Terra network.
Here, once again, the ingenuity of the developers lends us a big hand, implementing different solutions, which I will now review.
The REN protocol model
This group of people set the following goal: we need to have within the second blockchain in terms of Market Cap (Ethereum) the number one cryptocurrency in that category, Bitcoin. To achieve this ambitious goal, in a decentralized way the REN team created a model that we can define as block to mint or block to create.
How does REN work? Simple, Bitcoin users connect to the protocol page and send their BTC to an address within that network. REN nodes have access to these addresses, so they check that the transfer has been made. After sending BTC to that address, users must specify the Ethereum address where they want to receive the renBTC. That’s it.
After the necessary checks, the sent BTC balance is replicated on the Ethereum network as renBTC, which would come to be BTC “wrapped” in Ethereum code.
Now these renBTC, are functional on the Ethereum network, just like any other ERC-20, and their price will move in unison with the BTC quote. Of course, that this information is provided by the oracles used by the REN protocol.
As of today, REN bridged BTC, BCH, ZEC and DOGE on both Ethereum and BSC.
The liquidity model in both networks
A perhaps simpler system was implemented to build bridges between different blockchains that, for the most part, are not compatible with the Ethereum virtual machine.
The dual liquidity model, enables bridges such as Terra Network’s bridge with Ethereum and BSC, Allbridge, Celer Bridge and xPollinate, just to name a few.
Dn this way, by different methods, these bridges block liquidity permanently on both sides. For example, in the hypothetical case of wanting to send USTs from Terra to BSC, we should check that the bridge we are going to use is liquid in USTs in the BSC network. In this way, we connect our wallet to the bridge and send our USTs from Terra to the bridge and they are “locked” on Terra’s side. While on the other side, in BSC, the same amount of UST is released, from this network, to the address we have specified.
It is very important, before interacting with this type of bridge, especially when they are unofficial, to check that there is liquidity of the token that we want to send in the receiving network. As this explanation shows, this solution, besides being simpler, requires more attention from the user.
Blockchain bridges with specific standards
This subtitle catapults us into the explanation of one of my favorite bridges, which took 5 years of work, but with its uncomplicated operation for the user, makes each of those years worthwhile.
I am talking about the IBC that, only at first, will connect all Cosmos networks. This bridge does not require an extra connection, simply from the wallets enabled in the different Cosmos networks, we can send tokens from one network to another.
To achieve this simplicity in bridging, Cosmos took advantage of the use, by all its own networks, of the same consensus called Tendermint. On the other hand, they created a type of standard, known as ICS-20, which must be supported by all networks that want to connect via IBC, specifically for this shipment.
Thanks to this standard, through the IBC, it will be possible to send tokens not only between Cosmos networks, but also between networks outside the ecosystem. Without a doubt, the IBC is a “game changer” for the industry.
Looking ahead, there is no doubt that as the Cosmos team and its IBC continue to polish the tool, Celer Bridge is one of the projects in this area that I am most excited about and that will be a trend-setter.
Already in its first version it had a great acceptance by users, who transmitted a simple, fast and quick experience.
This bridge uses a liquidity system in both chains to transmit cryptos between different blockchains. In its next version, unlike most of its competitors, it plans to set up an open liquidity provision system, in which without any kind of restriction, notation in previous lists or waiting lists, any user will be able to provide liquidity in any of the functional networks.
Undoubtedly, they will go a step forward in terms of decentralization and towards the elimination of the great problem of liquidity. But that’s not all, to this opening of liquidity provision they will add the incentive to lend liquidity to the bridge. The team behind Celer is not taking any breaks when it comes to achieving mass adoption of its products.
What we expect from them
With the brief look at the past, which I gave at the beginning of this article, it is very easy to assess the road travelled to date. We have gone from isolated networks to a completely interconnected ecosystem with inexhaustible possibilities.
In reference to bridges, users are asking for greater transparency, elimination of liquidity problems and a simpler and more straightforward user experience.
No effort will be in vain, as bridging is necessary for this ecosystem to continue to grow. I have heard several times that in the future, we will operate in the crypto world, without necessarily realizing on which network we are doing it. I have no doubt that in order to put this phrase into practice, innovation on these tools will not have to stop.