*obligatory not financial advice*
Hi,
In this series I want to explain some terms that are relevant to the amazing world of cryptocurrencies to help newcomers understand it better. Today I want to talk about what crypto bridges are.
Previous Parts:
Crypto Basics #1: What even is a Blockchain?
Crypto Basics #2: What are Smart Contracts?
Crypto Basics #3: What is a Cryptocurrency Wallet?
Crypto Basics #4: What is Mining and Proof of Work?
Crypto Basics #5: What is Staking and Proof of Stake?
Crypto Basics #6: What is a Decentralized Exchange? And how do they work?
Crypto Basics #7: What are Stablecoins? And How do they work?
Crypto Basics #8: What are Coins and What are Tokens?
Crypto Basics #9: What even are NFTs?
Crypto Basics #10: What is Yield Farming and Liquidity Mining?
Crypto Basics #11: What is the Bitcoin Halving?
Crypto Basics #12: What is a Fork in the Crypto World?
Crypto Basics #13: What is Impermanent Loss?
Crypto Basics #14: What is Sharding? And how does it make Blockchains faster?
What is a Bridge?
A bridge is a construction that connects two landmasses or roads together so that humans or vehicles can safely cross things like rivers, canyons or other roads. In the crypto world however, there are also bridges that can connect different blockchains with each other. This allows people to move their coins and tokens from one blockchain to another and use them in dApps on the new blockchain.
This can be useful because for example you cannot use smart contracts and DeFi applications on the Bitcoin chain. So if you want to use your BTC to earn interest in a lending protocol or to use it as collateral to take a loan, then you would have to first move your BTC to a chain like Ethereum that can host applications like Aave.
There are centralized solutions for that like Wrapped BTC from Bitfinex, which are tokens on Ethereum that are backed with real BTC at a 1:1 ratio, but using them is destroying the entire point of DeFi because they are centralized. A bridge is a kind of network of nodes that run on all of their supported blockchains and automatically store, mint and burn tokens in a decentralized way.
When you use a bridge to move a coin to a new chain, you deposit your coins to a wallet of the bridge and it will automatically create a wrapped version, which is a token on the destination chain that will be backed by the stored coins. You can then use this token in the applications of that new blockchain and if you want to move your funds back to the original chain, then you can send your wrapped tokens back to the bridge which will burn the tokens and send you back the original coins. This ensures that this wrapped tokens are always backed 1:1 by real tokens or coins on their original chain.
There are many different bridges that all work a little bit differently and have varying network fees. Some of the most popular examples are Ren Network with its renBTC and also Multichain which connects countless different chains together. There are also blockchains that have protocols integrated that allow them to easily bridge to certain other chains, like the Comos IBC Protocol and Polkadot that are both networks of connected blockchains.
I hope that short explanation was helpful for some newcomers. I will keep writing more such short articles about various crypto terms. Feel free to follow me if you are interested.
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