Unlocking the Key to Global Crypto Liquidity Through Cross-Chain Bridges
More than 12,400 cryptos exist today, and it doesn’t look like things are slowing down with a combined market cap of $2.3 trillion according to recent data from Coinmarketcap, Bitcoin and the rest top nine digital assets by market capitalisation control $1.8 trillion of the industry’s entire market cap.
And beyond what anyone would like to believe, with splintered liquidity for each of these over 12,400 cryptos across the industry, many more are still baking to launch their cake. DeFi could reach over $500 billion in total value locked (TVL) if the necessary infrastructures like asset management, dev tooling, etc., are put in place to support its growth. Innovators will build, and it is only normal for the world to continue to edge towards entropy. Thus, the solution to harnessing liquidities across several siloed networks and protocols remains — cross-chain bridges.
What are cross-chain bridges?
Despite the crackdown from China on Bitcoin and crypto as a whole, Bitcoin’s market cap surged above the $1 trillion mark yet making the news on how it has overtaken Facebook’s market cap. Who then would blame DeFi protocol developers on how they have been implementing bridges to Bitcoin. As of August, the value of tokenised Bitcoin on Ethereum crossed $11 billion, with Wrapped BTC — wBTC commanding 76% of that volume. This is made possible through cross-chain bridges communicating with each other (in the case of wrapped Bitcoin, it is an asset-specific cross-chain bridge, more on that later).
In their simplest sense, Cross-chain bridges are decentralised systems that facilitate the exchange of “information” between networks. Information could be anything from assets, contract calls, state, or proofs in this context.
Depending on the design, cross-chain bridges comprise of the following subsets:
Monitoring: A function as an oracle, validator or relayer monitors state on the source chain.
Relaying: Transmitting information from the source chain to the destination chain.
Consensus: Some bridges require consensus between the source chain actors to relay that information to the destination chain.
Signing: Cryptographic signature authentication between actor from source and destination chain. This could be done either individually or as part of a threshold signature scheme.
Benefits of cross-chain bridges
Cross-chain bridges are essentially beneficial to DeFi’s sector composability, i.e. stacking protocols upon themselves to bring out newer use cases for users otherwise called Money Legos.
But in more specific instances, cross-chain bridges:
Allow individual network/protocols more capabilities: For instance, Yearn Vaults which were created for yield farming and liquidity mining demands on Ethereum, could be extended to farm yields on Solana, Avalanche c-Chain, BSC, and any other EVM compatible protocol. Another example would be using NFTzie multichain bridge to move Flow-based NFTs to Ethereum and then staking on Aavegotchi.
Offers more use cases for network users as well as developers: With a cross-chain bridge, a Filecoin or Sia user can perhaps use Bitcoin to pay for services in these distributed storage protocols.
Increases utility for existing crypto assets: Beyond the example mentioned above, where BTC is used for paying for services in distributed storage systems, how about using DOT or SOL as collateral on Ethereum-based lending protocols like Aave, Compound, or Maker? A cross-chain bridge would be needed for this cross-chain function without resorting to derivatives.
Types and function of cross-chain bridges
Asset-specific cross-chain bridge: This type of bridge has a singular function that allows access to a specific asset from a separate chain. Wrapped assets like wBTC operate on this kind of cross-chain bridge. These assets are normally fully collateralised by the underlying chain adopting any custodial or non-custodial option. Due to the monster liquidity of the Bitcoin network, it is one of the most bridged assets on other chains. Although we also have wETH or wrapped LINK also. Examples of asset-specific bridges are tBTC, Interlay, ever etc.
Generalised cross-chain bridges: These are bridges that allow for transferring information across several individual blockchains. Protocols built on generalised cross-chain bridges can use a single transaction to access the entirety of the multiple chain layers interacting with the bridge, thereby facilitating a network effect for such projects. However, the drawback of this type of cross-chain bridge is the security and decentralisation implications. Axelar, Chainlink,
Application-specific cross-chain bridges: Similar to generalised but unlike chain-specific bridges, application-specific bridges gives access to at least two blockchains. However, this type of bridge can only be used within that application and nowhere else. With a lighter codebase, dapps using this employ modular “adapters” on each of those blockchains they are bridged to without needing an entire app tailored to each blockchain. Although dapps using application-specific bridges enjoy the network effect of the individual blockchains, they are limited in how their feature sets can be extended. Anyswap, Celer, Thorchain, Compound Chain, etc., are examples of application-specific bridges.
A chart showing the different cross-chain bridges grouped according to their type like I mentioned in each
Chain-specific cross-chain bridges: This is a specialised kind of bridge facilitating communication between two blockchains that normally supports simple operations like locking & unlocking tokens on the source chain and minting any wrapped asset on the destination chain. Because of their not-so-complex architecture, chain-specific bridges are easily codable but however can’t scale into other ecosystems. A good example of this type of bridge is Polygon’s PoS bridge. With the PoS bridge, users can transfer assets from Ethereum to Polygon and vice versa. And that’s pretty much what it can do. If you need to bridge Polkadot Assets with Polygon, then you have to bridge it to Ethereum before Polygon. Other types of chain-specific bridges are Avalanche, BSC, Rainbow, Wormhole, etc.
Siloed networks cause friction for users who seek to enjoy similar robust liquidity legacy finance and CeFi options offered albeit in a decentralised environment with non-custodial and permissionless features. Bridges are essential towards not just the continuous functioning of DeFi but the adoption of the sector by mainstream finance users. PolkaCipher has positioned itself for DeFi’s continuous growth as a cross-chain oracle focused on NFT privacy for businesses, community governance, multichain interoperability, and on-chain DeFi Apps.
About PolkaCipher
PolkaCipher is a privacy-preserving oracle network on the Polkadot Blockchain focused on bringing the use case of private NFTs to off-chain businesses and be a bridge for seamless integration to on-chain Defi apps.
PolkaCipher’s unique offerings help push the use-cases of the NFTs in real-world scenarios while still being connected to a cross-chain network that is fair and accurate. PolkaCipher intends to achieve business goals by helping users transact privately and securely using NFTs as a mode of access to different decentralized apps (Dapps) and real-world business rewards.
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