What are Blockchain Bridges?
Blockchain Bridges enable the transfer of crypto assets & data between different blockchain networks.
Blockchain Bridges enable the transfer of crypto assets & data between different blockchain networks.
To understand this concept, let’s take a real-world example.
Let's say you live in India and are traveling to Singapore. In India, the local currency is Indian Rupees (INR) while in Singapore the local currency is Singapore Dollars (SGD).
So you could convert some money from INR to SGD using a bank. Or you could use an international card that enables you to pay in SGD when you are in Singapore.
This is simple in the world of banks. But a lot more difficult in the world of Blockchains.
Let’s take an example of two fictitious independent blockchains - AlphaChain and BetaChain. They have different rules and consensus mechanisms. The native token of AlphaChain is ALPHA while that of BetaChain is BETA.
Suppose you have a bunch of BETA on BetaChain, but want to use it on the AlphaChain. How do you do that?
That's where a Blockchain Bridge comes into the picture. You could use the BetaChain Bridge to buy Wrapped Beta (WBETA) which is native to AlphaChain.
In simple terms, here's how a typical bridge works:
It receives one type of crypto e.g. BETA.
It locks this BETA as a deposit.
It "mints" an equal amount of another crypto e.g. Wrapped BETA and releases it on another blockchain e.g. AlphaChain.
The top 3 Blockchain Bridges and their TVL (Total Value Locked) are:
WBTC (TVL = $4.25 billion)
JustCryptos (TVL = $3.34 billion)
Multichain (TVL = $1.58 billion)
Note: Figures are from DeFiLlama as on 5 April 2023 and may be rounded off.
Wrapped Bitcoin (WBTC)
Wrapped Bitcoin (WBTC) is an ERC-20 token on the Ethereum blockchain that represents Bitcoin (BTC) at a 1:1 ratio.
Each WBTC token is backed by an equivalent amount of Bitcoin held in reserve by a custodian.
The primary purpose of Wrapped Bitcoin is to bring the value and liquidity of Bitcoin into the Ethereum ecosystem, enabling its use in DeFi applications like lending & borrowing platforms, decentralized exchanges, and yield farming.
To create WBTC tokens, users can deposit their Bitcoin with the custodian, who then mints an equivalent amount of WBTC tokens on the Ethereum blockchain. These tokens can be redeemed for the underlying Bitcoin at any time.