How do cross-chain swaps work?

The number of different first and second-level blockchains is growing steadily. Each network has its own unique characteristics, which means that smart contracts and tokens from one blockchain cannot be directly transferred to another. Work on solving the problem of blockchain incompatibility began quite a long time ago. As a result, cross-chain bridges were created and continue to be improved.

Why are bridges needed if there are exchanges?

If transfers between blockchains are impossible, then how do large centralized exchanges where hundreds of coins are traded work? It is especially unclear how this works with stablecoins. The USDT (TRC20) price does not differ from the price of USDT BEP-20 and externally there are no differences between them at all. But you can add tokens of one standard to the exchange, and then immediately withdraw them to another network in a version compatible with its requirements.

The fact is that the exchange has wallets for all blockchain protocols that it supports. Each new user receives an account with a full set of wallets. However, they do not belong to you, since all the keys are stored by the exchange itself. For each income and expense transaction, the system automatically selects which asset to use. It's easy and convenient, but not always. In exchange for comfort, users receive significant restrictions:

• Commissions.
• Delegated management of cryptocurrencies.
• Necessity of KYC
• Lack of direct access to wallets.
• Force majeure costs (technical maintenance of the exchange, suspension of inputs/withdrawals).

Crypto exchanges eliminate the problem of cross-chain exchanges for their users, but at the same time they can create other types of problems themselves.

How is cross-chain bridge useful?

A cross-chain bridge is a decentralized service that specializes in transferring assets and data between different blockchains or layer 2 scaling solutions.

The presence of bridges greatly simplifies the use of blockchain capabilities. Bridges provide:

• Flexibility. Users do not have to be limited to the capabilities of one blockchain; they have access to the benefits of other networks.
• Scalability. Bridges between the main and secondary circuits redistribute traffic in networks, thereby increasing its throughput.
• Efficiency. By moving assets to high-performance blockchains, users save time and reduce transaction costs.

Using cross-chain bridges, you can combine the use of different blockchains, taking the best from each of them. undoubtedly, these are new opportunities for the further development of the DeFi and DApps segment.

How bridges work

Direct transfer of assets between blockchains is not possible. The most popular solution to the problem is a mechanism for freezing and re-issuing assets.

For example, you buy USDT-TRC20, transferred them to your wallet, but you urgently needed tokens of the ERC20 standard. Of course, they can be returned to the exchange and withdrawn again. Or you can transfer tokens from the Tron network to the Ethereum blockchain. They must first be sent to a special address on the originating network where they are frozen. 

At the same time, copies of your tokens are created on the Ethereum network, and their price is tied to the cost of the original ones. Although the original tokens technically remain on the native network, to the user this process looks like a normal transfer. The reverse process is carried out in the same way. In this case, copies of tokens on the Tron blockchain are burned, and the original ones are unfrozen

The second method of transferring assets involves the use of liquidity pools. The user sends their tokens to a pool on the source network and receives an equivalent number of copies of their assets from the pool on the destination network. The reverse translation is done in the same way.

Prospects for cross-chain bridges

The crypto industry is constantly developing and improving. The likelihood of the emergence of an absolute leader and monopolist is rapidly decreasing. Therefore, the need for cross-chain bridges is growing and this area will be relevant for a very long time.