Gas fees make cross-chain transactions very expensive, hindering the free flow of crypto assets. So it’s not surprising that cross-chain bridges have grown at an unprecedented rate—a TVL increase of 89% MoM in October—as DeFi transaction volume booms in the bull market.
However, did you know that cross-chain bridges solve other problems besides (what are essential) crypto transaction fees?
As multi-chain projects and interoperability become key components of the industry, DeFi investors need to understand how cross-chain bridges work.
DeFi TVL since January 2021 (Data source: Footprint Analytics)DeFi TVL Ranking by BlockChain since Jan 2021 (Data source: Footprint Analytics)
This article will look into the nature of cross-chain bridges, specifically:
What is a cross-chain bridge?
A cross-chain bridge or a blockchain bridge enables the transfer of tokens assets, smart contract instructions or data between blockchains. Two chains may have different protocols, rules and governance models, but a cross-chain bridge connects these disparate blockchains together by interoperating securely.
A cross-chain bridge allows users to:
Here’s an example of how cross-chain assets are transferred with a bridge:
When a user needs to convert an asset such as an ERC20 A token on Ethernet into another asset such as BEP20 A token on the BSC chain via AnySwap, the ERC20 A will be locked on the source chain and then notify the bridge to generate the BEP20 A on the BSC chain before sending it to the user.
In this example, the entire operation of the cross-chain bridge takes about five to 20 minutes, with an approximate gas fee in the range of $10 to $20, depending on the pre-congestion conditions in Ether at the time.
Data source: Anyswap.exchange
How has Crosslink Bridge performed recently?
The market is currently dominated mostly by Layer 2 scale-out cross-chain bridges, which are mainly built on Ethereum for better interconnection and interoperability.
According to Footprint, the TVL of cross-chain bridges was $16.2 billion as of Oct. 26, an increase of over 72.25% in the last 30 days.. The four largest cross-chain bridges namely, Avalanche Bridge, Polygon Bridge, Arbitrum Bridge and Fantom Anyswap Bridge, account for 95.61% of the entire cross-chain bridge, with its highest monthly increase of 401.23% last month.
Data from CoinTofu Cross-ChainBridge tool, reveal that these four cross-chain bridges also have excellent user experience ratings.
TVL & share distribution across- chain bridges since Apr 2021 (Data source: Footprint) AnalyticsEthereum Bridges TVL Ranking & Change (Data source: Footprint Analytics)
The above chart shows that Optimism has had the most active deposits from the beginning of September to today, followed by Avalanche. Current transfer fees are as low as $0.25 (according to L2 Fees) and their transfer fees are variable, but with relatively small changes.
Ethereum Bridge Daily Unique Depositors since June 2021 (Data source: Footprint Analytics)
The main asset traded on cross-chain bridges is ETH (WETH), with total ETH lock-ups on the 15 cross-chain bridges valued at $6.882 billion as of Oct. 26. This represents approximately 42.6% of total lock-ups and the most used asset by investors, followed by WBTC and stablecoin USDC.
Asset Distribution- Tree Map (Data source: Footprint Analytics)
What problems do cross-chain bridges address?
Cross-chain bridges create growth across chains (reflected by Fantom and Avalanche prices—which hit gains of 12% and 18%, respectively, in the first week of November) that offer disparate asset interoperability, high level of security and better asset rendition.
Without a bridge, investors have to go through different exchanges and incur larger fees instead.
Cross-chain bridges also address the following:
The use of cross-chain bridges is appropriate in the following scenarios:
How to choose the right cross-chain bridge
Consider the following criteria when selecting a cross-chain bridge:
In addition, there are also a number of aggregation tools that offer a one-stop cross-chain bridge solution, of which CoinTofu has a better overall experience in terms of reaching the cross-chain page with one click and displaying the advantages of supported cross-chain bridges, estimated arrival times, transaction fees, and user experience ratings.
Data source: cointofu.com
With the development of the DeFi industry, cross-chain bridges have become more popular than traditional exchanges. They enable interoperability and mutual integration of blockchain applications to support project owners, various blockchains and investors and address the problem of capital flow and lower transaction costs to users.
The above content above is for reference only and does not constitute investment advice. If you spot any errors, feedback is welcome.
This report was brought to you by Footprint Analytics.
Footprint Analytics is an all-in-one analysis platform to visualize blockchain data and discover insights. It cleans and integrates on-chain data so users of any experience level can quickly start researching tokens, projects and protocols. With over a thousand dashboard templates plus a drag-and-drop interface, anyone can build their own customized charts in minutes. Uncover blockchain data and invest smarter with Footprint.
Get an edge on the cryptoasset market
Access more crypto insights and context in every article as a paid member of CryptoSlate Edge.
Join now for $19/month Explore all benefitsPosted In: Analysis, DeFi