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Description: Cross-chain swaps play an important role in the ecosystem but their essence is still unclear to many users. Here, you can read about cross-chain swaps, tokens supported by various blockchains, and how it all works.
All about cross-chain swaps: are cryptos supported by different blockchains the same?
The rise of different blockchain networks like Ethereum, Binance Smart Chain, Avalanche, Polygon and others has allowed for incredible innovation in the crypto space. However, it has also resulted in siloed ecosystems where assets are trapped in their native chains and unable to interact with other blockchains.
This is where cross-chain bridges and swaps come into play. They enable the transfer of cryptocurrencies and other digital assets across different blockchain networks such as USDT TRC20 to USDT ERC20 swaps. But an important question arises - are cryptocurrencies supported by multiple blockchains actually the same asset?
Understanding Wrapped Tokens
The core concept behind cross-chain swaps is the use of "wrapped" tokens. When you want to transfer an asset to a non-native blockchain, you lock the original tokens into a smart contract vault. This vault then mints new tokens on the destination chain at a 1:1 ratio.
For example, if you want to use Ethereum-based DeFi applications but only hold BNB (the native token of BNB Chain), you can lock your BNB into a smart contract. This will release the equivalent amount of wrapped BNB (wBNB) on the Ethereum blockchain, which can be used just like any ERC-20 token.
So while wBNB represents actual BNB assets locked on the BNB Chain, it is technically a different token that derives its value from the original. The same concept applies to wrapped Bitcoin (wBTC), wrapped Ether (wETH), and other bridged assets across chains.
Are They Fundamentally the Same?
At the core, wrapped tokens aim to be representations of the same underlying cryptocurrency. The issuance is usually done at a 1:1 ratio, and the original asset is locked in a custodial smart contract that mints the new tokens. So when you swap BNB to USDT, you receive the same amount of coins independently on the chains.
However, while bridged tokens may trade at similar values, they are technically separate cryptocurrencies issued on different blockchains. For example, BNB on BNB Chain and wBNB on Ethereum have different smart contract implementations, transaction histories, and token supplies.
As such, while the goal is for them to represent the same asset and value, bridged tokens are not identical. They rely on the security of the bridge/wrapping protocol, which could be compromised leading to exploits and loss of funds on either side of the bridge.
So in summary, while cryptocurrencies like wBTC, wETH etc. strive to be representations of their native assets across multiple chains, they are technically distinct tokens governed by separate smart contracts and blockchain networks. Their values are closely correlated, but not necessarily identical.
Benefits and Risks
The key benefit of cross-chain bridges is the ability to take advantage of opportunities across the entire crypto ecosystem. DeFi users can access yields, applications and protocols across multiple blockchains with their assets.
It also improves capital efficiency by allowing movement of funds where needed, rather than having liquidity fragmented across different siloed networks. This increased connectivity is seen as essential for the overall growth of the crypto and DeFi spaces.
However, cross-chain bridges introduce additional security risks. If the smart contracts governing the bridges are compromised, it could lead to funds being frozen, drained or replicated across multiple chains.
Several major cross-chain bridge hacks and exploits have already occurred, such as the $600 million Ronin bridge attack impacting Axie Infinity's ecosystem. As more capital moves across bridges, they become lucrative targets for hackers.
Closing Thoughts
Cross-chain bridges solve a major issue of bridging different blockchain ecosystems. While cryptocurrencies supported on multiple chains strive to represent the same underlying asset, they are technically separate tokens with different implementations.
As the multi-chain future continues evolving, solutions that can securely and trustlessly facilitate interoperability between blockchains will become increasingly crucial. Cross-chain swaps are an important step, but secure cross-chain communication remains an open challenge in the crypto space.
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