Cross-Chain Bridges and Atomic Swaps Explained Simply

Cross-chain bridges and atomic swaps are useful tools in the crypto space, but what exactly are they? Are cross-chain bridges and atomic swaps the same thing? If not, what’s the difference between the two?

What Is an Atomic Swap?

An atomic swap (or an atomic cross-chain trade) involves the exchange of cryptocurrencies on different blockchains without the need for a validating third party. This may sound similar to smart contracts, which execute contracts if a set of pre-defined conditions is met. That’s because atomic swaps use smart contracts to function without intermediaries.

The purpose of atomic swaps is to remove the need for fiat currencies in cryptocurrency exchange. If you want to convert Bitcoin to Ethereum, for example, you don’t need to convert it to a fiat currency if you’re using atomic swaps.

Atomic swaps use Hashed Timelock Contracts (HTLCs) to facilitate trades. These transactional agreements use both hashlock and timelock keys and require the fund receiver to acknowledge the swap by a deadline. The hashlock key only facilitates the swap if users provide cryptographic proofs, while the timelock key sets the deadline.

If any conditions in the contract are not met, the transaction will not go through. The trade is either fully executed using HTLCs, or not executed at all.

The Pros and Cons of Atomic Swaps

One great feature offered by atomic swaps is that it doesn’t need a private key. In an atomic swap, a private key does not need to be provided, so there’s less of a chance of such valuable information being harbored by malicious actors.

On top of this, you don’t need a centralized platform to carry out an atomic swap. Centralized platforms are controlled by a small group of individuals, which isn’t ideal for many crypto traders who prefer the distribution of power.

Information and power are distributed across multiple connection points or nodes on decentralized platforms. These platforms also use a process known as governance, wherein users can vote on changes made within the network.

Because atomic swaps can take place on decentralized platforms, this opens the door to those who aren’t fans of centralized crypto services, like Binance and Coinbase. This is why atomic swaps are a key service used in the DeFi industry.

Moreover, using decentralized platforms for atomic swaps can lower or even eliminate certain charges, such as withdrawal fees. Atomic swaps can also speed up transaction times, as users don’t need to wait for intermediaries to validate the trade. If there’s anything crypto traders love, it’s low transaction times and fees.

But atomic swaps are not a perfect technology. Like many crypto tools, they have numerous drawbacks. Firstly, you can only swap cryptocurrencies with the same hashing algorithms, which can be pretty limiting. Another limiting factor is that atomic swaps can only occur if both parties agree to the type and amount of assets being swapped.

On top of this, atomic swaps aren’t always fast. While they certainly can be, the speed relies on both parties meeting the contract conditions before the deadline or as soon as possible. If one or both of the parties take their time here, the atomic swap can take quite a while to go through.

What Are Cross-Chain Bridges?

Cross-chain bridges (or blockchain bridges) are somewhat similar to atomic swaps, but the two technologies are not the same. Cross-chain bridges are applications that facilitate transactions between independent blockchains. One of the biggest problems faced by blockchains is that they’re isolated. This means that they can’t communicate with each other without the help of additional tools. This is where cross-chain bridges come in.

Cross-chain bridges provide blockchains with interoperability, allowing cryptocurrencies to be transferred from one chain to another. This also increases the utility of tokens, allowing them to be used within more than just one blockchain network.

There are three kinds of cross-chain bridges out there: lock and mint, burn and mint, and burn and unlock. Let’s go through how these work.

A burn and mint cross-chain bridge involves a user burning an asset on one blockchain while the same amount of that asset is minted on another chain.

A lock and mint cross-chain bridge involve a user locking a holding of tokens on one blockchain within a smart contract. When this is done, the wrapped version of these tokens is then minted on another blockchain. When a token is wrapped, it can be used on a non-native blockchain so long as the same amount of the native token is locked in a smart contract.

Lastly, a lock and unlock cross-chain bridge involves tokens being locked on the original chain. At the same time, the same amount is made accessible within a liquidity pool on the destination chain.

As you can see, all cross-chain bridges require a token to be burned or locked before it can be made available on another blockchain.

The Pros and Cons of Cross-Chain Bridges

There are many popular cross-chain bridge platforms today, including Polygon Bridge, Binance Bridge, and Avalanche Bridge. Binance Bridge, for example, exists on the BNB Chain and allows users to transfer assets to a destination blockchain without needing to pay high fees. Cross-chain bridge transfers can also take place incredibly quickly using the Binance Bridge, often in a matter of seconds.

Cross-chain bridges can even transfer data between chains on top of cryptocurrencies, giving blockchains an even higher level of interoperability and utility. This technology can also make using DApps (decentralized apps) on various blockchains easier. However, there are a few issues surrounding cross-chain bridges, namely their security vulnerabilities.

A lot of trust is required to execute a cross-chain bridge transfer, as funds are being moved between chains. This trust can be exploited, especially if one party acts maliciously within the trade or exploits the smart contract coding used within cross-chain bridges. Cybercriminals tend to target cross-chain bridges because they can have security vulnerabilities to take advantage of.

On top of this, if the cross-chain bridge in question is centralized, there’s a much higher chance that the system could be severely affected or even shut down by technical malfunctions or malicious takeovers. Binance Bridge, which we briefly discussed previously, is an example of a centralized cross-chain bridge.

Cross-Chain Bridges and Atomic Swaps Both Have Their Uses

Both atomic swaps and cross-chain bridges have applications in the crypto world, though some may prefer one for various reasons. There’s no denying that both of these tools have their benefits and drawbacks, which can impose limitations and security vulnerabilities on those who use them.

So, be mindful of what problems you may run into or be at risk of if you want to use atomic swaps and cross-chain bridges yourself.