Since its inception in 2020, DeFi has experienced tremendous growth. The use of bridging protocols in the crypto space is one innovation that should be focused on as this industry continues to expand and introduce new innovations.
The financial markets and technological fields have experienced a thrilling period in the twenty-first century. After the introduction of the internet and web 2.0 technologies, the century began with great promise. Only 20 years old, the market capitalization of cryptocurrencies has surpassed $1 trillion since the launch of Bitcoin, the first cryptocurrency to be introduced on a blockchain network.
Even though traditional finance purists haven’t fully embraced its potential, the crypto ecosystem is currently one of the most rapidly developing parts of the financial market. But over the past year, the number of new cryptocurrency projects has significantly increased. Since then, innovators in this field have started to develop solutions that incorporate blockchain networks to expand the opportunities available in the cryptocurrency market.
Solutions for Decentralized Finance via Cross-chain
Before diving into the cross-chain technology’s value proposition, it’s important to remember that these solutions came about after the rise of DeFi. By establishing an ecosystem through which users can access decentralized financial services, this emerging crypto niche challenges the centralized nature of conventional finance. DeFi should make dealing with conventional banks and asset managers unnecessary.
The DeFi innovations that have been released so far include goods like decentralized exchanges (DEXs). The only distinction between these DeFi platforms and centralized exchanges is that DEXs use smart contracts for execution while their conventional counterparts rely on third parties to settle transactions. Today, centralized cryptocurrency exchanges with a long history are facing competition from DEXs like Uniswap and Pancakeswap.
Traditionally, to connect to the protocol on a compatible blockchain, a user would need to purchase the network’s native tokens, transfer them to a compatible wallet, and do so. Users can now transfer their assets between blockchain networks by using bridges.
Coins and tokens that are native to one blockchain cannot currently be transferred to or used on another blockchain network. For example, Ethereum (ETH) and ERC-20 tokens previously could only be used on the Ethereum network and could not be transferred to another blockchain. Bridging protocols have made it possible to transfer ETH and other digital assets between different blockchains.
Users can transfer assets from one blockchain to another using bridging protocols, including tokens, NFTs, and stablecoins. Decentralized applications (dapps) that are appropriate for various networks are used by bridges. As a result, the dapp can receive a token from one network and distribute an equal number of those tokens on another blockchain.
The cryptocurrency market, though only a decade old, has undergone significant change recently. From creating crypto assets for transactional uses, the industry has expanded to creating for financial services. What’s more intriguing is that innovators are developing new ideas at a faster rate than ever before, drawing VC funding from all over the world.
DeFi has grown by more than 50X in the last two years, making it one of the main beneficiaries of this increased funding. The current market capitalization of all DeFi is $79 billion, or roughly 5.3 percent of the total market capitalization of all cryptocurrencies. Stakeholders predict that as more institutional and retail investors see the value of DeFi, this growth will continue.
Having said that, integrating different blockchain networks is the only way to ensure the expansion of this ecosystem. Cross-chain bridges provide a perfect remedy for this flaw and are likely to be a hot topic in the coming crypto era. However, since most of the development is still experimental in the field of cryptography, only time will tell how things turn out.