Since DeFi summer 2020, the entire crypto ecosystem has seen a monumental increase in the number of projects, size of their communities, and total value locked (TVL) in them. Unlike last year, however, where most protocols would launch on Ethereum, 2021 has shown that DeFi, NFTs, and many other projects can scale horizontally — and vertically, as we will see later -, across different blockchains.
The high gas fees prompted by the Ethereum network’s congestion contributed to the quick adoption and increase in TVLs of other, cheaper and higher transaction throughput-capable blockchains like Avalanche and Solana.
Blue chips like Aave and Sushi followed the flow of users and forked their own projects into new ecosystems, bringing their user base with them and opening huge opportunities for new ones to use their products.
But how does one start swapping, lending, LPing, or farming on Avalanche if their entire capital is still on Ethereum or elsewhere? The answer: Bridges!
Bridging works by burning a token on the origin chain, where your assets are currently held, and minting an equivalent token on a destination chain, where you want to transfer those assets too. When bridging takes place,
If you bridge BNB — Binance Smart Chain’s native BEP-20 token — to Polygon, a wrapped BNB-equivalent, ERC-20 token will be deposited to your wallet, connected to Polygon. This allows you to take advantage of potentially higher yields on farms and tap on liquidity that would otherwise not be available on the Binance Chain, for example.
Recently, bridging has caught the attention of Crypto Twitter and the entire crypto-verse not only because it allows for cross-chain value capture, but also because of the increase in prices of projects like Trader Joe, which propelled a large inflow of capital through the Avalanche Bridge.
Depending on the amount bridged, some of those who used the Avalanche Bridge received an airdrop in GB, the Good Bridging token, which quickly appreciated at price afterward.
Synapse is another project that brings chain interoperability whose token shot up in price and usage, further consolidating bridges as an increasingly commonly used tool in the DeFi user.
Bridges not only connect layer 1 (L1) ecosystems but also provide a link between L1s and L2s like Optimism and Arbitrum.
In an UpOnly podcast episode, Dragonfly Capital Managing Partner Haseeb Qureshi made the differentiation between different L1 blockchains and L2 solutions by comparing them to cities. In his analogy, every blockchain is a different city, with different properties and profiles of inhabitants — or users, in crypto -, whereby each one is completely independent of one another. Cities scale horizontally and can only expand/develop to a certain degree.
L2s are the buildings inside those cities. They scale vertically, transferring the load off the network for cheaper and faster transactions, and only final settlement is made on the ground floor, or on the L1.
Following Qureshi’s example, the role that bridges play, similarly to chain agnostic, interoperability-focused protocols like Cosmos and Polkadot is of roads that connect and allow for the connectivity between different chains.
Given the speed at which new projects and solutions are created in crypto, users, VCs and protocols are left only with speculative ideas as to what will be the main modus operandi in terms of DeFi and blockchain interactivity.
Will we mainly operate in L2s? Will Cosmos or Polkadot completely replace bridges? Will every project be built on every chain?
Time will tell.