What is bridging in crypto: What is Crypto Bridging? A Guide to Cross-Chain Bridges

What is bridging in crypto

What is bridging in crypto

The centralized entity behind a custodial bridge could theoretically steal users’ funds. When using custodial bridges, go for established brands with long-term track records. The bridge mints new assets compatible in the Avalanche ecosystem, as wrapped ERC-20 tokens. Each blockchain network has a different set of rules and is inherently isolated.

Most of the erc20 tokens that you buy right now are native to the Ethereum network. This means even if you purchase polygon or Matic on Binance, they give you an Ethereum version of polygon instead of the actual polygon token on the polygon network. However, for all these other networks, you can have an Ethereum token on the Binance smart chain and have Ethereum on the polygon network. Shane Brunette founded CTC back in 2018 after dealing with his own crypto tax nightmare. He has worked closely with accountants and tax lawyers to make it easy for fellow cryptocurrency users to be tax compliant.

During 2022, up to August, there were 13 bridge attacks, making 69% of all stolen funds for the year. The custodian mints ERC-20 tokens, WBTC, equal to the original BTC. Users request WBTC conversion by transferring original BTC amount to a custodian merchant address. Nevertheless, the most popular bridging is done from Bitcoin to Ethereum. When people travel and use Visa cards in a foreign country, they don’t think about the underlying processes that facilitate this convenience.

Observers interested in using blockchain technology do not know where to begin due to an abundance of separate chains that cannot communicate with one another. There are so many distinct blockchain ecosystems that it limits the user pool. For instance, without interoperability, there might be 100 chains with 10 users, but if these chains were able to communicate with one another, there could essentially be one chain with 1,000 users. Countless businesses would gladly implement blockchain into their daily operations, but because the majority of blockchains are not interoperable, businesses often steer clear of them. Projects like Metropoly believe that blockchain technology has the potential to decentralize and democratize the real estate market.

In a decentralized blockchain system, this truth is achieved by many computer nodes reaching a common agreement according to the rules written into the software. This removes many of the problems of centralized systems, which are open to corruption or abuse of power, by using transparency and incentivization of widespread participation. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

The only exception is transactions that originate from Optimism and Arbitrum, and the fee for these transfers is 0.2%. Because of the multi-chain market structure, the need and demand for cross-chain interoperability have increased dramatically. That’s why in recent months, there has been an explosion in blockchain bridges. The main goal of crypto bridges is to help unify the fragmented landscape.

Ethereum basics

Now the Ethereum’s network is obviously built using Ethereum as the leading coin. For the sake of this blog post, there’s one thing left; exchanging currency. In most countries, that is really easy, though, because there’s already a system set up where you can go to a kiosk or a bank and quickly exchange your dollars. Help.coinbase.com needs to review the security of your connection before proceeding. Bridging transactions will not be auto-categorized, they require manual selection due to the complex nature of the transaction. Both the ‘Bridge Out’ and ‘Bridge In’ components must occur within a 24 hour timeframe for them to be grouped together.

What is bridging in crypto

The platform assists users in suggesting appropriate categories for complex transactions as well as detecting and reconciling any missing transactions to ensure that the data is accurate. To make things so much simpler, you can select the type of transaction from a list of pre-defined categories based on whether funds are incoming or outgoing. Alternatively, you can select a particular network, such as Polygon or Fantom, and include any related networks with the same address. For centralized exchanges, you will need to use an API key, an external link provided by CryptoTaxCalculator, or directly upload a CSV generated from the particular exchange. Whitelisted assets can be moved back and forth between the two chains.

The team would then address the user’s concern within a few hours. Beyond tracking sales, purchases, and asset transfers, CryptoTaxCalculator embeds itself into the fabric of DeFi by tracking more complex activities such as lending, borrowing, bridging, and even liquidity pools. For NFT enthusiasts, the platform also offers plenty of support for NFT transactions across various networks, including batch mints and NFT sweeps. For project holders and creators, you can easily track the revenue generated from royalties and listings on NFT platforms.

What Is Wrapped Bitcoin?

One example is xDai Bridge, which connects the Ethereum mainnet to Gnosis Chain , an Ethereum-based stable payment sidechain. XDai is secured by a set of validators different from those who maintain the Ethereum network. The xDai Bridge allows easy transfer of value between the two chains. A blockchain bridge is a protocol connecting two economically and technologically separate blockchains to enable interactions between them. These protocols function like a physical bridge linking one island to another, with the islands being separate blockchain ecosystems.

What’s the future of blockchain bridges?

Since your original coins get locked up in the contract, there are no new cryptos coming into the market, and thus, there aren’t any complex inflationary problems being caused, either. Essentially, some of the most popular centralized crypto bridges are those that are located on trusted and well-known crypto exchanges. These bridges work with the help of exchange-based liquidity pools. Now, it’s a huge topic, in of its own, so if you’re not familiar with it, I highly recommend reading a section about liquidity pools. A bridge running as a parachain on Polkadot may have collators monitoring and translating the information between the Polkadot Relay Chain and an external chain, for example, Bitcoin.

Let’s go over a straightforward example as to why you would want to use a blockchain bridge. AAVE is a very powerful and popular lending and borrowing platform that allows you to lend out your cryptocurrency in turn for earning interest on it. In the aggressive approach, it is argued that because of the lack of guidelines available from your tax regulatory body, bridging is the equivalent of transferring crypto between two wallets owned by the same user. You would argue that, as a result, this doesn’t constitute a disposal event, and as such, you wouldn’t incur capital gains tax. In this article, we’ll break down everything you need to know about the taxation of wrapped and bridged tokens and share different approaches to reporting these transactions on your tax return.

Manual checkpoints are similar to a trusted model as it depends upon a third party, i.e., the officials, for its operations. As a user, you trust the officials to make the right decisions and use your private information correctly.

Then once your assets are frozen, you’re given a copy of that token on the new network that you wish to move to. Just as the name suggests, a blockchain bridge connects two different chains and allows assets to move from one to the other. As discussed, swapping one cryptocurrency for another is typically considered a taxable event that requires the holder to incur a capital gain or capital loss on the coin that was disposed.

Similar to Binance Bridge, the Avalanche Bridge can be accessed through MetaMask. Once the assets are bridged, tokens are appended with the symbol “.e.” For example, the bridged USDC token is called USDC.e. Ethereum bridges offer a way to send assets to EVM-compatible networks like Binance Smart Chain, Avalanche, and Fantom, as well as non-EVM-compatible networks like Solana and Terra.


If you use a bridge to send one Solana coin to an Ethereum wallet, that wallet will receive a token that has been “wrapped” by the bridge – converted to a token based on the target blockchain. In this case, the Ethereum wallet would receive a “bridge” version of Solana that has been converted to an ERC-20 token – the generic token standard for fungible tokens on the Ethereum blockchain. A blockchain bridge is a tool that lets you port assets from one blockchain to another, solving one of the main pain points within blockchains – a lack of interoperability. The most important benefit of blockchain bridges is the ability to improve interoperability.

Terra operates a bi-directional bridge with Ethereum called Shuttle. AnySwap’s Ethereum-Fantom bridge currently holds about $2.1 billion in value locked. Now you should know here, sometimes instead of a pool, it’s literally a company or a person, but usually, it’s a pool . Along with that issue, another issue is that they are usually quite slow. Some transfers take minutes, others take hours and some even take multiple days.

Not only does it make interoperability seamless, but it also allows the users to benefit from the low cost and high speed of the Solana network. Aside from enabling cross-chain transfers, blockchain bridges provide other benefits. They allow users to access new protocols on other chains and enable developers from different blockchain communities to collaborate. In other words, blockchain bridges are a critical component of an interoperable future of the blockchain industry.

To understand what a blockchain bridge is, you need to first understand what a blockchain is. Bitcoin, Ethereum, and BNB Smart Chain are some of the major blockchain ecosystems, all relying on different consensus protocols, programming languages, and system rules. A simple example would be the inflow of assets from holding reflection tokens, where there is a tax’ when a user buys or sells the token, which is redirected back into a liquidity pool or to existing token holders. Since these inflows, or ‘reflections’ are not like conventional transactions, CryptoTaxCalculator is unable to properly categorize them and only records them as incoming transactions. Hence, the onus is on the user to determine whether these inflows should be marked as interest income or staking rewards, depending on their local tax laws.

In most regions, a capital gains taxable event regarding crypto activity happens when there’s a ‘disposal’ of an owner’s asset. A disposal is defined as a change of ownership in a specific asset; for example, when selling ETH for BTC. The seller is ‘disposing’ of their ETH to receive BTC in return. If you are unsure how to report your wrapped or bridged tokens, we recommend reaching out to a tax professional.