Cross-chain bridges and nuclear exchange explained simply

Cross-chain bridges and nuclear exchange 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 exchanges the same thing? If not, what is 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 like smart contracts, which execute contracts if a set of pre-defined conditions are met. That’s because nuclear swaps use smart contracts to work without intermediaries.

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

Atomic swaps use Hashed Timelock Contracts (HTLCs) to facilitate trades. These transaction agreements use both hashlock and timelock keys and require the fund recipient to confirm the exchange within a deadline. The hashlock key only facilitates the exchange if users provide cryptographic proof, 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 executed entirely using HTLCs, or not at all.

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Pros and Cons of Atomic Swaps

A great feature offered by atomic exchange is that it does not need a private key. In a nuclear exchange, a private key does not need to be provided, so there is less chance of such valuable information being stored by malicious actors.

On top of this, you don’t need a centralized platform to carry out a nuclear exchange. Centralized platforms are controlled by a small group of individuals, which is not ideal for many crypto traders who prefer decentralization.

Information and power are distributed over several connection points or nodes on decentralized platforms. These platforms also use a process known as governance, where users can vote on changes made to the network.

different cryptocurrencies

Because atomic swaps can take place on decentralized platforms, this opens the door for those who are not fans of centralized crypto services, such as Binance and Coinbase. This is why atomic swapping is a key service used in the DeFi industry.

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

But nuclear exchange is not a perfect technology. Like many crypto tools, they have many drawbacks. First, you can only exchange cryptocurrencies with the same hashing algorithms, which can be quite limiting. Another limiting factor is that a nuclear exchange can only take place if both parties agree on the type and amount of assets exchanged.

On top of this, nuclear swapping isn’t always fast. While they certainly can be, the speed is dependent on both parties meeting the terms of the contract before the deadline or as soon as possible. If one or both parties take their time here, the nuclear exchange could take quite a long time to go through.

What are Cross Chain Bridges?

earth from space with network grid above

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 blockchains face is that they are isolated. This means that they cannot communicate with each other without the help of additional tools. This is where cross-linked bridges come in.

Cross-chain bridges provide blockchain 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 types of crosschain bridges out there: lock and coin, burn and coin, 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 cross-coin bridge involves a user locking a holding of tokens on one blockchain within a smart contract. Once this is done, the wrapped version of these tokens is minted on another blockchain. Once a token is wrapped, it can be spent on a non-native blockchain as long as the same amount of the native token is locked in a smart contract.

Finally, a lock and unlock cross-chain bridge means that tokens are locked on the original chain. At the same time, the same amount is made available 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.

Advantages and disadvantages of cross chain bridges

man walking across bitcoin bridge feature image
Image credit: haroldguevara/Shutterstock

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 having to pay high fees. Cross-chain bridge transfers can also happen incredibly quickly using the Binance Bridge, often within 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 the use of DApps (decentralized apps) on different blockchains easier. However, there are some issues surrounding cross-chain bridges, namely their security vulnerabilities.

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

Image of hands shaking over different technology screens

On top of this, if the cross-chain bridge in question is centralized, there is a much higher chance that the system could be severely affected or even shut down by technical failures or malicious takeovers. The Binance Bridge, which we briefly discussed earlier, 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, although some may prefer one for different reasons. There is no denying that both of these tools have their pros and cons, which can impose limitations and security vulnerabilities on those who use them.

So be aware of the issues you might encounter or be at risk of if you want to use nuclear swaps and cross-chain bridges yourself.

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