Even though blockchain has come a long way since 2008, the lack of cross-chain interoperability is still an issue that bothers crypto traders. Coins on a given blockchain couldn’t be transferred to another—making crypto trading a longer and costlier process for users. With DeFi, blockchain interoperability is more important than ever. This problem is solved by three concepts—wrapping, swapping, and bridging. Let’s learn more about Wrapping vs. Swapping vs. Bridging.
In crypto, wrapping refers to putting an asset into a wrapper or a digital vault that allows the wrapped asset to be created and used on a different blockchain. Wrapping allows the use of non-native assets on any blockchain.
Wrapped tokens are pegged to the value of another original crypto (or other assets) and put to work on the DeFi platforms. Wrapped tokens represent anything from commodities, arts and collectibles, equity, crypto assets, and stocks to fiat currencies and real estate. Wrapped tokens are regarded and managed by a custodian entity responsible for wrapping and unwrapping the asset. There are two types of wrapped tokens;
Wrapped tokens require a custodian who holds an equivalent amount of the asset as the wrapped token. If we take the example of Wrapped Bitcoin (WBTC)—a tokenized version of Bitcoin on Ethereum, the custodian needs to hold 1 BTC for each 1 WBTC that is minted.
A merchant will send BTC for the custodian to mint. The custodian then mints WBTC on Ethereum as per the amount of BTC sent. When the WBTC needs to be exchanged back to BTC, the merchant will send a burning request to the custodian, who will then release the BTC from the reserves. In addition to allowing non-native tokens to be used on any blockchain, wrapped tokens can increase centralized and decentralized exchanges’ liquidity and capital efficiency. Another great comparison in Wrapping vs. Swapping vs. Bridging tokens is the benefit of decreased transaction times and fees in wrapping.
Crypto swapping refers to the exchange of one coin or token for another. It is a seamless process that allows users to instantly acquire the coin they want.
Trading crypto means executing a trade based on the order book. You can only execute a trade based on the trading pairs available on a specific exchange. The process of swapping is similar but has room for flexibility. It allows you to exchange a cryptocurrency for another even if the pair is not live on the market. Swapping can be carried out at any level of volume.
A token swap can have two different meanings in the crypto sphere:
Let’s say you want to change BTC for ETH. In the case of trading, you will have to first trade your bitcoin to fiat and then trade that again to Ethereum. This is a long and costly process.
With Swapping, you can directly exchange your BTC for ETH. All you have to do is enter the amount you want to exchange and your desired trading pair. The token swap service will instantly process and convert your coin. Token swaps give users a convenient way to trade cryptocurrency. Swap-enabled crypto platforms are flexible, convenient, and highly secure.
Because token swap processes and related transactions are stored on the chain, users also benefit from data integrity. And by eliminating a layer of transaction fees, swapping helps investors save money while trading crypto. Which is a great comparative advantage in wrapping vs. swapping vs. bridging.
A blockchain bridge is a connection that permits the transfer of tokens from one chain to another. Both these chains can have different protocols, rules, and governance models. However, the bridge provides a compatible way to interoperate securely on both sides.
Blockchain assets are often not compatible with one another. In wrapping vs. swapping vs. bridging, bridges can create a synthetic derivative representing an asset from another blockchain. Bridges can be built on several different designs. Centralized Bridges rely on some type of central authority for smooth operation. Trustless Bridges are decentralized, where users don’t have to place trust in a single authority.
Unidirectional or one-way bridges allow users to port assets only to the target blockchain and not the other way around. Bi-directional or two-way bridges allow you to freely convert assets to and from blockchains. In addition to token exchange, bridges can also be used to exchange data, including decentralized identifiers, smart contract calls, off-chain information from oracles, etc.
Let’s say you have bitcoin that you want to convert to Ethereum. To do this regularly, you must convert BTC to ETH on a trading platform, withdraw it to a wallet, and then deposit it again to another exchange.
A blockchain bridge, however, will hold your coin and create equivalents in Ethereum for you to use. The amount of bitcoin you want to transfer gets locked in a smart contract, and you gain access to an equal amount of Ethereum. When you want to convert back to bitcoin, the Ethereum you have will get burned, and an equal amount of bitcoin will return to your wallet.
Benefits of Blockchain Bridges
One of the biggest benefits of bridges is the interoperability they provide between blockchains. Blockchain bridges allow users to access the benefits of each without giving up on the advantages of the host chain.
In addition, there are 3 main benefits to using blockchain bridges:
The primary use of the Wrapping is in Decentralized Finance, as it gives the owners of digital assets the freedom to explore other blockchains. Swapping provides cryptocurrencies with low market capitalization and an easier entry into the market. And Bridging allows the cross-chain transfer of assets and information across different blockchain networks. Though different, Wrapping vs. Swapping vs. Bridging all aim to increase the interoperability between blockchains.
These concepts open up a world where capital is more efficient, applications easily share liquidity, transaction costs less, convenience is high, and network congestion is drastically reduced. As DeFi becomes more mainstream, these concepts are only to gain more success.