What is Crypto Bridging? A Guide to Cross-Chain Bridges | BitPay (2024)

FAQs

What is Crypto Bridging? A Guide to Cross-Chain Bridges | BitPay? ›

Definition of crypto bridging

Bridging in crypto refers to the process of transferring assets between different blockchain networks.

Cross-chain bridges increase token utility by facilitating cross-chain liquidity between distinct blockchains. A cross-chain bridge typically involves locking or burning tokens on the source chain through a smart contract and unlocking or minting tokens through another smart contract on the destination chain.

First you lock your crypto in a smart contract on the blockchain network you're bridging from, and then you'll receive crypto from the network you're bridging to. For example if a user is bridging from Ethereum to Polygon, the first transaction on Ethereum typically takes 10-20min.

Bridging assets

Bridging crypto may or may not be taxable, depending on the circ*mstances and who you ask. Tax implications of bridging in DeFi: Most tax professionals believe that simply moving assets from one chain to another is not taxable—it's just a transfer. However, most bridges provide a swapping function.

An attacker can take money out of the bridge at the other end if they can create a deposit event without making a real deposit or by making a real deposit, or by depositing with a token that has no value.

This function is called network bridging. Bridging is distinct from routing. Routing allows multiple networks to communicate independently and yet remain separate, whereas bridging connects two separate networks as if they were a single network. In the OSI model, bridging is performed in the data link layer (layer 2).

Cross-chain bridge examples

Avalanche Bridge: The Avalanche bridge allows for the transfer of assets between the Avalanche and Ethereum networks. Polygon Portal (Polygon Bridge): The Polygon to Ethereum bridge enables seamless interoperability between the Polygon and Ethereum networks.

Cross-chain bridge exploits are widely recognized as major risks in DeFi ecosystems. High-profile incidents in recent years, such as the Wormhole, Qubit, and Ronin exploits, each resulting in losses of hundreds of millions of dollars, have underscored the vulnerabilities of bridges.

To do this, you could use a cross-chain bridge to initiate a cross-chain transfer. This involves locking up your tokens on the Ethereum network and minting equivalent tokens on the Binance Smart Chain. Once the tokens are successfully transferred, you can freely use them within the BSC ecosystem.

How long do crypto bridges take? ›

How long does an Avalanche Bridge™ transfer take on each network? The Ethereum network transaction will typically take approximately 20 minutes (96 confirmations). The Bitcoin network transaction will typically take approximately 1 hour. The Avalanche network transaction will typically take a few seconds.

Crypto Bridges vs Swaps: Key Differences

Swaps occur within the same blockchain, while bridges facilitate the transfer of assets across different blockchains.

Exchange fees - Every time a user swaps one digital asset for another using a crypto bridge, the bridge operator charges a fee for facilitating the transaction.

The IRS has agents trained to link wallet addresses to individuals, and upcoming regulations will mandate both centralized and decentralized exchanges in the US to report user transactions to the IRS via form 1099-DA.

If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event, even if you receive an information return from an exchange or platform as a result of the transfer.

The crypto you receive as income (like mining, staking, and rewards) is also subject to these same income taxes, which often won't be deducted or withheld. When you report your earnings, you'll generally owe according to the income tax rate appropriate to your tax bracket.

Using a blockchain bridge instead of a centralized exchange offers several advantages. Bridges enable direct, peer-to-peer transactions between different blockchains, reducing reliance on central intermediaries. This enhances the autonomy and privacy of users. They also support a wider range of tokens and assets.

Bridging involves transferring assets or data between two different blockchain networks. Wrapping refers to representing an asset from one blockchain on another blockchain network. To facilitate interoperability and transfer of assets between different blockchains.