Crypto Bridges: The Good, The Bad, & The Ugly
Crypto Bridges: The Good, The Bad & The Ugly Truth
The Good Truth
Crypto bridges are a new phenomenon and yet no one seems to really understand their purpose. They serve a unique function in that they help diversify the crypto market. This is achieved by a user with, say a MetaMask wallet, connecting to the Harmony Protocol, for example.
The user will trade their said ETH to the Harmony Bridge and in return, the user is given the Harmony Coin or some equal balance in another said cryptocurrency that is available on the protocol, like a typical swap (or you could stake your crypto.)
This allows for a quick and easy exchange at very low transactional fees when compared to that of Ethereum. Which has lately been immensely high in price due to high demand as well as the heavy usage of the network. Some are hoping this will be fixed with the upcoming Ethereum 2.0., which will address some very important key issues, such as Ethereum going from a PoW (Proof-of-Work) to PoS (Proof-of-Stake).
The Bad Truth
Crypto bridges are coming online at an alarming rate. most with the promise of something to the effect of bringing mass adoption. However, one of the most misunderstood things about these bridges is about how they work in principle. Think of the earlier example about the user and the Harmony Protocol swapping your Eth. The Eth never leaves the Ethereum ecosystem but gets locked up instead on the Eth blockchain. This lock would be to an Ethereum wallet that would be owned by The Harmony Protocol. Now, the protocol will give the user the said currency that the user chose upon the swap. If the user chooses any cryptocurrency other than the Harmony Token, then said user will receive a synthetic token (BNB, LINK, etc…)
You read that correctly! The user would receive a synthetic token as opposed to the real BNB or ChainLink coins. This exact swap model is the very reason for the transactions to be fast and with low fees. The simple matter of fact is the bridge actually has the ability, as well as the centralized version, to synthetically print tokens. Sort of like The FED printing money, they control the flow rate which allows for low fees. However, what you don’t hear is just how dangerous this can be for users in the long run. Which leads us to…
The Ugly Truth
In the real world today, we all are talking about inflation (more like hyper-inflation!) Due to users trading in their Ethereum for synthetic tokens, these synthetic tokens must be added to the current supply of whatever currency the users are swapping/trading for. To be as accurate and transparent as possible, the current supply will go up which will deflate the price.
Think of it like this: if you live for the law of supply and demand, then your golden rule is to always have a finite supply–always sell at high prices and buy back at low prices. Thus, continuing the finite circle of profits.
This is retail arbitrage at its most basic level. You don’t need to make the good, you only need to supply it. If the good is in a finite supply you only need to acquire said good when its price is lower than normal and sell said good when it's in huge demand, albeit at high prices. Thus the circle of profits continues.
If more centralized bridges come online then it is fair to say that we are right back where we started. Remember, Decentralized Finance or DeFi is the ‘Holy Grail’ of taking those first few steps into the unknown away from the centralized finance model that we have come to know as the standard. If DeFi becomes the minority in the cryptocurrency bridge game, well we will just be up you know what creek.
The fact of the matter is simply this: iif more centralized bridges come online, then more control goes to the central authority of that said bridge. With more centralized control comes less freedom for individual crypto users. Given the purpose of these cryptocurrencies in the first place, this is a lose/lose.