Cross Chain Bridging

Most blockchains are networks that operate independently from other blockchains, having their own native tokens/digital assets and native network token. For example, ETH is the native currency of the Ethereum network used to pay for the fees required in processing complex deterministic transactions and change the state of the network’s ledger. The Ethereum network is a smart contract-based network that can process deterministic transactions which has ultimately led to the innovation in DeFi.

In contrast, the Bitcoin network does not support smart contracts. What if a user wanted to maintain their position in Bitcoin and make use of the smart contract functionality available in Ethereum’s DeFi ecosystem? Many protocols have emerged to support the bridging of assets across different chains specifically for this purpose. A specific blockchain may also have a desired level of liquidity and TVL, lower transaction fees and processing time making it desirable for a user to use that chain for some deterministic transactional activity.

Over the past year, we have seen a variety of cross-chain protocols supporting the bridging of crypto assets across multiple chains allowing for further interoperability, flow of liquidity and capital market efficiency in the blockchain ecosystem. Similar to the decentralized market making functionality on decentralized exchanges, some cross chain bridging protocols allow for users to provide liquidity to the bridge and earn bridging fees for ensuring that there exists liquidity to support the bridging of assets.

With regards to Shariah compliance, bridge fees also follow the concept of ‘Mudharabah’ and the incentivized rewards also follow the concept of ‘Hiba’. Therefore, bridging can be utilized as long as the tokens being used in the ‘Mudharabah’ are compliant as well as the tokens being earned in the ‘Hiba’.