Realization

Why are cross-chain bridges challenging to implement? The difficulty arises from the need for trust in exchange operations between users. Transactions between users wanting to trade Asset A for Asset B require a third party (guarantor) in the absence of trust. The guarantor receives Asset A from the seller and funds from the buyer (Asset B). After receiving funds from both users, the guarantor completes the exchange by transferring assets to each of them.

Traditional exchanges can act as guarantors in these transactions. However, in the context of decentralized exchanges and smart contracts, the process becomes more complex. Smart contracts can ensure asynchronous locking of funds from each user, followed by unlocking and transfer of the required assets to each user. This method, however, was not widely adopted due to the simultaneous availability requirement of both a buyer and a seller.

In existing non-custodial exchanges, liquidity providers (LP) lock funds in liquidity pools for exchanges. When users perform exchange operations, their funds enter a liquidity pool in one asset, and in return, they receive funds in another asset. All these operations are carried out using smart contracts and do not require a guarantor.

However, smart contracts can only execute within a single blockchain (e.g., Ethereum). When it comes to moving assets across different ecosystems, this approach falls short as smart contracts cannot interact with them. Special algorithms are needed for cross-chain transfers, often involving second-layer scaling solutions.

L2 smart contracts allow access to information from other ecosystems, including transaction details in Bitcoin, Ethereum, Binance Smart Chain (BSC), and more. They can also interact with external data through oracles.

How does a blockchain intermediary enable cross-chain bridges? One promising method for asset transfer between different networks involves using a specialized blockchain. The BTS - SEI project, for instance, employs this mechanism. Liquidity providers contribute funds to a pool and earn income in return.

The algorithm involves contributing funds to liquidity pools in two blockchains, with SEI being one of them. The project enables the exchange of assets from different blockchains with varying values. The exchange operation occurs in two stages through exchanges. Initially, the user exchanges the source blockchain's asset for BTS using the first liquidity pool.

In the second stage, the BTS token is exchanged for SEI in the destination blockchain, utilizing the second liquidity pool. This exchange, for example, from BTS to SEI, requires two liquidity providers. One provider offers USDT and BTS, while the other provides USDT and SEI. The operations are conducted through exchanges, and after the user submits a transfer request and specifies the SEI destination address, they need to transfer BTS to the exchange-provided address.

BTS goes to the first liquidity provider, who converts the corresponding value into SEI in the second liquidity pool. The second liquidity provider, after receiving SEI, transfers it to the user's specified address in the SEI blockchain. These operations are automated, and the liquidity providers' collateral funds, exceeding the value of funds used in exchange operations, serve as a guarantee of fairness. With two liquidity pools, assets can be exchanged in both directions.

Cross-chain bridges allow the transfer of stablecoins (such as USDT, USDC, etc.) between EVM-compatible blockchains like Ethereum, BSC, Huobi ECO Chain (HECO), and others. There are no restrictions on the types of assets or blockchains involved in exchange operations, as long as there are corresponding liquidity pools.