Cross Chain Swap

A cross-chain swap in crypto allows users to exchange one type of digital asset for another directly between different blockchain networks, enhancing interoperability. For example, it enables users to exchange ETH on Layer 1 Ethereum for USDC on Layer 2 Arbitrum. It can also involve different networks on the same layer, such as swapping BTC on Bitcoin for ETH on Ethereum.

Various mechanisms facilitate cross-chain swaps, including atomic swaps and bridge-based swaps.

Atomic Swap

Atomic swaps use time-locked contracts and require two parties on each blockchain to deposit tokens into these contracts. The transaction only occurs if both parties deposit the agreed-upon amount of tokens, ensuring the exchange happens “atomically,” meaning it either completes fully or not at all.

Bridge Based Swap

Bridge-based swaps enable users to exchange assets using a bridge connecting two different networks. These mechanisms include:

• Lock-and-Mint Bridges: This method locks tokens on the source network and mints an equivalent amount of a different token on the destination network.
• Liquidity Bridges: Users deposit the tokens they want to exchange into the liquidity pool on the source chain and withdraw an equivalent value of a different token on the destination chain. This process is similar to how an automated market maker (AMM)-based DEX (decentralized exchange) operates, but it functions across different networks.
• Optimistic Bridges: These operate on the liquidity model with the additional assumption that all bridge transactions are valid unless proven otherwise.
• Multisig Bridges: These use multi-signature (multisig) wallets, requiring a predetermined number of approvals from different parties to execute the bridge transaction.