DeFi bridging facilitates the movement of assets across blockchains, such as from
Ethereum to Bitcoin or Bitcoin to Solana, similar to how we might transfer money
between banks in traditional finance (TradFi). This process is useful if your assets are on
one blockchain but you want to interact with an application on a different blockchain.
In the TradFi world, we have the same problem when we need to move money from one
bank to another. Banks have a variety of mechanisms to move money including wire
transfers, ACH, and more.
For example, let’s say you bank with Chase and want to move some money to a new
Bank of America account. Chase sends a wire transfer to Bank of America and charges
you a $50 fee for providing the service.
Here’s how moving assets works in DeFi.
In DeFi, bridges act like gateways, allowing users to move their crypto assets between
different blockchains, similar to how banks might transfer money between each other.
However, unlike banks, blockchains aren't inherently compatible. DeFi bridges solve this
problem by enabling the transfer of crypto assets across these networks. These bridges
rely on liquidity providers who deposit their crypto holdings to facilitate the transfers. In
return, liquidity providers can earn rewards or interest on their deposited assets. This
makes DeFi bridging a valuable tool for users who want to access a wider range of DeFi
applications and opportunities across different blockchains.
Let’s take a look at an example in DeFi.
You deposit 1 ETH into a bridging pool with total deposits of 10 ETH.
Assume each exchange in this pool incurs a 0.1% bridge fee and the annual
bridging volume is 1000 ETH. You earn a percentage of the transaction fees
based on your share of the pool.
The fees earned would be calculated as:
Fees = (volume x fee rate) x your share of the pool =
(1000 ETH * 0.001) * (1/10) = 0.1 ETH
Yield = fees / initial investment = 0.1 ETH / 1 ETH = 10%
That covers all the jobs in DeFi. Now that you understand where the yield comes from,
let’s learn about how DeFi investors evaluate the protocols and pools.