Asset Swaps and Cross Bridging on Centralised and Decentralised Exchanges

February 11, 2024
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The earth with network mesh overlayed

CEX & DEX words you'll get used to, but you need to understand the differences of why to use one or the other.

Have you ever wondered exactly how you can send an asset or token over from one exchange to another, yet they are on two completely different networks and blockchains? For example, why is it so much easier to swap a token from other blockchains when using a centralised exchange(Cex) than a decentralised exchange(Dex)?

I will explain how this works and what it involves in this article. However, we first need to know precisely what a smart contract is to show you how it can be achieved.

What is a Smart Contract?

A smart contract is a set of instructions formed by computer language and code on the blockchain and kept on a decentralised Ledger. This code is built on an understanding or agreement between 2 or more parties to execute a particular obligation with complete transparency, proof, and verifiable identity. Once this contract occurs, its record is on the blockchain forever. These contracts can help use everything from finance to the supply chain and, in this particular case, help exchanges swap a token from one chain to another.

Swapping a Token Between two Centralised Exchanges

When a token is sent from one centralised exchange to another, for example, an ERC20 token on the Ethereum network, if this particular token is on the same blockchain, a chain of events occurs, starting with your withdrawal confirmation. After you have successfully started the withdrawal process, the transaction is broadcasted to the network. For the transaction to be completed and confirm your deposit to your other exchange, a set number of nodes need to be completed before your asset or token will show up in your deposit account. Of course, you can always go to your notifications on the exchange on your account and watch these nodes in action as this whole action is being carried out.

Withdrawing an Asset from One Blockchain to Another

Sending a token from one exchange to another is very simple when it's on the same network or blockchain, but it starts to get tricky when you send out one token from one particular network to another. An example will be if you decide that the fees on the Ethereum Network are too expensive and it's much cheaper to send your token to another exchange via the Solana blockchain network. We all know that if you send a token from one network to a different network, your funds could be lost forever. I wonder how many people have accidentally sent Vechain to an Ethereum address or Ethereum to the Binance Smartchain and found they have lost their funds forever. It's easily done. You have a lapse of concentration, are tired after a long day at the office, and don't check the details properly. Remember, we are not infallible as humans, and we all occasionally make mistakes.

Token Swaps On a Centralised Exchange

So how does a Centralised Exchange move your tokens from one network to another? Well, they can do this by using what is called a cross-bridge. What exactly is this? It can be quite simply explained! When you decide to send a token over to an exchange using two different networks, the centralised exchange that your sending your token out from will do this by using a set of protocols and technologies, API'S for example, but not solely using smart contracts to swap your token over for the same token on the other network. At this point, the token will be sent by the exchange you're sending your token from to the exchange you're depositing your token to. The depositing exchange will do the same procedure to swap your asset back to the original token. An example of such a swap would be exchanging one token from the Ethereum(ERC20) blockchain to the Solana blockchain and then back to the Ethereum(ERC20) blockchain. So how does this kind of token swap differ from a decentralised exchange?

Token Swaps on a Decentralised Exchange

For a start, a centralised exchange will already have all their cross-bridges set up by their developers within their exchange to make it a seamless and easy experience. However, with a decentralised exchange, it's completely different. Such an exchange will need smart contracts to execute such a swap, and they will also need some 3rd party intermediary to facilitate the swap or cross-bridge. A good example would be if you used your Metamask wallet to facilitate such a bridge over to the Trust wallet using Uniswap, which themselves would use Wormhole to cross-bridge.

Pros and Cons

The upside of using a centralised exchange for such a swap is that it will undoubtedly be much quicker and cheaper to execute, as they do not need a 3rd party to cross-bridge.

You would have to pay more considerable fees for the luxury of using this 3rd party, whereas by using a centralised exchange, you would not need this 3rd party to make such a transaction. The exchange would completely do it. So there is an upside to using a decentralised exchange.

The fact that you are sharing your information with a Cex, and you do not need to go through the whole process of KYC to swap assets on different blockchains gives another big kudos for using a Dex.

Your tokens can be held immediately and safely in your hard wallet once the transaction is complete on a Dex.

Another upside of using a Centralised Exchange is that you can interact with their support team if something goes wrong. Using a decentralised exchange, your funds may be lost forever.

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