P2P Bridge

What Is a P2P Bridge?

A P2P bridge is a feature on decentralized exchanges (DEX) that enables two users to swap the same cryptocurrency across two blockchain protocols without involving a third party.

P2P bridges support blockchain interoperability by enabling 1:1 peer-to-peer trading, minus blockchain validation fees (i.e. gas fees) or platform transaction fees. For example, a bridge allows a trader to swap USDC on the Ethereum blockchain for USDC on BNB Chain, or vice versa.

In general, the main benefit of blockchain bridges is that they make it easier for users to move their crypto balances to a different blockchain. For example, many users who have found Ethereum network DeFi applications impractical due to high gas fees use bridges to move their cryptocurrencies to blockchains that have lower gas fees. Then, once on another blockchain, it’s possible for the user to access various decentralized applications (dApps), some of which might only be accessible on that specific blockchain.

Many bridges use automated market makers (AMMs), which rely upon liquidity pools. The trading process on AMM bridges is very different from P2P bridges. Liquidity providers (market makers) supply cryptocurrencies to a liquidity pool for a specific trading pair and earn interest from trading fees each time a user makes a trade. Traders (market takers) take funds from the liquidity pool to fill their orders. The advantage of AMMs is that market takers typically don’t have to worry about liquidity, which greatly reduces slippage problems.

AMM liquidity pools have several known issues, however. For example, smart contract vulnerabilities make it possible for hackers to drain large pools of funds locked in liquidity pools. Also, impermanent loss often leads to actualized net losses for market makers.

In order to solve the issues of AMM bridges, P2P bridges like AtomicDEX are powered in a different way. P2P bridges use atomic swaps — a direct wallet-to-wallet trade between two peers, with a specially designed smart contract for decentralized exchanges. Once an order is received, the exchange software connects the buyer and seller directly allowing them to conduct the transaction through the bridge.

Like traditional centralized exchanges, P2P bridges connect market makers and takers via order books. However, they have the added advantage of removing third parties from the trading process. Users can trade from their own non-custodial wallets, giving them true ownership of their funds before, during, and after they use a P2P bridge.

The upside of P2P bridges is that they tend to be more secure than AMM bridges and centralized exchanges. The downside is that most of these currently have lower trading volumes compared to AMM bridges or centralized exchanges.

Examples of P2P bridges include AtomicDEX,Cosmos and Polygon.