51. What Is the XDAI Bridge and How Does It Work?
The XDAI bridge is an integral part of the Gnosis DAO. Gnosis itself appeared on the market back in 2015 in the form of a decentralized predictive marketplace. Initially, the project was intended to be an independent blockchain platform. However, the team behind Gnosis identified another need: to develop tools that can support the Ethereum ecosystem.
This is how Gnosis DAO and XDAI came together and developed the Gnosis Chain. It is a sidechain, or Layer 2 solution, that solves Ethereum’s scaling problem. Gnosis Chain is an executive layer EVM chain. It bases its operation on XDAI stablecoin, which facilitates transactions and fees.
What is the significance of the XDAI bridge for Gnosis Chain? How are the two ecosystems dependent on each other and how do they work together? The following lesson will answer these questions.
Before we move on to discuss XDAI, we need to explain to you what Gnosis Chain is. It is the first blockchain in which XDAI is the main operating currency.
The ecosystem itself uses a dual token model, with XDAI and STAKE tokens. XDAI is used for transaction fees, and the STAKE token is an important element in achieving consensus in the ecosystem. The STAKE token uses the DPoS (Delegated Proof of Stake) consensus in its operation. It is a multichain token. On the other hand, we have the XDAI token, which is a derivative of the DAI token and is pledged at a 1:1 ratio to USD. XDAI runs on the Gnosis sidechain, while DAI runs on the Ethereum mainnet.
Bridges play an important role in the Gnosis chain. The ecosystem uses native bridges to transfer tokens and data. Native bridges, such as Omnibridge and those for XDAI conversion, for example, are an important part of the Gnosis chain architecture.
Moreover, within the Gnosis ecosystem, we have three fundamental types of bridges: native bridges, third-party bridges, and application-specific bridges. Native bridges are developed specifically for the Gnosis chain and play a crucial role in minting and burning native tokens. Third-party bridges facilitate the exchange of tokens for canonical tokens, which are generated on native bridges. Conversely, application-specific bridges are custom bridges provided by certain applications to uphold their unique canonical tokens on the Gnosis Chain.
The two native bridges in the Gnosis chain are the aforementioned Omnibridge and XDAI Bridge. Both of the bridges perform different functions.
What Is XDAI Bridge and How Does It Work?
This is the native DAI bridge between Gnosis Chain and Ethereum. This bridge is crucial for minting and burning XDAI, the native currency of Gnosis Chain.
The process begins with network users minting DAI tokens, which can be done through the Maker protocol or by purchasing DAI on an exchange. These acquired tokens are then deposited onto the XDAI Bridge. The Bridge initiates a notification to the Gnosis Chain contract, which subsequently communicates this notification to the block reward contract. As a result, the consensus algorithm mints XDAI tokens directly to the user’s corresponding Gnosis address, completing the transaction.
The XDAI bridge works on the principle of generating bridge revenue by depositing a certain portion of DAI stablecoins in protocols such as Compound and Aave. At this point, about 1 million DAI has been locked up in reserves, while the remaining stablecoin balance helps generate revenue. The profits generated this way go into the GnosisDAO vault, which are then used to develop Gnosis.
Note that the XDAI chain utilizes the ERC-20 function for the Native Token Bridge in its operations. This functionality offers users fast, cost-effective, and stable transactions. Through this bridge, it is possible to convert DAI, which is an ERC-20 stable token in the core network, into XDAI, which exists within a compatible chain.
XDAI tokens transformed in this way are sent quickly and truly at minimal cost on the XDAI network. The XDAI bridge and the entire chain has been a breakthrough success in the Ethereum ecosystem.
At the beginning of its existence, mainly connected with the Gnosis Chain bridge. It can also be said that XDAI is a very important element in strengthening the entire Gnosis ecosystem. As the native currency of the Gnosis Chain, XDAI is a key element and allows us to determine how the other tokens work in the chain.
In addition, combining DAI on Ethereum with XDAI on Gnosis gives users even more opportunities to use these tokens, as well as the entire ecosystem.
Complete today’s lesson!