Since Ethereum & Cardano are distinct networks, when the ERC20 converter moves tokens between them in either direction ensuring conservation of token (the process does not destroy or create tokens), what is actually happening? Is the ERC20 converter a centralized process that operates on both networks or something more decentralized and trustless? If it's not a centralized process, I would be very interested to know how conservation of tokens is maintained considering that the two networks do not directly interact with each other.
From the IOHK blog post: Bringing ERC20 to Cardano
Our ERC20 converter is a tool that will allow issuing organizations and their users to handle ERC20 token migration to Cardano. It is designed for token issuers (organizations that wish to enable the migration of their tokens to Cardano), and their users (token holders) to use the tool to move their ERC20 tokens to the Cardano network.
Users can convert their Ethereum tokens in just a few clicks, and when moved across, these tokens will be ‘translated’ into a special native token on Cardano that has the same value and works just like an ERC20. Additionally, if the user wishes to do so at a later stage, they can move their tokens back to the source network by burning them on Cardano. Two-way convertibility is baked in.
After logging into the ERC20 converter, Users must authenticate their source account via Metamask and provide their Daedelus address for token delivery. Tokens are then migrated to to the Cardano address. All operations on the migrated token are visible on both Cardano explorer and Etherscan
Conversion is token specific and adding a token for conversion requires partnership to add a token to the list of tokens available for conversion.
The answer is EVM. Ethereum Virtual Machine. You should definitely look into how they work. It works the same way centralized exchanges like Binance and CryptoCom work.
The coins value is intrinsically already a part of the system and the coin itself is a native token on the Cardano network regardless if its ERC-20 or not. By using the EVM technology they can convert coins instead of wrap them by having a bridge between both networks and having a version of both ADA on ERC-20 and ETH natively on Cardanos network. Liquidity providing is how you know your coin is still your coin and because it's on the blockchain its verified by the entire network that the transaction took place for garunteed no duplication.