Cross-Chain
Cross-chain is a technology that enhances the interconnection between blockchain networks by allowing the exchange of information and value.
What Is Cross-Chain?
Cross-chain is a technical term that refers to the interconnection of two or more completely separate
blockchains. This allows the exchange of information and data, such as
digital assets across blockchains that would otherwise be siloed from one another.
Cross-chain technology removes the need for trusted third-party
intermediaries. It plays a fundamental role in blockchain
interoperability, the ability to move assets and information across blockchains, which will ultimately lead to greater
Web3 adoption. There are numerous use cases for cross-chain technology such as asset transfer via cross-chain bridges, cross-chain oracles, and cross-chain
smart contracts.
Why Do We Need Cross Chain?
As blockchain adoption is increasing and the interdependence of blockchains is becoming more prevalent, the impracticalities of siloed blockchains reveal that seamless and secure cross-chain solutions are an absolute necessity for the future of web3.
Cross-chain technology is fundamentally important because it removes the need for custodians — third parties (i.e.
centralized exchanges) that would otherwise be necessary when transferring assets or information across different blockchain protocols. Many cross-chain technologies are designed to be
non-custodial and trustless, which means users control and own their funds and data at all times. It, therefore, facilitates interoperability between blockchains in a more secure and
decentralized manner. There are also several custodial/ trusted cross-chain technologies, which slightly prioritize convenience and usability over decentralization and security.
The potential of cross-chain cannot be understated as the
tokenization of assets becomes more popular. Cross-chain bridges will play an important role in people’s finances similar to transactions between banks, as tokenization is allowing new digital assets to emerge (i.e. stock shares and fractionalized real estate).
Furthermore, DeFi ecosystems will not be able to flourish without cross-chain technology as it is central to enabling token swaps and data transfers between different blockchains.
It is also important to note that it improves blockchain efficiency and allows users to communicate across blockchains more freely.
How Does Cross-Chain Work?
There are two kinds of cross-chain interactions: isomorphic cross-chains and heterogenous cross-chains. They are distinguished by the underlying technology that supports them, for example, their security mechanism,
consensus mechanism, network topology, and block generation.
Isomorphic and Heterogenous Cross-Chain Interactions
Isomorphic cross-chain interactions are much less complex because the blockchains share similar underlying consensus mechanisms. Heterogenous cross-chains are far more complex as the underlying technologies are quite different. For example, Bitcoin and Ethereum are quite different as they each use very different consensus mechanisms.
There are different approaches to enabling cross-chain transactions without the use of third parties and every network takes its own approach. There are, however, two fairly common means of enabling cross-chain transactions:
atomic swaps and relays.
Atomic swaps facilitate the exchange of assets for two parties across separate chains without having to rely on centralized third parties. They allow parties to transact on a peer-to-peer basis. They are described as “atomic” because the mechanism will either finalize the whole transaction or not initiate it at all. For each swap, trades are either completed, in which case the two users exchange funds, or they’re not completed and the original funds are distributed back to the two users making them “trustless”. This is what makes atomic swaps a safe option for cross-chain transactions.
AtomicDEX,
Liquality,
Polkadex and
ShibaDEX are examples of decentralized exchanges that use atomic swaps.
Relays are fundamental to the blockchain network as they allow blockchains to keep tabs on transactions that happen on other chains. Relays can verify the history of transactions of multiple chains.
Benefits of Cross-Chain
The Connection of Two Independent Blockchain Networks
The greatest advantage of cross-chain technology is that it enables blockchains that are totally independent of one another to communicate effectively. Blockchain incompatibility is not a problem as it is used to initiate asset transfers and token swaps.
Better Scalability
Cross-chain technology has a vital role to play in the scalability of blockchains because it will improve the user experience by making transactions interoperable. This will ultimately lead to greater scalability.
Enhanced Data Flow and Transfer of Tokens
Cross-chain alleviates users from the current cumbersome mechanism. With cross-chain technology, transactions are verified straight after completion and only arrive at the destination once the verification process is complete. This lowers the number of interceptions from
validators making the whole process much less clunky than the current mechanism where users must send instructions from the source chain to a validator which is then relayed to the destination chain.
Examples of Cross-Chain Projects
Many cross-chain projects include the term “bridge” in their name to indicate that they help users connect one blockchain to another. Avalanche Bridge, for example, is used mainly to bridge assets to and from the Avalanche blockchain ecosystem. Other cross-chain bridge applications, such as AtomicDEX and cBridge, support cryptocurrency swaps of assets across several blockchain ecosystems.
While bridges all aim to allow users to move assets across chains, they operate quite differently and reveal two different types of cross-chain bridges: trusted bridges and trustless bridges. It is fundamental to recognize the differences between them.
Trusted bridges rely on central entities such as external verifiers who facilitate the transfer of assets and information. By using trusted bridges, one must give up the self-custodial ownership of their money. Trusted bridges often use
automated market makers (AMMs) which rely on
liquidity pools. However, these can be problematic, as they contain large sums of crypto in one place, acting as ‘honey pots’ for bad actors.
Smart contract vulnerabilities have made it possible for hackers to gain access to liquidity pools and drain their contents, which in several cases have been millions of dollars worth of crypto. AMM bridges have been the subject of the greatest cross-chain bridge hacks, for example, Ronin, Wormhole, and Harmony.
On the other hand, trustless bridges offer better security to users. Trustless bridges do not require the involvement of third parties.
P2P Bridges are trustless because they remove reliance on complex smart contracts and liquidity pools utilizing decentralized order books and trustless atomic swap technology. Atomic swaps enable a direct wallet-to-wallet trade between two parties. This removes a need for trust and maintains custodial ownership of assets. They are described as “atomic” because, for each swap, trades are either completed and two users exchange funds or they’re not completed and the original funds are distributed back to the two users thus “trustless”. This is what makes P2P bridges more secure. AtomicDEX and Orion Bridge are examples of P2P bridges.
Author: Kadan Stadelmann, CTO of Komodo, a leader in blockchain interoperability and atomic swap technology.
Kadan Stadelmann is a blockchain developer, operations security expert, and Chief Technology Officer of Komodo, an open-source technology provider that offers all-in-one blockchain solutions for developers and businesses. Komodo works closely with organizations that want to launch their own custom decentralized exchanges, DeFi platforms, and independent blockchains. Its flagship technology and end-user application is AtomicDEX - a mobile and web-compatible non-custodial multi-coin wallet and atomic swap-powered DEX rolled into one dApp.
Kadan strongly identifies with Komodo’s open-source vision and ideology. His dedication to the Komodo project is founded on an unwavering desire to make the world a better place. In addition to cryptography, blockchain technology, and development, Kadan is interested in literature, mathematics, astrophysics, and traveling.