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Cross-chain is the ability to transfer data, tokens, and other assets between different blockchains.?
Traditionally, blockchain networks exist in isolated environments and cannot communicate with other blockchain networks. Cross-chain technology looks to fill this gap and enable data sharing and interoperability between independent blockchains.
Cross-chain interoperability is considered an essential feature for the cryptocurrency and decentralized finance (DeFi) sector that aims to achieve mass scale. This is because individual blockchains encounter scalability limitations when maintaining a high level of decentralization and security.
Therefore, crypto experts believe that the future of cryptocurrencies will not be dominated by a single blockchain network. Rather, numerous cryptocurrency blockchains will co-exist and scale together as a multi-chain ecosystem.
Importance of Cross-Chain Communication Explained
Cross-chain technology is expected to help the crypto sector with:
- Asset Interoperability
Cross-chain technology lets users transfer funds and tokens from one blockchain to another. The cross-chain movement of capital will allow smaller blockchains to tap into the funds and user base of larger blockchains. This will minimize the fragmentation of capital, unlock higher capital efficiency and improve liquidity conditions across all interoperable blockchains.
Cross-chain interoperability also opens new opportunities for users, like gaining exposure to exotic assets, new yield farming techniques, and promising crypto projects.
- Cross-Chain Smart Contracts
Cross-chain interoperability enables smart contracts to be deployed over multiple blockchains. DeFi applications are able to expand the user base, innovate new features, and create a better user experience by offering their services across various blockchains.?
- Decentralization
Innovation in cross-chain technology lets users move funds without having to go through centralized custodians. Most cross-chain technology is designed to be trustless, which facilitates blockchain interoperability in a decentralized manner.
Defining Cross-Chain Technologies and Approaches in Blockchain
Below we review examples of the most promising technologies and approaches employed to achieve cross-chain communication in blockchain systems.?
Blockchain bridges
A blockchain bridge is a smart contract-powered application that enables users to effectively transfer cryptocurrencies from one blockchain to another.
Most known cryptocurrencies are not innately compatible with cross-chain environments, as they can only exist in their native blockchains. Blockchain bridge solves this problem by locking (or burning) bridged tokens on the initial network and creating a synthetic derivative that represents the token on the receiving network.
Here is an example. Let’s say you own 1 ETH on the Ethereum blockchain. You come across a profile picture NFT that exists on the Polygon blockchain. You will not be able to purchase the NFT using your ETH tokens because the tokens exist on the Ethereum blockchain.
You will have to bridge your ETH over to the Polygon blockchain. In doing so, you will send that ETH to a bridge smart contract where it is locked or burned, and then it mints or unlocks an equivalent amount of derivative ETH that exists on the Polygon blockchain. They often use specifically designed cross-chain messaging protocols to transmit the necessary information to complete the bridging process between the blockchains.
Bridges can be uni-directional (allowing transfers in one direction) or bi-directional (allowing transfers in both directions).
Sidechains
Sidechains are individual blockchains that are connected to a parent blockchain via a two-way bridge. Sidechains have their own consensus mechanism (that also relies on the main chain) and often a different native token used to pay gas fees.
Side chains are usually the most interoperable with the blockchain they are built on top, but they don’t always work well with other networks. The best example of sidechain interoperability is between Ethereum and Polygon PoS chains.
Inter-Blockchain Communication (IBC) Protocol
IBC is an open-source protocol that allows independent blockchains to communicate with each other in a trustless manner. This cross-chain technology is a key feature of the Cosmos ecosystem. Cosmos is a blockchain ecosystem where developers can build custom blockchains. All the blockchains built on Cosmos can connect with each other using the IBC protocol.?
The IBC protocol is central to Cosmos’ vision of becoming “the Internet of Blockchains.” Blockchains on Cosmos do not have to depend on third-party bridges to send cryptocurrencies from one Cosmos chain to another. Instead, the IBC protocol provides a native and secure way to exchange data, messages, and tokens.
Cross-Consensus Messaging Format (XCM)
XCM is a messaging format used to communicate messages between blockchains and smart contracts that exist on the Polkadot blockchain. XCM not only allows cross-chain token transfers but also enables computer code to be sent from one chain and executed in another.
Atomic swaps
An atomic swap is a way to trade cryptocurrencies from different blockchains in a peer-to-peer manner. Atomic swaps utilize a special type of smart contract called Hashed Timelock Contract to execute the token exchange.
However, atomic swaps are still quite new, and their potential hasn’t been explored in full yet.
Challenges Remain For Cross-Chain Interoperability
Cross-chain interoperability has been touted as one of the “hardest problems that the blockchain industry faces. At the moment, bridges are the most popular way to send cryptos from one blockchain to another. However, bridges are considered the “weakest link” in the blockchain infrastructure due to their vulnerability to hacks and theft.
According to blockchain forensics firm Chainlysis, cross-chain bridge protocols were the top security risk, with over $2 billion stolen across 13 separate bridge hacks in 2022.?
The industry has been pushing for rigorous code audits to become a standard practice for blockchain bridges. Experts also expect that, with time, bridges can be modeled after the safest smart contracts used across various blockchains.
