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Phemex Crypto Blog: Learn the latest news, updates, and industry insights on bitcoin futures, bitcoin trading, crypto derivatives exchange, and related blockchain technology.

What is Cross-Chain Technology: A Solution for Blockchains to Achieve Interoperability

As protocols are exclusive to their own blockchains, the crypto industry cannot achieve maximum efficiency. Individual blockchains also do not contribute to industrial growth and user experience. Another issue with some blockchains is the transaction speed, which affects the technology’s scalability. Many blockchains do not have the capacity to handle too many transactions and cannot provide a good user experience during network congestion. This is where cross-chain technology has a potential to address these issues.

cross-chain

What Does “Cross-Chain” Mean?

A cross-chain bridge is an independent technology that eliminates the need for third parties. Without third parties, governance is decentralized. Transaction costs are also low as users do not need to pay additional fees (other than gas fees) to move assets. The technology brings interoperability to the blockchain ecosystem so that communication can be seamless. At the current development stage, interoperability is not standardized, so different networks adopt different protocols. As a result, the blockchain world is too spread out to enable cross-chain transactions for every project or blockchain.

Cross-Chain and Scalability

Many projects have their own unique approaches to scalability issues, but they cannot share such benefits across the various blockchain due to the lack of cross-chain bridges. In addition, each blockchain has its own rules which makes it difficult for other projects to leverage them to create new solutions. If the new projects want to transfer data, reduce fees, or increase speed, it is unable to do so freely on blockchains such as Ethereum (ETH) and will require cross-chain bridges. By enabling assets to move across blockchains, various blockchain-specific features can be used by users from other blockchains. Therefore, a cross-chain bridge makes it possible to intertwine the technologies that different projects offer.

As a side note, there is some distinction between multi-chain and cross-chain. Multi-chain means the project can be utilized on multiple chains like Ethereum and Polkadot (DOT). In contrast, cross-chain enables asset transfer from a source chain to a destination chain.

What Are the Benefits of Cross-Chain Technology?

Cross-chain bridges are made up of multiple components such as a validator and a relayer. Usually, the validator would receive instructions from the source chain. After that, the relayer would convey the instructions from the source chain to the destination chain. Some protocols would have a consensus mechanism on both sides of the chain for information transfer. Finally, the transaction is complete after it is signed, and will arrive at the destination chain.

Currently, cross-chain technology is mostly used for asset transfers and token swaps. Cross-chain technology enables the connection between two independent blockchain networks. It eliminates information silos from blockchain incompatibility. Furthermore, cross-chain technology allows the transfer of information like transaction proofs, assets, and contract calls. In decentralized finance (DeFi), cross-chain technology is typically utilized for token swaps.

Furthermore, cross-chain technology also discourages monopolization by large entities. Bitcoin (BTC) and Ethereum are the biggest players in the crypto world, enjoying above 60% of the market share. As a result, cross-chain technology can bring benefits because the transaction process will no longer be concentrated on the few major blockchains. Without cross-chain technology, scalability and innovative opportunities will be limited.

What Are the Types of Cross-Chain Bridges?

Most blockchains are isolated with different features and governance specifications. For example, a project has strong features but sacrifices decentralization and security. On the other hand, projects across blockchains have different trust levels because there is no standardized number of miners or validators in a blockchain. Therefore, security is an issue when sharing information with a network that has a weaker trust level.

cross-chain features
Features and benefits of cross-chain technology (Source: 101Blockchains)

Regardless, cross-chain bridges can be adopted across the different blockchains. In addition, these different bridges also offer different levels of security, speed, connectivity (ease of linking two blockchains), costs, and statefulness (the ability to retain information about transactions). Some examples of cross-chain bridges are validators, stateless simplified payment verification (SPVs), relay nodes, and so on. The description for some of the bridges are detailed as follows:

  • Validators: Validators can interact with multiple destination chains, perform transactions, and store data. It has better statefulness and connectivity but less security.
  • Federation: A federation is similar to validators. It is powerful but requires third-party trust, which makes it less centralized for DeFi.
  • Relays: Relays help two chains to perform verification of events through block headers. However, it trades connectivity for better security and cost because multiplesmart contracts have to be deployed on multiple chains to reach full functionality.
  • Liquidity network: Liquidity networks are native systems. Therefore, consensus is not required. They are fast, safe, and cost-efficient despite the significant amount of transaction volume. However, their functionality or statefulness is quite limited. For example, they can interact with but not transfer certain data.
  • Atomic swaps: Atomic swaps facilitate token swaps rather than cross-chain communication. Moreover, atomic swaps use a Hashed Timelock Contract (HTLC) for the user to manage token trading on different blockchains. However, many blockchains do have compatible hashing mechanisms. Thus, hash-locking is not viable for cross-chain asset transfers and smart contracts.
  • Stateless SPVs: Stateless SPVs use smart contracts to verify a number of proof of work (PoW) records. In addition, they are cheap and customizable for most use cases.

Moreover, the cross-chain bridges can be centralized or decentralized. A centralized approach would involve an institution before users can lock, mint, and trade their assets or tokens between two networks. For example, a wrapped BTC token, wBTC, can be used on various platforms with ease after users deposit their BTC into a centralized wallet in a custodial manner. In addition, the institution is responsible for verifying the transaction records.

For a decentralized approach, bridges can be independent because they use smart contracts in a non-custodial manner and the whole process is automatic. The assets are locked in a smart contract before being transferred to another blockchain. New tokens are then minted on the destination blockchain. If users want to reverse their actions, the previously locked asset will be unlocked, and the newly created tokens are burned. In addition, a number of validators are incentivized to help the decentralized system to verify the transactions.

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What Are Some Examples of Cross-Chain Projects?

Interoperable projects offer different solutions for cross-chain interactions.  Some projects focus on cross-chain smart contracts or decentralized exchanges. Some examples of existing projects that enable cross-chain technology are as follows:

  • Polkadot: On Polkadot, other developers can create their own chains with specific purposes on the network. The created chains are known as parachains. The relay chain in the network provides security and enables the transfer of assets among the other parachains on the Polkadot network.
  • Wanchain: Wanchain (WAN) is a project that unites public and private blockchains. Wanchain has a decentralized approach so that interoperability can be achieved between various public and private chains. It adopts a proof of stake (PoS) consensus mechanism and features a native token for transaction validation on its network.
  • Cosmos: Cosmos (ATOM) is designed similarly to the Polkadot network. The difference is that it adopts a Byzantine Fault Tolerant (BFT) protocol to manage the consensus and states for chains on its network. In addition, it also has a central Hub for blockchain communication and interaction.

Other than these major projects, some projects focus on supply chain and payment networks such as the VeChain (VET) and the Stellar (XLM) blockchain. Some projects also created cross-chain solutions for specific organizations or governments. The processing of transactions and data are different across these cross-chain projects.

What Is the Future of Cross-Chain Technology?

Cross-chain technology is still in its early stage of development. Therefore, several uncertainties remain unanswered for cross-chain technology. For example, the cross-chain bridge may struggle to preserve the records of the NFTs as they are sold and moved across blockchains when traded across different platforms. The finality of the transaction and state rollback of bridge technology is also another concern. In addition, the industry is also concerned with the performance of cross-chain bridges under congestion and malicious attacks.

For now, the technology is unlikely to develop into an all-round bridge that covers most functionalities like token minting and asset transferring. The best bridges would replicate the benefits of blockchain, such as high security, fast speeds, low costs, and censorship-resistance. Meanwhile, there are additional directions that cross-chain technology can go towards. For example, the cost reduction of block verification, bridge aggregation, and scaling liquidity networks.

In the future, cross-chain technology should increase token use cases and expedite blockchain adoption. Besides token swaps, the technology will have to facilitate information, payment, and resource sharing.  In addition, token transactions should be easier, and users need only depend on a single wallet system. In a business setting, customers should be able to deal with business effectively in real-time on various blockchains without incurring high costs.

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Nevertheless, benefits of cross-chain technology development include better user experience and increased efficiency. Moreover, the industry will have reduced competitiveness, which is beneficial as the value of blockchain benefits can be maintained. Regarding the competitiveness of the crypto space, projects are often created as solutions. Blockchain projects are coded differently with different transaction processes and functionality. Therefore, a reduced competitiveness can result in less complexity for cross-chain transactions within the industry.

Blockchain technology is increasingly being used in multiple industries such as art, music, and sports. In addition, smart contracts and NFTs are also developing. Hence, interoperability is needed for the blockchain world to further flourish. Moreover, blockchain technology can be increasingly appealing when private and public chains are united. Generally, a well-developed cross-chain bridge should be able to serve everyone’s needs in the crypto world at a fast speed and with low cost.

Conclusion

At the current stage, cross-chain technology provides services such as asset transfers and token swaps. There is more space for development until blockchain technology can achieve true interoperability, as the internet did. The cross-chain technology itself also has many possibilities and various development directions. However, users looking to use this technology have to do more research to avoid losing their funds. This reason is that the security for cross-chain technology is quite lacking. Nevertheless, the development of cross-chain technology should contribute to further blockchain adoption and usage in the future.


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