Cross-chain (or “cross-chain interoperability”) refers to the ability of different blockchain networks to communicate, exchange data and transfer assets between each other.
Why is cross-chain important?
Without cross-chain solutions, the blockchain ecosystem is fragmented:
- Isolation: a token created on Ethereum (e.g. an ERC-721 NFT ) cannot be used natively on Solana or Cardano. Applications built on one blockchain cannot interact with data or assets on another blockchain.
- Fragmented Liquidity: Liquidity (availability of funds for trading) is dispersed across different networks, limiting market efficiency.
- Scalability and cost: Users are limited to the blockchains on which their assets and applications reside. This means they may miss out on the benefits of other networks by accessing faster and cheaper solutions.
Cross-chain solves these problems by enabling:
- Asset transfer: moving tokens, NFTs and other digital assets from one blockchain to another.
- Data/message transfer: Sharing information and calling smart contracts between different networks.
- Enhanced user experience: Users can choose the blockchain best suited for their needs (low fees, high speed) without being locked into a single network.
- More versatile decentralized application development: Developers can build apps that leverage the strengths of multiple blockchains.
How Cross-Chain is realized.
To achieve cross-chain interoperability, the most common approaches are:
Blockchain bridges (blockchain bridges, the most prevalent cross-chain solutions): A bridge is a set of protocols and smart contracts that enable the transfer of assets and data between two separate blockchains. The typical mechanism involves blocking assets on the source blockchain and creating (minting) a “wrapped” or “pegged” representation of them on the destination blockchain.
- Examples include Polygon Bridge, Avalanche Bridge, Wormhole, Hop Protocol.
- Note: We have already discussed them when explaining “bridge”.
Atomic swaps: allow the direct exchange of cryptocurrencies between distinct blockchains, eliminating the need for a centralized intermediary. This is possible through the use of HTLC (Hash Time-Locked Contracts) smart contracts, which guarantee that the transaction is fully completed for both parties, or not at all.
Multi-chain networks and interoperability hubs:
- Polkadot: Uses a central “Relay Chain” to which “Parachains” (specialized blockchains) connect. Assets and messages can flow freely between Parachains through the Relay Chain.
- Cosmos: This is another major example of a multi-chain network that aims to create an “Internet of Blockchains”. Cosmos uses an Inter-Blockchain Communication Protocol (IBC), which allows independent blockchains (“zones”) to communicate and exchange values and data with each other through a system of hubs and zones. Each zone is a sovereign blockchain, and the IBC allows them to interoperate without depending on a single central entity.
While essential, cross-chain solutions also come with challenges, particularly related to security(bridges have been frequent targets for hackers), complexity and liquidity fragmentation. Developing robust and secure cross-chain solutions is an active area of research and innovation in the blockchain space.
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