The Importance of Cross-Chain Protocols in Web3 [2024]
In the rapidly evolving world of blockchain technology, cross-chain interoperability is emerging as a key driver of innovation and growth of the ecosystem. According to L2Beat, bridges have a Total Value Locked (TVL) of over 8 Billion USD. By enabling seamless interaction between disparate blockchain networks, cross-chain protocols are revolutionizing the way we transact, collaborate, and innovate in the digital realm. In this article, we delve into the importance of cross-chain protocols and explore the motivations behind studying and embracing research in the area.
Blockchain Interoperability
As defined by Belchior et al. [1], blockchain interoperability is
“the ability of a source blockchain to change the state of a target blockchain (or vice versa), enabled by cross-chain transactions, spanning across a composition of […] blockchain systems”.
In a nutshell, interoperability reduces the fragmentation between blockchain networks, enabling seamless transfer and exchange of data across them.
Why do we need to research cross-chain protocols?
We go over 5 reasons to study and enhance cross-chain protocols: scalability of blockchains, interoperability of networks/systems, enhancing DeFi protocols, and providing further collaboration between industry partners.
1. Scalability
Interoperability plays a central role in enhancing blockchain scalability, particularly in the context of Layer 2 (L2) solutions like rollups. These solutions address Layer 1’s (such as Ethereum) scalability limitations by processing transactions off-chain or in parallel, thereby increasing the network’s throughput and reducing congestion on the main chain (the L1). By enabling interaction between blockchains, interoperability facilitates the integration of L2s with existing blockchains. In the figure below is the Blockchain Scalability Trilemma, where Scalability is solved using cross-chain protocols — for example, rollups. Rollups allow increasing transaction speed and throughput through offloading computation to a second blockchain (a second layer on top of the existing chain).
2. Interoperability of Networks/Systems
At the heart of cross-chain protocols lies the promise of enhanced interoperability, breaking down silos and fostering collaboration across diverse blockchain ecosystems or even other external legacy systems. By facilitating seamless data and asset transfer between different networks, cross-chain protocols promote synergies between projects, platforms, and industries, driving efficiency, innovation, and collaboration. Cross-chain interoperability allows users to diversify their digital asset portfolios by being able to access the same assets on different blockchain networks. Whether it’s cryptocurrencies, tokens, or digital assets, cross-chain protocols empower users to explore a wide range of investment opportunities.
3. Decentralized Finance (DeFi) Evolution
Tied with the latter, cross-chain interoperability is instrumental in shaping the future of decentralized finance (DeFi), enabling the seamless integration of various DeFi protocols and applications. With cross-chain protocols, users can access a broader array of DeFi services, transcending single blockchain boundaries and unlocking new avenues for investment and participation. Access to a higher variety of protocols and services also allows for reducing the risk associated with specific protocols. These include decentralized lending and trading protocols to asset management and yield farming, unlocking new opportunities for financial empowerment and innovation. Arbitrage opportunities appear in cross-chain scenarios. Additionally, more liquidity is present in decentralized applications benefiting the whole web3 ecosystem.
4. Industry Collaboration
Cross-chain protocols pave the way for collaboration and partnership opportunities between blockchain projects, enterprises, and industries. By enabling secure and efficient data and asset transfer between different networks, these protocols encourage collaboration and innovation across various sectors, driving industry-wide adoption of blockchain technology and fueling the next wave of digital transformation. Usually, these involve disparate blockchain networks, including permissioned (private) ones. Interoperability between public and private chains is mandatory for enabling new use cases in the industry. A great example of this topic is the Portuguese Blockchain.PT project — connecting over 56 organizations that aim to innovate by employing blockchain technology in, for example, healthcare, sports, or digital asset management, through the Secure Asset Transfer Protocol (SATP).
Call To Action
The Rekt’s DeFi incident leaderboard states that 5 of the 10 most profitable hacks in Web3 history have originated in cross-chain protocols (+2.3 Billion USD). With this information, the blockchain community must prioritize security and risk management in cross-chain environments, otherwise, there will be no such protocols left unhacked. As stakeholders in the web3 ecosystem, we must collectively work towards implementing robust security measures, conducting thorough audits, and fostering a culture of transparency and accountability to mitigate the risks associated with these protocols. Let us take proactive steps to safeguard the integrity of networks and protect the interests of users and investors.
Read our most recent paper, a systematization of knowledge on the Security and Privacy of Blockchain Interoperability! 👇👇👇
A special thanks to Rafael Belchior for reviewing and making suggestions that improved this post.
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