Can cryptocurrency gateways be fully trustless?

Cryptocurrency gateways are a big topic nowadays, since they allow different cryptocurrencies to interact with each other. This is, e.g., important for decentralized exchanges.

What is a cryptocurrency gateway?

Waves allows you to hold and transfer external currencies on its blockchain using a proxy token for each supported coin (currently BTC, ETH, LTC, ZEC, BCH, Dash and Monero) as well as fiat currencies (EUR, USD, TRY).

How does it work?

The user transfers the original cryptocurrency, e.g. 1 BTC, via a standard transfer to the gateway. The gateway processes the request and sends the user the corresponding amount in the proxy token of the cryptocurrency, e.g., 1 wBTC, on the Waves blockchain. If the user wants to withdraw his funds, the process is repeating but in the opposite direction which means that the user sends the amount of the proxy token to withdraw, e.g., the amount of wBTC he/she wants to withdraw, to the gateway and the gateway will send the corresponding amount of the cryptocurrency, e.g., BTC, to a wallet of the original cryptocurrency defined by the user.

How can be the exchange through the gateway payment be ensured?

This approach makes trading very easy using proxy tokens and new cryptocurrencies can easily be added to the platform. Unfortunately, this approach also comes with two major trust issues:

1) The user who transfers a certain amount of a cryptocurrency to the gateway needs to trust the gateway that it will actually send the corresponding amount of the proxy token to the account of the user.

2) Whenever the user wants to transfer his funds back to the original cryptocurrency, he/she has to trust the gateway that it will still exchange the proxy token to the original cryptocurrency. This could be referred to as the fungibility of the proxy token.

As a matter of fact, the first trust issue is rather simple to solve. Here, Atomic Swaps can ensure that the exchange between the original cryptocurrency and the proxy token happens in an atomic way. Atomic here means, that either both transfers happen or none of them, so in this case the user can be sure that the transfer of the original cryptocurrency happens if and only if also the corresponding amount of the proxy token is successfully transferred.

Unfortunately, there is so far no solution known to the second trust issue. Therefore, at the current state, the approach of using proxy tokens seems to demand for a certain level of trust.

Alternative approaches

In case that the demand for an interaction between different cryptocurrencies does not come from decentralized exchanges, in some cases, the interaction could be implemented completely trustless by not using the previously described approach based on proxy tokens.

The TenX approach

TenX is a Singapore-based company, which offers crypto-debit cards (physical and virtual) and cryptocurrency wallets. The project attempts to allow users to make purchases using not only popular currencies e.g. Bitcoin, Ethereum, DASH and other ERC20 altcoins, but also any other cryptocurrency.

The approach consists in connecting blockchains, leveraging the COMIT network (see Figure 1), including the COMIT Routing Protocol and the Cross-chain Payment Channels.

This approach is different from the proxy token concept because values are being exchanged by directly bartering one cryptocurrency for another. Broadly speaking, exchanges on the COMIT network happen between users and liquidity providers through so called Payment Channels connected via Hashed-Time-Locked-Contracts, basically a way to implement an Atomic Swap , this makes transactions completely trustless.

The Komodo approach:

Komodo is a new cryptocurrency project focused on security and anonymity. The Komodo platform provides many features such as:

· Creation of own Independent blockchain: allows users to create their own blockchain on the Komodo protocol.

· Own High-Performing decentralized initial coin offering’s (dICO): Solves many issues in the Centralized ICO Model:

Ø Funds are sitting on many different servers

Ø Eliminates ability for whales to just buy up everything

Ø The project can decide to release the total supply slowly and not all at once

Ø Transactions are instant

Ø Option for privacy with dICO

· Decentralized exchange platform (BarterDEX):

For making trades between users easy and fully trustless, BarterDEX implements a combination between a variation of Tier Nolan’s atomic-swap protocol, which consists in rewarding honest users and penalizing malicious ones; and a UTXO concept to manage order offers.

The Komodo’s decentralized exchange platform implies a trustless exchange environment avoiding to rely on any third party in comparison to the cryptocurrency gateways concept.