The Future of Cross-chain Communication in a Decentralized World
Blockchain and distributed ledger networks are exploding day by day. Interconnecting these new chains is becoming necessary as more people continue to take note of the emerging technology and its capabilities.
Cross-blockchain communication refers to the ability of different blockchain networks to exchange information and interact with each other.
In decentralized technologies, cross-blockchain communication is essential because it enables various blockchain networks to interoperate, allowing users to transfer value and data without needing centralized intermediaries. The importance of cross-blockchain communication stems from the fact that most blockchain networks are currently isolated, making it difficult for users to take advantage of the unique features and capabilities different networks offer. With cross-blockchain communication, users can directly access DAPPs and other services on various blockchain networks without intermediaries, making decentralized technologies more accessible and user-friendly. Additionally, cross-blockchain communication can enhance the security of decentralized systems by allowing users to take advantage of the unique security features offered by different blockchain networks. Given the ever-growing need to improve the connection between various blockchain networks, many developers are already working on optimal solutions. We have already witnessed the first unicorns coming up in this space.
The Basic Cross-Chain communication methods
Many blockchain companies are trying to solve the issue of blockchain interoperability by creating different types of blockchain bridges. Although in no way exhaustive, the most commonly used cross-chain communication are relays, atomic swaps, and native interoperability.
Relays: Relays enable blockchain interoperability through verifying events and block headers on different chains with something known as Relays. Essentially, a contract on one chain (Chain A) can notice and understand changes on another chain (Chain B) by being a light client on Chain B. An interesting use case of this, albeit historically expensive, is that of BTCRelay.
Atomic Swaps: Another way to bridge different blockchains is through something known as atomic swaps. In Layman’s terms, an atomic swap allows users to trade one cryptocurrency for another. This is done through a peer-to-peer transaction known as a Hashed TimeLock Contract (HTLC), which lets the user coordinate a cryptocurrency transaction on one blockchain with a cryptocurrency transaction on another. This can be compared to “wrapping” cryptocurrencies. Atomic swaps work with the exchange of digital assets.
Merged Consensus: Merged consensus enables “native” blockchain interoperability and cross-chain communication but needs to be built into a blockchain from the start. Merged consensus allows two-way blockchain interoperability through the use of a relay chain. Real-world examples of this include Ethereum 2.0 and Cosmos, which both look to employ merged consensus.
The opportunities lying ahead
Before the days of cross-chain interoperability, DeFi protocols were also restricted to serving the crypto community of the blockchain on which they were built. There was no room for non-Ethereum users to participate in Decentralized Finance on the most popular blockchain ecosystem. Because of a lack of interoperability, DeFi protocols were limited to only the original blockchain they were built on. As such, they inherited all the underlying challenges associated with their native network. For Ethereum, this meant slow transaction speeds and high gas fees. It was low liquidity and a smaller customer base for a few others. Cross-chain interoperability, therefore, changed the game for decentralized finance. Projects no longer have to build for one network alone, as they can easily allow digital asset transfers across blockchains through bridges. Users can also complete cross-chain token swaps, deposit liquidity, collect and repay loans, farm new tokens without limitations, and transfer assets across networks at all times. Cross-chain interoperability also bridged previously disenfranchised participants into the world of DeFi, creating entry points for retail and institutional users alike. Today, DeFi protocols can enjoy scalability, greater adoption, storage spread, and liquidity spread, aiming to make it possible to transfer wealth between multiple blockchains effortlessly.
The unsolved vulnerabilities
Today there are a lot of skeptics — Vitalik Buterin being among them — on why cross-chain bridges will not work, citing two main concerns: interdependency and interoperability vulnerabilities. One of the principal challenges of cross-blockchain communication is the need for centralized intermediaries. Centralized entities, such as exchanges or payment processors, facilitate cross-blockchain communication and act as intermediaries between blockchain networks. While these intermediaries can provide a simple and convenient way for users to access various blockchain networks, they also introduce a single point of failure and increase the potential for security vulnerabilities. For example, if a centralized intermediary is hacked or otherwise compromised, it could affect the security of all the blockchain networks it connects to.
Who’s going to make it happen?
→ Empowering the crosschain future: Axelar
In 2022, former Algorand developers launched Axelar (AXL) — a new project that could revolutionize Web 3.0. It is a universal overlay network that connects all blockchain ecosystems, applications, assets, and users to achieve true interoperability. Although the project was launched in 2022 and is currently in development, Axelar allows decentralized apps to exchange purchases between supported blockchains momentarily. The Axelar network makes cross-chain communication as simple as using HTTP/HTTPS protocols on the web. Platform developers can plug their blockchains into other ecosystems, and application builders can leverage a simple protocol and API to access global liquidity and communicate with the entire ecosystem. The Axelar team has deep roots in distributed systems, consensus, and cryptography. The venture has already raised over $65m and is backed by Binance X, Coinbase Ventures, DCVC, Lemniscap, Collab+Currency, North Island Ventures, Divergence Ventures, Cygni Labs, and others.
→ Using blockchain data to solve real-world problems: Bitquery
Bitquery is a data company building products to solve blockchain data problems on a global scale. Bitquery’s products deliver real-time data from over 40 blockchains and various Web3 protocols. It also provides a decentralized BIT protocol to democratize access to blockchain data. Today, Bitquery’s data infrastructure empowers thousands of developers, businesses, and governments. It delivers solutions to various verticals such as decentralized finance (DeFi), DEX arbitrage analytics, crypto surveillance & forensics across significant blockchains like Bitcoin, Ethereum, BNB Chain, and Polygon. The company has raised $11m in Seed funding from Binance Labs, DHVC, Infinity Ventures Crypto, dao5, and others.
The future of cross-chain applications
Blockchain technology is one of the most remarkable innovations of all time. Ten years earlier, we didn’t even know that decentralized applications could be possible. But now look at the tech industry. Everyone is looking for a way to integrate this new system into their existing one. The future of cross-chain applications looks promising as more and more projects are being developed to overcome the challenges and limitations of current cross-chain communication methods. Some key trends and developments in the field include increased adoption of decentralized finance (DeFi) applications, development of cross-chain messaging protocols, and advancements in cross-chain data exchange protocols. We are only at the beginning.
The initial thought behind this blog was to empower everyday readers to understand and stay informed about the technology shaping our world. In Discovery Series, my main priority is to demystify complex technology concepts and showcase the creativity and innovation happening in the startup world.
