Cross Chains: A Bridge Connecting Reputation Value in Silo — Part 1

I. “LAKE OF A THOUSAND ISLANDS” IN VALUE

Currently, there are more than 1,900 blockchain projects on CoinMarketCap, which means we have at least 1,900 different cryptocurrencies. What if someone only accepts ETH, and you only have BTC? You can go to an exchange or have an off-site transaction. But why must we rely on the exchange? There have been many problematic cases with centralized exchanges, such as Mt.Gox, the exchange is already shut down.

Furthermore, ETH and BTC are too different in infrastructure to communicate with one other, so why can’t we find a way for direct transactions? The 1,900 cryptocurrencies are in fact like a thousand islands of value in silos, and there’s no direct path connecting the transactions among them. It’s high time we see a resolution, and that’s where cross-chain comes in.

II. CROSS-CHAIN TECHNOLOGY

The blockchain is essentially a ledger, and the books of two distinct blockchains are not interchangeable. This has caused a lot of troubles in ensuring the operation safety of block chain. How can the value of the two blockchains be measured against each other? For sure, exchanges could do the job, but what if that certain blockchain is not listed yet? ETH, for instance, was not on the exchange during its fundraising on BTC, and therefore adopted Proof of Burn, which was a rare method to identify the crowdfunding source for ETH Foundation.It is precisely by bridging two different blockchains via cross-chain that value can flow safely in a decentralized manner.

A. Cross Chains, Sidechains and Lightning Network

Both sidechain and lightning network are projects proposed by BTC to improve its usuability and transaction speed. The essence of this project was to expand the application range of BTC. Cross chains are built based on side chains and lightning network, but they are different from the latter two:

The side chain is only a ramp for BTC, and the BTC assets that are temporarily conveyed into other chain assets can not be separated from BTC main chain for a long time before they inevitably return to BTC. At the same time, the payment verification of sidechains is SPV(Simplified Payment Verification) only. As a proof of payment, it inevitably sacrifices security. At the same time, the increase of scalability is very limited and can not be separated from the nest of BTC main chain.

Lightning Network’s reference to value exchange lies in the Hash locking mechanism. Therefore, the following problems that exist in the lightning network will also occur on Hash lock-up:

• The collection must have a hot wallet, or it could risk the possibility of leakage;
• The transaction details could potentially be disclosed without the protection of Hash rate;
• It is probable that the central node will not be able to transfer large amounts of funds;
• In order to prevent the failure of a transaction resulting from the disconnection of a central node, it is likely that a bank node will be needed and thus damages decentralization.

The cross-chain is designed to enable trade at any amount between two chains, and the amount of the transaction needs to be verified with sufficient security, and it might not return to the original chain in a short period of time, or at all. Meanwhile, the cross-chain can even achieve smart contract interaction, which is beyond the reach of the two technologies mentioned above.

The contribution of side chains and lightning network to cross-chains is that the side chain provides the concept of connecting two chains with a third party middle chain, whereas lightning network provides a passageway that does not affect the main chain process.

B. A summary of three kinds of Cross Chain technology by Vitalik Buterin

In his 2016 report to R3, Vitalik mentioned three common approaches of Cross Chains: the Notary Model, Side Chain/Relay Model and Hash Lock-up Model.

i. The Notary Model

Since there is a need to regulate cross-chain transactions, it is very easy to think of ways to elect a group of notaries to determine the legality of transactions from chain A to chain B. Notaries have the right to monitor the whole process of trading from chain A to chain B, and even if the issue is only found on chain B, the notary has the right to suspend the transaction on chain A to recover the loss.

Usually, the consensus that fits the notary model is either DPOS or PBFT, and if it is a third party notary, there could even be no consensus. In order to ensure a certain degree of decentralization, we choose the multiple signature EC-Schnorr. A transaction is not legal until there is a consensus reached among notaries and multiple signatures are conducted.

This model must ensure that the notary remains honest throughout the whole process and is not affected by other factors.

It is relatively easier to transform a centralized exchange into a multi-hub exchange of the notary model, where many mechanisms do not need to be reversed, but only require a certain decentralization adjustment. But many users who believe strongly in decentralization do not see such exchanges as real decentralization.

ii. Side Chain / Relay Model

Relay model is derived from the side chain.

Consensus is often more credible on blockchains, repeating consensuses is not only unnecessary, but also a waste of resources during application of the PoW consensus in the original chain. As long as the original chain can reach a consensus, it can be trusted by the cross-chain. To verifiy the consesus validity, we only need to transfer the information of the blockheadin the original chain to the cross-chain. After the block of the original chain is determined, the operation of the original chain can be proved valid according to Merkle (data proof for unique validity of blocks). The original chain and the cross-chain cannot verifiy each other directly, otherwise it will result in a deadlock of infinite validation of the other side. It’s like the original chain hands the baton to the cross-chain, and the latter can then relay the value to other chains.

The cross-chain must await the consensus of the original chain, so its relationship with the original chain is asynchronous, its TPS relatively restricted by the latter. Nevertheless, the relay model can achieve cross-chains when the original chain uses light nodes. This could extend the application range of the original chain — BTC does not have a smart contract, but it does have a light node mode. In this model, there exists UEO(Unfinalized Event Output), which is similar to UTXO. This means that the cross-chain transaction of the original chain is first introduced into the UEO pool and processed after cross-chain validation of blockhead information. Compared to other two methods, Relay Model’s transaction process is more concise.

The relay process is an atomic one, therefore it’s resistant to double spend attacks and speed attacks. But if the original chain is slow to come out, then the cross-chain can only wait and transaction efficiency is then affected. At the same time, the cross-chain verifies only the header file of the original chain block, and problems occured might not always get spotted by a SPV level verification. And finally, there are different structures in the relay model: one-way and two-way, and the bidirectional structure could be very complex.

iii. Hash Lock-up:

Hash Lock-up is precisely the development and application of lightning network on cross-chains. Unlike the lightning network, Hash lock is better suited to run under the middle chain, whereas direct cross-chain transactions from chain A to chain B are better suited for using a Diffie-Hellman encryption. The process of Hash lock-up is relatively complex, as shown in the diagram below:

It can have the following variations: in order to hedge exchange rate fluctuations, A is allowed to not send a message in the first half of the period, andthe contract transaction is only made when the exchange rate becomes advantageous to A. What’s more, A can cancel the transaction when the conditions are infavorable. Of course, it won’t be so easy to cancel in the second half!

In addition to lightning network’s own problems, Hash Lock-up also has the issue of not being able to support complex contracts.

It can be seen that if the final time spent in the offline process is ???, it will be converted to a nonlinear structure (that is, A transacts with C, C with B, B with A) , this time complexity would increase by the fourth power of the chain N, which makes it very inappropriate for multi-chain complex contracts. Its one advantage, however, is the simplicity of its structure.

C. NEW CROSS-CHAIN METHODS

New cross-chain technologies are also being developed following the submission of cross-chain technical reports by Vitalik. There are two ways of thinking — one is the combination approach: since every single approach has its own problems, the combination of all approaches can be considered to make up for each other’s original disadvantages. The second is the derivation of multiple signatures — since multiple signatures can be used, it is therefore possible for multiple users who don’t know each other to work together in protecting the assets, such is called the distributed private key control technology.

i. COMBINATION METHOD

The current known combination method is notary + side chain. Trading on the side chain requires only blockhead information without affecting the main chain process, while the Notary Mechanism has strengthened the protection against security. The combination of notary and DPOS can increase TPS(Transactions Per Second) of the whole chain. But the combination of the two models is bound to add to the complexity of the system, and the more complex the system is, the more likely it is to fail. Under the premise that the model is well designed with proven security, it could be a good idea; otherwise, should cases of cross-chain fund loss occur, it could easily lose its popularity.

ii. DISTRIBUTED PRIVATE KEY CONTROL

As its name suggests, the distributed private key control means cross-chain assets are controled with multiple private keys by the decentralized technology; the original holder still owns the assets, but their single private key will not allow them to withdraw the assets — in order to do so, you will need to apply to the chain in question for sufficient private keys.

For example, User Alice wants to be able to convert one original coin into another. A number of cross-chain nodes (be it the shard/Super Delegates Committee) maintain a multi-signature account on the original chain, divide the private keys and control them separately, so that any single node will not be able to obtain this one original coin, only when sufficient private keys are collected can the control of original chain currency be obtained.

When Alice transfers one original chain coin into a cross-chain controlled multi signature account, cross-chain coin of equal value will be simultaneouly released on the cross-chain and be traded with a node that had converted another chain’s coin into the cross-chain coins of equal value. When Alice needs to return the cross-chain coins back to the original chain, she would need to lock up the cross-chain assets first and then release an equal amount of the original coin in the original chain.

This process is safer, and because it distributes tokens on the cross-chain, it supports smart contracts, especially multi-cryptocurrency complex contracts, regardless of whether the original chain itself can apply smart contracts — this is good news for BTC, since it’s unable to carry out smart contracts and therefore have limited functions. However, as the transaction volume gets bigger, there may be an overrun on the corresponding currency pool, and the cost will become too high for atomization.

For more sharing about cross chains, looking forward to our part 2.

Thanks for your reading.

ABOUT Myself (Xiaolong)

Xiaolong Xu, Co-founder of DREP Foundation

Former lead developer at QTUM, with extensive experience in blockchain technology and public chain development. Current technical advisor for a range of established blockchain projects. Instructor of NODE Blockchain Accelerator.

Previous software developer at Microsoft and Tencent. Master of Chinese Academy of Sciences.