Inter-ledger as a subset of inter-blockchain communication
An inter-blockchain resolves a different problem than blockchains.
Blockchains are, in fact, hosting one or more database(s). A consensus mechanism takes care of ordering the transactions performed in these databases. The first generation of blockchains, incarnated by Bitcoin, is hosting a single database, a single ledger. The second generation of blockchains, incarnated by Ethereum, is hosting several databases, several ledgers. These blockchains are primarily used for financial interactions, hence the usage of ledgers.
In contrast, Inter-blockchains are not hosting any database per se, blockchains do, not inter-blockchains. The main purpose of inter-blockchains is to route messages across blockchains. Any messages can potentially be transmitted across blockchains but, because actual blockchains are mainly used for financial purposes, specialized inter-blockchains are, in fact, inter-ledgers. As a concrete example of an inter-blockchain mechanism, suppose that we want to move just one Bitcoin across two blockchains, let’s say Bitcoin and EOS. This means that after the transfer process, this Bitcoin is no longer usable in the original blockchain and is now transferred and usable in the destination blockchain.
One of the main constraints of inter-blockchains is that both blockchains involved in a transfer should have the same type of ledger. For example, if bitcoins are to be transferred to another blockchain, then, the Bitcoin replica in the destination blockchain should have the same characteristics as the original one. Thus, if the Bitcoin total supply is 21 million, then, the Bitcoin replica on another blockchain should be capped at 21 million. In other words, both ledgers should be identical and behave the same way.
The other constraint is that the replica cannot be used to create new tokens in the replicated ledger. For example, a bitcoin replica hosted on EOS cannot be used to create new bitcoins in the Bitcoin blockchain. Thus, new Bitcoin replicas are created when Bitcoins are moved to a destination blockchain and not vice versa. However, when a Bitcoin has been moved to the destination blockchain, it can be redeemed back to the original bitcoin blockchain. The best inter-blockchain mechanisms should allow redeeming back tokens/coins as a whole or as a fraction.
In the following illustration, a Bitcoin is moved to EOS. In the type of inter-blockchain implemented with the Interblockchain lab technology, a transaction is, at first, performed from a token holder to a reserve (no longer usable by the token holder). When this step is completed, another transaction is performed in the destination blockchain by transferring the Bitcoin replica from its ledger’s reserve into a user’s account.
The mechanism to redeem back any replica Bitcoin is simply a reversed image of the previous mechanism
By using a reserve instead of a pure atomic swap mechanism, replica bitcoins can be spent, transferred to third parties, and redeemable back, as a whole or as a fraction, to the original blockchain network. For example, a transferred Bitcoin (1 BTC), on the EOS network (1 replica Bitcoin - iBTC), is owned by Bob. Then, Bob uses it to buy some goods, let’s say, a 0.5 replica bitcoin (iBTC) transferred locally, to Alice’s account, on the EOS blockchain. Alice can redeem back this 0.5 replica Bitcoin (iBTC) to the original Bitcoin network and Bob still owns a 0.5 Bitcoin replica (iBTC) in the EOS blockchain. A reserve allows redeeming any fraction of a transferred Bitcoin without any need for a counterparty.
Why would a token holder move one of his assets? Two mains reasons:
· To spend it on a less expensive (fewer transaction fees) and faster blockchain (with confirmation time as fast as Visa or Mastercard).
· To trade it in a distributed exchange. For example, to trade a Bitcoin or any other high-value token in one of the 0x relays, in Bancor (all based on smart contracts hosted in Ethereum) or any other DEX based on any type of protocol on programmable networks such as Ethereum or EOS and on multi-ledger ones like Stellar..
In summary, as a foundation for any inter-blockchain allowing the movement of transactions across blockchains, lays a means to replicate the characteristics of the original token/coin. This may involve using a piece of code to do so (i.e., smart contract). The usage of a reserve on both sides of the inter-blockchain transaction removes the need for a counterparty. This feature allows a single token holder to move tokens across blockchain without any need for a counterparty.
The actual Interblockchain lab’s implementation allows transferring cryptocurrencies and crypto assets across the boundaries of seven (7) different networks: Bitcoin, Ripple, Bitcoin Cash, Ethereum, Stellar, Litecoin, EOS. For more details, go to interblockchain.io
