Understanding Blockchain Interoperability & Why the Future Is Cross-Chain DeFi

What was once classed as a far-fetched vision of a trustless, inclusive, and efficient financial framework, is now leading the way to the mass adoption of blockchain technology. Decentralized finance (DeFi) has given many the key to financial freedom, with decentralized trading, credit markets, passive income streams, and secure capital storage playing a central role in the shift to decentralized models.

Ethereum — Where It All Began

Vitalik Buterin envisioned a blockchain-based virtual machine that would not be limited to P2P transactions, but rather birth an entirely new economy of decentralized applications governed by smart contracts. His design was quickly validated by thousands, leading to the genesis of decentralized finance.

The majority of today’s DeFi protocols run on the Ethereum blockchain. Although Ethereum has a stranglehold on the markets, its presence is slowly beginning to fade due to a few major hurdles that leave many seeking alternative solutions. From exorbitantly high gas fees to scalability concerns, Ethereum’s status as the home of DeFi is being challenged. This isn’t to say that Ethereum is doomed, but complementary solutions are widely gaining acceptance.

Today, dozens of blockchains support dApp deployment and offer diverse opportunities to retail and institutional users. As having your assets siloed to one chain goes against the crypto ethos of financial freedom, cross-chain solutions are actively being developed.

Moving on, we will dive deeper into the need for blockchain interoperability, how it works, and Onomy Protocol’s role in advancing DeFi’s cross-chain capabilities.

The Need for Cross-chain Solutions

Traditionally, blockchains may be described as impenetrable citadels that are oblivious to the outside world. Hence, if you own bitcoin, you are limited to only using it on the native network, with no means of engaging in novel opportunities like lending markets — unless, of course, you give away your keys to a centralized entity.

Let’s dive into another example. If you hold stablecoins on the Ethereum chain, you’re welcome to partake in liquidity provision via Uniswap. But what if you could access significantly higher yield on an alternative network like the Binance Smart Chain or Solana? Lack of interoperability would force you to onboard additional fiat onto an exchange and withdraw to a BEP-20 compatible address. This is friction, an irritating reminder of CeFi processes.

The value proposition of blockchain interoperability is simple. The deeper you dive into the DeFi realm, the more opportunities you want to access. Rather than being constrained by the rules and processes specific to each network, cross-chain capabilities give you the freedom of choice.

New protocols and applications are being developed with interfaces that allow users to trade across these different chains, all from one focal point — this ease of access has been a center of focus for this technology and is key for drawing in new entrants. When making a trade, you are no longer restricted to one chain, and can now choose the best chain(s) to meet your financial needs. Interoperability between chains is critical for usability and selection purposes, as user preference for different chains will always exist — they each offer unique assets and opportunities.

Given that these alternate blockchains exist and are thriving, new protocols are being built to create even faster, cheaper, and more user-friendly options, allowing the transfer of tokens and data between seemingly independent networks.

How Cross-Chain Trading Works

Blockchain interoperability is not limited to a single, fit-all solution. Generally speaking, cross-chain solutions may be divided into centralized and decentralized alternatives.

• Centralized Interoperability

Centralized cross-chain implementations single-handedly manage the locking and minting of assets in a custodial manner. For instance, a bitcoin holder looking to use their coins on the Ethereum blockchain might choose the route of depositing their coins into the custodial wallets of a company, which then mints (wrapped) bitcoin in the ERC-20 standard at a 1:1 basis, to be used on the Ethereum chain. Another example of accessing CEX interoperability is to deposit BTC to a centralized exchange, and use it to trade against token pairs based on other blockchain networks.

• Decentralized Interoperability

On the other hand, decentralized implementations rely on smart contracts and are non-custodial. To initiate bridging, users lock their coins in a smart contract, which proceeds to mint an equal value of the cryptocurrency on the second blockchain. Upon bridging back, the newly-minted tokens are burned, and the initial contract-based assets are unlocked and placed back into circulation.

There are several technical processes that facilitate bridging. For instance, Cosmos uses the inter-blockchain communication (IBC) network and the help of validators to provide a more seamless bridging experience across its ‘internet of blockchains’.

This leads us to the main concern of blockchain interoperability — the bridging experience. Process simplification is essential to mass adoption, as tech newbies demand a straightforward approach to using their assets cross-chain.

Inside Onomy Protocol’s Cross-Chain Approach

Onomy has stepped into the DeFi ring with a strong purpose — to sustain the CeFi to DeFi migration by developing a user-centered approach towards utilizing stablecoins cross-chain.

Based on Cosmos, Onomy Protocol’s ONET blockchain is built with interoperability at heart. Through EntangleMint (our bridge network), many of the world’s largest and most established blockchains will be integrated, including Cosmos, Ethereum, Avalanche, Cardano, Polkadot, and OKChain.

By building bi-directional bridges to prominent blockchain economies, Onomy’s stable representations of national currencies will not be siloed to specific chains. There’s nothing more powerful than network-agnostic stablecoins which can freely be used to tap into DeFi opportunities. This will further strengthen our goal of plugging the $6.6T per day Forex market into DeFi, fully digitizing foreign currencies. Moreover, Onomy Protocol also serves the wider market, expanding beyond stablecoins. Our cross-chain DEX also allows the trading of other cryptocurrencies, granting users the same efficiency, ease of use, and advanced tools available for Denom trading.

Onomy’s underlying infrastructure allows these stablecoins to be traded and lent across its supported chains, maximizing their applicability and providing users with the convenience of not needing to switch between multiple wallets. In fact, Natural Rights, our single sign-on technology, makes it possible to access assets cross-chain, whereas our hybrid DEX seamlessly takes care of bridging, consequently creating a simpler and more efficient user experience.

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