The Interoperability Landscape and Perun-X
A few years ago, blockchain scalability seemed to be the greatest challenge in the development of the blockchain space. This is not the case anymore because many projects created their own solutions. As a consequence, many new ecosystems emerged separately and independently. The resulting silos were not exactly the interconnected world that is often propagated. Therefore, the importance of cross-chain infrastructure and applications became more and more obvious. In this article, we present the current landscape of DLT interconnectivity, what they can enable and what the future might hold. Furthermore, we describe Perun-X, an interoperability protocol that does not depend on its own chain or a new token.
Authors: Hendrik Amler & Marcel Kaiser
Why Cross-Chain Applications matter
Interconnectivity
Allows to move value more effectively and in a decentralized manner
The possibility of swapping tokens from different ecosystems as such is already useful. Without centralized institutions and many steps, this process has not been feasible. Interconnected ecosystems make it possible to minimize trust and transaction costs while maximizing efficiency. One use case would be to extend the use of DeFi protocols across more ecosystems. This would, to use a popular analogy, be adding bricks to the set of available money LEGO parts. Users can create more complex financial mechanisms by combining a larger variety of services.
Also, the connection between companies using applications from one blockchain or the other has now the possibility to engage with each other without having to adopt a new system. Thus, businesses no longer need to fear using the wrong ecosystem but can confidently go on their chain of choice. Before they can be discussed, the possibility of executing cross-chain contracts needs to be wrapped up briefly as it serves as a necessary component.
Cross-Chain Contracts
What are Cross-Chain Contracts?
Cross-Chain contracts are essentially smart contracts executed on both chains respectively (Nazarov, 2021). They can be considered the next generation of smart contracts and do not only work on one chain but across multiple ecosystems. An example could be an offline payment triggering a process in two different ecosystems or an insurance payment which is triggered, paying parties on several different blockchain ecosystems.
What kind of infrastructure is required for them to work?
To make use of such contracts, several conditions need to be fulfilled. Due to smart contracts not sharing a common language, a different kind of compilation needs to be taken on every end of the interconnecting structure. It highly depends on the layer on which the smart contract is supposed to work: if transactions should directly be triggered on L1, some kind of smart contract translation needs to occur. If an L2 protocol is used and accepted, then the transfers can be made using one protocol only. This can be the case in channel technology which allows arbitrary logic to be executed. The second layer holds the resulting funds and can be withdrawn by owners.
CBDCs & Wrapped Tokens in interoperable systems
By 2026, there might be CBDCs of the major currencies (Ghosh, 2021). Maybe sooner, maybe later. Independent of them being blockchain-based or not, they will be brought on-chain. Once officially accepted currencies are in the space of smart contracts, their movement from one contract to another and from one chain to another will be expected as a requirement by users. Their concentration and velocity of CBDCs on different blockchain ecosystems will be a relevant metric for analysts of various disciplines. An analysis of future economies might be done not only on a national basis but also with an ecosystemic perspective, giving economists true insights on the impact of distributed ledger technologies on the economy. By then, centralized exchanges might become obsolete for some users if blockchain interoperability is matured and all systems scale well.
In terms of the implementation of CBDCs across multiple systems, they might be locked and wrapped decentrally with the help of cross-chain contracts. Currently, wrapped tokens often require trust in a consortium, as demonstrated by wBTC on Ethereum. This solution as a basis for many financial applications is lackluster. The Cross-Chain interconnectivity has therefore to depend on some decentral or at least somewhat trustless mechanisms. In the following subsection, we briefly introduce existing solutions.
Current Solutions
Technologies in comparison
The following section will briefly deal with the existing solutions for cross-chain transactions. A more thorough discussion of them can be found in Zamyatin, Alexei, et al. (2019).
There are solutions which aim to solve the interoperability problem. According to Lohachab et al., the current research scope focuses on developing solutions relying on trusted brokers, hash-locking, and relays with the result that obfuscation ecosystems emerge that are unable to communicate with each other. In order to avoid further complexity, interoperability solutions need to empower the notion of trustless interoperability. They recommend the implementation of a holistic approach to bridge disparate blockchain solutions. Belchior et al. systematically analyzed and categorized interoperability into three different categories: Public Connectors, Blockchain of Blockchains, and Hybrid Connectors (details can be found in Table 1).
Public Connectors include Sidechains (Loom network, Polygon), Hashed Timelock contracts (Connext) and notary schemes which include centralized (Coinbase, Kraken) and decentralized exchanges (Anyswap, Wanswap).
Blockchain of Blockchains like Polkadot, Cosmos or ARK can achieve a high degree of interoperability. A relay chain in Polkadot for example can connect different subchains over which transactions are routed. However, interoperability is only possible with subchains within a particular ecosystem so interoperability with other blockchains or other ecosystems is not easily possible.
Hybrid connectors include trusted relays and agnostic protocols. Trusted relays operate as gateways (i.e. pNetwork) where interoperability is realized by having a trusted component (either hardware module, single entity or consortium) that locks a token on one blockchain (1 BTC locked) and mints a wrapped token on the receiving blockchain (1 wBTC minted). Gateways are especially useful for connecting blockchains not able to execute arbitrary smart contracts. To our knowledge, native token swaps are not easy to implement with gateways which is a downside of this solution next to the lower trust assumption.
Agnostic protocols like Perun or Overledger can orchestrate transfer between arbitrary DLT- and possibly even non-DLT based systems. Users connect to a dedicated (trustless) hub-Node that is connected to multiple blockchain networks and is able to initiate the exchange of tokens through liquidity pools. Perun uses state channels (conditional token transfers) to offer interoperability. Compared to gateways, solutions like Perun can be completely trustless. Further, native token transfers are possible with the use of liquidity pools. Lastly, channels can be used on any blockchain that can execute smart contracts.
Compared to other solutions, our channel-based solution Perun can execute arbitrary smart contracts within a channel that go far beyond simple value transfers. Perun’s architecture is completely modular which means that for example blockchain connectors can be added without touching the core protocols. This is especially useful for adding non-EVM compatible blockchains such as Tezor or Hyperledger Fabric. The core protocols used by Perun are provably secure and published at peer-reviewed cryptography conferences. Utilizing virtual channels, offline transactions between two users can be achieved which are especially useful in IoT applications where agents have limited connectivity.
Perun-X by PolyCrypt
Payment channels emerged as an efficient method for performing cheap micropayments in cryptocurrencies. In contrast to traditional on-chain transactions, payment channels have the advantage that they allow for a nearly unlimited number of transactions between parties without involving the blockchain (unless there is a dispute). Perun adds to the concept a technique called “virtual payment channels” that avoids the involvement of the intermediary for each individual payment. In our academic whitepaper, we formally model and prove the security of this technique in the case of one intermediary, who can be viewed as a “payment hub” that has direct channels with several parties. Our scheme works over any cryptocurrency that provides (nearly) Turing-complete smart contracts. Thus, it is also possible to build channels across ecosystems.
We have been extending the Perun framework constantly by adding network backends to include more systems to our network and by implementing everything with security in mind.
With Perun-X we want to create a highly capable infrastructure that is more than a carrier of tokens. It can help to tackle the explained emergence of silos described above. The Channel-based technology gives rise to DeFi-like rates for those assisting to maintain the network by pooling their funds from different ecosystems to guarantee smooth service. Using Perun-X, individuals and firms will be able to execute arbitrary logic across networks. The high scalability of this approach in combination with trustless operations fulfills the requirements of different types of users.
If you want to learn more about what you can use Perun-X for and where we head with this project, feel free to reach out!
Remarks
If you are interested in learning more about the Perun Channel Technology and how it can be used to scale your blockchain application, visit our website (https://perun.network/) and our GitHub repo or contact us directly by writing us an email at info@perun.network.
References
Belchior, et al (2020): “A survey on blockchain interoperability: Past, present, and future trends”.
Ghosh (2021): “ECB will introduce digital EUR by 2026; the Future of Crypto as an alternative digital currency may be at stake due to trusted CBDC”. iforex
Lohachab, et al. (2021): “Towards Interconnected Blockchains: A Comprehensive Review of the Role of Interoperability among Disparate Blockchains”.
Nazarov (2021): ”Keynote on the Future of Hybrid Smart Contracts”. Youtube.
Zamyatin, Alexei, et al. (2019): “SoK: communication across distributed ledgers.”.
