Understanding Blockchain Interoperability
The launch of Bitcoin nearly ten years ago ushered in the world’s first decentralized, trustless and democratic economy. It was also the first practical demonstration of blockchain technology, the pioneer of a new era for distributed ledger technology.
Today, there are over 2,000 cryptocurrencies currently in circulation, all based on the same underlying technology. As a result, it has become increasingly clear that no single blockchain can reign supreme over the rest. Since blockchain projects are often designed for highly specific use cases, they tend to each have a unique balance of security, decentralization and convenience. This has inevitably led to the problem of fragmentation, where blockchains cannot communicate or transfer value between each other.
Blockchain interoperability attempts to solve this problem, allowing assets to be transferred between platforms, even in the absence of a middle man or trusted third-party.
Existing blockchain projects are also starting to warm up to this idea of interoperability. The cofounder of Ethereum Vitalik Buterin, for instance, authored a research paper titled ‘Chain Interoperability’. He reasoned, “There has not yet been a single permissioned chain that has seen substantial use or adoption, and so it is not fully clear to what extent the consensus algorithms and other features of current experiments will translate.”
Centralized Exchanges
At this time, centralized cryptocurrency exchanges are the only way to achieve interoperability between blockchains. In addition to providing a crypto-to-fiat corridor, they allow users to trade between multiple digital currencies or tokens.
However, given that users cumulatively entrust these companies with large amounts of cryptocurrency, they have become larger and larger targets for intruders and malicious actors. While Mt. Gox was the first major cryptocurrency exchange to be hacked back in 2013, security breaches have become worryingly common, especially in the past couple of years. Bitfinex, for instance, announced the theft of approximately $72 million worth of Bitcoin in August 2016. Countless others have also declared bankruptcy after falling victim to security breaches.
Thus, exchanges have effectively turned into central points of failure, which is ironically what decentralized currencies like Bitcoin set out to replace. For the overwhelming majority of users though, cryptocurrency exchanges represent a necessary evil due to the lack of mainstream alternatives.
Cosmos and Polkadot: Limited Interoperability
Cosmos and Polkadot are some of the most popular interoperability projects in the blockchain industry. They are both designed to be independent networks that host a number of sub-blockchains, or ‘hubs’. Blockchains created under Cosmos’ Tendermint protocol, for instance, are capable of communicating and transferring tokens with other chains on the network. New trades are routed through the Cosmos Hub, which relies on a set of validators to verify and validate new transactions. This hierarchy is precisely why Cosmos’ solution has been dubbed ‘Internet of Blockchains’.
However, this level of uniformity comes at a cost. Specifically, Cosmos and Polkadot are not designed to be compatible with existing blockchains and their consensus mechanisms. The developers of Bitcoin and most popular cryptocurrencies will likely never modify the base protocol to comply with Cosmos or Polkadot’s rulesets due to the security implications.
As a result, they will have to be recreated on each interoperable network from scratch.
Thus, in an open market with thousands of blockchain offerings, Cosmos and Polkadot cater to a very small segment of the industry.
Cross-chain Atomic Swaps
Atomic swaps use hash time-locked smart contracts to facilitate the exchange of value between blockchains. Because of this, swaps can be completed between two parties even in the absence of a third party or external hub. Another advantage is that users are not required to give up control of their cryptocurrency or private keys at any point in the entire process. In this regard alone, atomic swaps can be considered to be vastly safer than traditional cryptocurrency exchanges.
However, cross chain atomic swaps have only been successfully completed between select blockchain pairs such as Bitcoin and Litecoin. Furthermore, atomic swaps cannot transfer value across chains and are only capable of exchanging ownership of tokens between users.
Caasiope: Finding the Right Balance
The Caasiope Network, on the other hand, aims to achieve interoperability across a variety of existing blockchains and digital assets, including Bitcoin, Ethereum and other popular cryptocurrencies. Unlike Cosmos and Polkadot, it is a non-intrusive solution that does not require the creation of new blockchains for the interoperability logic to be fully utilized.
The Caasiope Network uses multi-signature custodian wallets to achieve interoperability between chains. Liquidity is achieved across blockchains with the help of ‘gateways’. According to the project’s white paper, “A gateway can be thought of as an agent who
interacts with end users of the network to perform a deposit or withdrawal.”
The platform’s developers have built a unique governance mechanism, termed ‘Business as Stake (BaS)’. Under this system, transactions on the network are verified by a consortium of business that have a vested interest in the smooth operation of the network. As a result, Caasiope delivers a superior user experience without sacrificing on important blockchain principles such as decentralization and security.
This article is a short version of an article originally published on Caasiope.net
