As exchanges revolve around transacting currencies, there are two fundamental exchange models: currency-centric and currency-neutral. Either of these models can be centralized or decentralized, depending on how the four key functions of the exchange are handled.
Currency-centric exchanges are built on top of singular blockchain platforms, such as Ethereum. A currency-centric exchange is limited to escrowing only the currency of the platform it is built on, such as ERC20 assets and other contracts if the exchange is built on top of Ethereum. This is the way traditional exchanges are built.
The newer model is currency-neutral, which is architected to connect different native cryptocurrencies, meaning that users do not have to adhere to any specific currency ecosystem. These systems allow users to trade cryptocurrencies without a coin underlying that exchange, which acts as a sort of additional “middleman” to go through since it is no longer fully peer-to-peer.
The Necessity Of Interoperability
As the blockchain industry continues to grow and progress, interoperability will become an essential feature for any project to survive. It doesn’t make sense to have hundreds of blockchains completely separated from one another, competing for market share and value.
Interoperability is the ability of computer systems or software to exchange and make use of information.
Or more simply, for blockchains to talk to each other and agree on truth, as they relate to transactions, so that different technology can co-operate.
Atomic swap, or atomic cross-chain trading, is the exchange of one cryptocurrency to another cryptocurrency, without the need to trust a third-party by way of smart contracts.
The atomic swap process is trustless and works by ensuring both parties fulfill the requirements of the trade, as defined in the contract. If one fails to meet the requirements, the time-locked contract will refund the other user.
To support this, a blockchain needs to implement the Lightning Network, a solution which allows one to open and close those payment channels which execute off-chain transactions.
After a certain amount of time (defined by the contract), the channel will be closed and the end balances will be submitted to both blockchains.
At present major limitations (mostly at the cryptography level) are proving to be an enormous impediment to this solution.
Since on-chain atomic swaps were first proposed back in 2013 it’s been an incredibly tough journey to get to the first real world transaction.
4 years later, on September 20, 2017, Decred and Litecoin did the first known successful implementation of the atomic swap.
However since this time not much as moved forward, and there are no known repositories of successfully executed atomic swaps. Basically even though the technology works in concept, and even in individual cases, it is not proving to be simple or elegant to implement and solve problems of interoperability.
Atomic swaps are not without merit, and will be of value as the technology matures.
This solution has been discussed ad nauseam often being described as “the game-changer.” However there is an error to this logic as the characteristic of communicating between chains is the breakthrough, not necessarily the method of atomic swaps.
We propose that bridges between between chains, monitored and mandated by validators, is not only a simpler solution to cross-chain transfer — but a solution that is safer and has greater access to instant liquidity.
The elegance of Cross-Chain Bridges
The Bifröst Protocol forms one of the cornerstone innovations of THORChain, and aims to solve the single biggest issue for asset transfer, interoperability between blockchains.
Because of this Bifröst is the glue that holds the entire THORChain ecosystem together, enabling the seamless trading of any digital asset across any distributed ledger.
While Bifröst is not the first cross-chain solution, it could be the most evolved. In fact, THORChain’s protocol improves upon the weakness of preceding cross-chain architectures like Rootstock 2WP, Liquid Sidechain, POA Network Bridge and COSMOS Peg Zone.
How does it work in practice?
Cross-chain Bridges are simple in concept; an asset is locked on one chain; whilst an identical asset is atomically “minted” on the other and sent to an address owned by the original party.
The newly minted asset is fungible with the original one by virtue of the fact that it can be used to redeem the original asset at the same ratio that it was minted.
This newly minted asset represents the rights to unlock assets on the original chain; so as long as the bridge continues to exist without censorship or interference, then the tokenised asset can be handled as though it was the original asset.
When the owner (anyone who has keys to spend) wishes to move back to the original chain, it is done via the same bridge; the asset is destroyed on the ‘bridged’ chain and atomically unlocked on the original chain.
- An asset is locked on one chain
- The exact amount is then minted on another chain.
- The assets are perfectly fungible, as they are pegged to each other, but can’t be double-spent.
- If the owner decides, the minted assets can revert back to their original state (and chain) and the newly minted asset will be destroyed.
- The original assets will be unlocked and exactly as they begun.
How are these bridges maintained?
Validators secure all transactions across the THORChain protocol by validating and relaying transactions, and by extension producing blocks.
Validators will stake their own tokens (Rune) as a representation of their self-interested responsibility to the governance of the protocol. There will be a limited number of validators, currently 100, who will be required to execute reliable multi-sig infrastructure to reach consensus.
THORChain will require protocol level slashing rules to immediately slash a validator’s stake if they attempt to spend from any of the multi-signatures without posting a valid
txid first, or they spend to an incorrect user address with a valid transaction
Bridges are not only a more elegant solution when compared to atomic swaps, but the technology and infrastructure exists now to create cross-chain fluency. Blockchains can not survive in the current fragmented state that they are in right now.
When we begin to visualise different blockchains, not as seperate universes, but as isolated highways — we can begin to see how connecting protocols can just be about creating equivalency of value and not necessarily about complete compatibility of design and infrastructure.
At it’s most simple, we are looking to agree on truth of transaction with cross-chain consensus.
We propose that cross-chain bridges, with on-chain governance, is the most effective way to achieve this.
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