I. What is Cross-chain?
Cross-chain is a solution to help transfer crypto assets, tokens from one blockchain to another, to optimize interoperability between blockchains. The reason Cross-chain was born is that each blockchain network has a different structure, so the protocols for them to transfer assets between each other are very limited. With the advent of Cross-chain, any coin created on blockchain A can easily be converted to blockchain B.
Simply put, the cross-chain mechanism is similar to the way we go through a bank to change Vietnamese money into Euros and then send it to Europe. For blockchain, we will wrap the token in one network to become a token that can be used in the other network. With the Cross-chain mechanism, DeFi has now appeared a new application that is considered an inevitable trend and has attracted a large number of users, which is Cross-chain Bridge.
II. What are the advantages of Cross-chain?
Increased interoperability: Cross Chain makes it possible for blockchains to interact with each other. This interaction can help combine the strengths of each platform to deliver a complete blockchain solution.
Improve efficiency: Native Bitcoin can be widely used in Ethereum DeFi protocols without any barriers. This means that a large amount of liquidity can be easily created and moved in different blockchain platforms.
Increase practical application: When blockchains can interact with each other easily, exchanging between coins will become simpler than ever.
III. What are the disadvantages of Cross-chain?
The biggest downside to the present time is probably the problem of technology. Cross Chain seems to be still too new. The Cross Chain solutions created are not yet able to effectively communicate. Furthermore, the individual blockchains themselves are still a work in progress. Therefore, it will probably take more time to develop and perfect in order to achieve optimal performance.
Thus, from a personal point of view, Cross Chain will probably be the trend in the future. We can divide the blockchain into several stages. If we consider phase 1 as the formation of ideas and foundational blockchain solutions. Then in phase 2 will be the combination and create interaction between these blockchains together. In other words, blockchain with multi-chain interoperability can be seen as a Layer 2 blockchain.
IV. Basic Cross-chain Types
1. Isomorphic Cross Chain
For Isomorphic Cross Chain, the security mechanism, consensus algorithm, network topology, and block generation verification logic are consistent, and cross-chain interaction between them is relatively simple. Tendermint-based chains like Cosmos can adopt Isomorphic Cross Chain. You can understand its simple mechanism like this.
Suppose we have two chains A and B. To be able to transfer assets between these two chains, the first thing is that they need to be registered with each other first. They do this by sending the genesis block and ChainID to each other for confirmation. The user will then send a Cross-Chain packageTx transaction to A to request it to be sent to B. Chain A will receive the request and notify Chain B of this event.
2. Heterogeneous Cross Chain
Heterogenous Cross Chain will be more complex than Isomorphic. Because it has heterogeneity in security mechanisms, consensus algorithms between chains. The transfer mechanism is similar to the isomorphic Cross Chain. However, to solve that inconsistency problem, the solution of using a third-party service platform is applied to store transactions.
Suppose in the case of Cosmos, with heterogeneous chains like this, PegZone or Peggy is the third service I just talked about. This one PegZone will consist of five parts: Smart Contract, Witness, PegZone, Signer, Relayer. It will do the conversion between the strings here.
V. Why is Cross-chain important in DeFi?
Blockchain in general and DeFi, in particular, are changing the way life operates today. Or rather, it brings the entire current centralized operating model (banks, applications, ...) to the blockchain platform. From there, it helps to solve the weaknesses of the other centralized models (centralization, high costs, long transaction times,...).
However, without establishing cross-chain interoperability, DeFi will probably forever remain in its infancy. Think of every single blockchain as a separate economy. If these economies cannot work together, the entire ecosystem cannot grow and take over the traditional financial world.
The world of DeFi is heating up day by day as shown by the increasing amount of money pouring into DeFi protocols. When WBTC was born up to now, over 1 billion USD worth of BTC is locked in DeFi protocols. Imagine if cross-chain technology develops, communication between blockchains becomes simpler, this number will certainly not stop there.
Many projects pursuing cross-chain technology have also really formed based on this perspective. It can be said that they will help revolutionize the DeFi world. At the same time, it will accelerate development and adoption, paving the way for a new financial system with easy communication between existing blockchain platforms.
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