Cross-Chain interoperability — Enabling the future of DeFi.
You walk into a coffee shop and want to start your day with a grande Cappuccino. The barista starts making your coffee, and you sit at your table, staring at the birds chirping outside the window.
You reach out to your pocket and suddenly realize that you have left your wallet at home. You look around and stumble upon a sign that says, “Cryptocurrency accepted,’’ which brings a sigh of relief because you have a phone with an ethereum wallet.
Your coffee is now ready, and the barista calls your name. You collect your freshly brewed grande Cappuccino and take out your phone to scan the QR code at the counter to pay for the coffee in ethereum.
Suddenly, you notice that the coffee shop only accepts “bitcoins’’ and you can’t pay in ethereum. You still want to try your luck, so you scan the QR code, but it all ends with embarrassment.
That’s a major problem in the blockchain ecosystem today, and we call it “lack of interoperability’’!
What is interoperability?
Interoperability means “cross-communication,’’ where two or more completely different systems can talk to each other and exchange value. In the traditional financial system, the majority of payment infrastructure is interoperable.
You can swipe your debit or credit card and pay for goods and services regardless of what currency the store accepts. If you’re traveling abroad with a card issued by your bank, you know it is accepted everywhere regardless of the local currency — that’s interoperability.
In the blockchain space, interoperability is when two more blockchain systems can talk to each other and exchange value. Coming back to the coffee shop experience, you should be able to pay with ethereum even though the store accepts bitcoin, and that too in a decentralized environment. Still, unfortunately, that’s not the case.
Like with the internet, you have a web service that provides an API through which you can talk to that specific web service. That API acts as a communication layer between the web service and all other external services on the web. Unfortunately, we don’t have such cross-chain communication protocols developed for blockchain, so they work and exist in silos.
In a moment, you will see that this space is evolving, and many protocols work similarly, as shown in the diagram above. But first, let’s discuss some of the solutions that existed in the past, which laid the foundations for the platforms that we have today for cross-chain communication and interoperability.
Past solutions (workarounds)
To solve this cross-chain interoperability problem, many existing solutions exist with all kinds of limitations and inefficiencies. Let’s discuss each one of them briefly to build the context.
Many third-party centralized solutions let you convert cryptocurrencies so you can pay for the goods, but why do we need a centralized intermediary?
If I have to rely on a centralized intermediary, I could use my credit card or services like PayPal, which are much easier to use and more efficient.
The majority of these centralized systems have a custodial wallet. When you purchase in a different cryptocurrency, they perform an Atomic Swap or make an independent conversion based on the current market rate.
This centralized operation kills the purpose of blockchain and decentralization and is not a permanent solution!
Atomic swaps are a cross-chain value exchange mechanism where users can convert their cryptocurrencies in a peer-to-peer environment.
Atomic swap uses a set of contracts called Hashed TimeLock Contracts, or HTLCs. These HTLCs help move value across different networks. In atomic swaps, there is no actual cross-chain communication happening on both networks, but rather two parties agree to make a transaction that will move value across the network through a time-locked contract.
However, one big limitation of atomic swaps is that both blockchain networks should have the same hashing algorithm and support the execution of HTLC contracts. Now a few blockchains do share the same hashing algorithm, but the majority of them don’t.
Wrapped Bitcoin (WBTC)
Wrapped Bitcoin (WBTC) is another special kind of smart contract that provides cross-chain interoperability between Bitcoin and the Ethereum network. WBTC is an ERC-20 token pegged to bitcoin at a 1:1 ratio.
In the WBTC contract, a third-party custodian holds your BTCs and releases a set amount of WBTC tokens, which are the ERC-20 tokens on Ethereum. To redeem your BTC, a function called “burn” in the WBTC Factory signals that a merchant wants to release the BTC.
There are two big problems with the WBTC contract. The first one is that it is only limited to Bitcoin and Ethereum, and the second one is that it still relies on third-party custodians, which is essentially a centralized aspect. One important thing to note here is that to receive WBTC, the custodian or the merchant performs an identity verification through KYC and AML procedures. The swap execution is only completed once the user's identity is fully verified.
pTokens by Provable Things
pTokens is another project developed by a firm called Provable Things. All pTokens are transparently pegged to an underlying asset. Anyone can deposit on the relevant pTokens smart contract a certain amount of the underlying asset (such as EOS or BTC) and request the equivalent 1:1 pegged pTokens representation (such as pEOS or pBTC).
pTokens utilize something called a “Trusted Execution Environment,” or TEE short. TEEs are hardware-isolated sandboxes that provide security features and a secure execution environment.
The TEEs securing the pTokens infrastructure represent an additional layer of protection for the network. The TEE operators are called validators responsible for issuing pTokens or releasing any underlying asset.
Why is Cross-Chain interoperability important for DeFi?
DeFi, or Decentralized Finance, is a set of financial services delivered through blockchains via smart contracts in a decentralized environment. Up until now, blockchain disrupted the model of “currency’’ by providing an alternative peer-to-peer monetary system.
However, what about all the financial services like banking, lending, savings, etc.? Well, that’s what DeFi is all about, bringing the traditional financial services ecosystem to the world of blockchain and cryptocurrencies.
“We disrupted the currency, now let’s disrupt the financial system’’ is the motive behind the DeFi movement.
But, establishing cross-chain interoperability is necessary for the DeFi movement to continue. Think of every single blockchain as a separate economy. If these economies can’t work together, the entire ecosystem cannot grow and take over the world of traditional finance.
Today's blockchains exist in silos, and these silos can’t communicate with each other and exchange value. This led to some third-party custodial services, but those make the ecosystem more centralized, taking away the essence of what blockchain is all about.
Next-Gen solutions that work!
The world of DeFi is quickly moving forward, and numerous projects have jumped in to make cross-chain communication platforms that solve the custodial and interoperability problems. These platforms we will discuss will revolutionize the DeFi landscape and accelerate the development and adoption process, paving the way for the new financial system powered by blockchain networks.
Cosmos aims to become the “Internet of Blockchains’’ by providing consistent interoperability between different blockchains on the network. At the heart of the Cosmos network is the Tendermint core, which houses the BFT (Byzantine fault tolerance) based Proof of Stake consensus algorithm and a peer-to-peer gossiping protocol like Bitcoin.
To achieve interoperability, the Cosmos project closely follows the model of the internet with its Inter Blockchain Communication (IBC) protocol. The Cosmos blockchain is built on top of the Tendermint Core and consists of two things:
Hub — The Hub is the central cosmos blockchain built on top of the Tendermint core.
Zones — Zones are autonomous and independent blockchains connected to the Hub.
The independent zones can be launched and connected to any external blockchain network like EOS, Ethereum, etc. All the communication between hubs and zones happens through the common IBC protocol. Like hubs, zones are built on top of the Tendermint protocol and are as simple as launching an ERC-20 token.
If we have the hubs, why do we need a separate layer of zones? This is because every blockchain speaks a different language, and these zones act as a “bridge’’ and a “gateway’’ for communication between external blockchains that are incompatible. Every external blockchain needs a separate zone to connect with the Hub.
The Hub also acts as a decentralized exchange, and all the tokens or coins are converted via atomic swaps, which brings massive liquidity across the network. For the consensus, the cosmos blockchain uses its native tokens called “ATOM’’, which are used as collateral for all the nodes participating in the PoS consensus. If any PoS node comes under the radar for malicious activity, their staked ATOM tokens are burned, and the participating node is removed from the network.
Fusion is undoubtedly the most promising platform for cross-chain interoperability, specifically built to enable global decentralized financial services for the masses. They have built a suite of different products that offer interoperability in its true sense.
Fusion has also built a set of finance-related APIs, allowing the developers to build financial applications that can cross-communicate with any of the supported blockchain protocols. This will enable the next generation of financial innovation.
Fusion has redefined the meaning of the “Internet of Values’’, which was only limited to exchanging “value’’ over the internet. The fusion platform believes that the internet of value, in its essence, can be achieved by not just focusing on the exchange of value but by focusing on usability, scalability, and interoperability.
This is the first time that a platform is focusing on both interoperability as well as scalability by design. Fusion uses a new kind of consensus mechanism called Ticketed Proof of Stake (TPoS), a custom-built consensus engine to secure transactions on the Fusion network. The Fusion's average block time is approximately 15 seconds and supports 2500 to 3000 TPS. Fusion currently occupies the 12th spot on the coinstats.network for being one of the most used networks.
Fusion uses its patented technology called Distributed Control Rights Management (DCRM) to achieve true interoperability.
DCRM is the distributed storage of private keys across the network of nodes using sharding. In the traditional custodial model, the keys are held on a centralized server, which increases the chance of them being compromised. In DCRM, however, your keys are not held on a central server, but they are divided into fragments called shards, encrypted and distributed across the global network.
World-leading and renowned cryptologists are part of the DCRM project, including Rosario Gennaro, Professor of Computer Science at CUNY, Steven Goldfeder, Ph.D., Postdoctoral Researcher in the Department of Computer Science at Cornell University, Louis Goubin, Professor of Computer Science at the University of Versailles and Pascal Paillier, Ph.D., CEO, and Senior Security Expert at CryptoExperts.
Fusion is a platform where you can build financial applications with a rich set of finance-focused APIs. This is possible because Fusion has all the necessary features that are very common in the financial industry, but these features aren’t present on other chains.
With its time-lock feature, Fusion enables us to recreate time-based financial transactions, and users can easily extract time value from their digital assets. In today’s financial markets, institutions build financial instruments to extract the time value from assets to meet market needs, such as bonds, futures, etc.
This method is very expensive and inefficient and takes days or weeks to issue those financial instruments. Fusion invented a way to extract the time value of assets instantly and efficiently. Fusion’s time lock function embeds time value at the point of digitization, letting anyone exchange the time value easily with Fusion’s decentralized and trustless quantum swaps.
Fusion wallets have a short address scheme called Universal Short Account Number (USAN). These function as unique account numbers on the ecosystem and can be traded for any other digital asset using Fusion’s quantum swap feature, enabling users to have a unique account number of their choice.
With its unique consensus mechanism and a range of different technologies, Fusion is trying to build crypto finance and DeFi in its true sense, focusing on usability, scalability, and interoperability — all at the same time.
Unlike other platforms discussed in this article, Anyswap is very different and built on top of Fusion’s DCRM protocol. Technically speaking, Anyswap is an Automated Market Maker (AMM), just like Uniswap. Users can deposit their digital assets on Anyswap and exchange them seamlessly for another asset, all in a decentralized environment.
Uniswap offers swap pairs that are limited to Ethereum and ERC-20 tokens, but Anyswap goes a step further and enables cross-chain token swaps, thus providing more liquidity. As of now, the Anyswap platform supports Fusion (FSN), Tether (USDT), and Ethereum (ETH), and they will soon be including Bitcoin, Ripple, and Litecoin as swap pairs to their platform.
The only slight limitation with Anyswap is that it can only swap 95% of all coins or tokens types without further modification or those that use ECDSA or EdDSA as a signature algorithm.
There are three main components in the Anyswap architecture:
Decentralized Cross-Chain Bridge — This utilizes the DCRM protocol, where the users can deposit their coins and exchange their digital assets.
Cross Chain Swaps — This provides instant liquidity where users can immediately swap one coin into another.
Programmed Pricing and Liquidity — Anyswap has an automated pricing system set by an algorithm, which depends on “liquidity providers’’. Those liquidity providers can add or limit the amount of liquidity into swap pairs, and the automated pricing system will set the appropriate pricing.
Anyswap is the world’s first fully decentralized cross-chain swap protocol built on top of the Fusions’ DCRM protocol. Platforms like Wanchain and Anyswap don’t just focus on interoperability but instant liquidity, which is much needed for the DeFi ecosystem to grow. Anyswap has certain limitations around the signature algorithms that it supports. Still, technology is evolving rapidly, and we might see it getting past the barriers soon.
Polkadot is a network that connects different blockchains through its unified platform. On a higher level, Polkadot follows the architecture of Cosmos, with the main chain called “The Relay Chain’’, connecting to different blockchains through “The Bridge Chain’’.
Let’s explain each one of the components of the Polkadot network that will provide a better understanding of how the platform works:
The Relay Chain — The relay chain is the main Polkadot chain, like “Hubs’’ in the cosmos network. This is where all the independent blockchain connects.
The Parachain — Parachain means “parallelized chains’’, which are built on the Polkadot layer, and they run in parallel, just like ‘’zones’’ in the cosmos network.
The Bridge Chain — These solo chains connect external blockchain networks, like Ethereum, to the main relay chain. All the cross-chain communication between the external and relay chains goes through these bridge chains.
Validators — These nodes validate everything on the Polkadot network and add blocks to the main relay chain.
Collators — These are the nodes responsible for collecting all the transactions happening on the Parachains and sending them to validators to add these transactions to the blocks, which are later added to the main relay chain.
The overall architecture is neat and simple. Although Polkadot resembles Cosmos in many ways, it has a different governance mechanism and provides more interoperability and cross-chain communication by introducing a separate Bridge Chain.
The transaction accumulation and validation process are also done separately, which means more speed and efficiency. The Polkadot network is powered by its DOT token, which is used for governance and paying fees.
Wanchain possesses an entirely different architecture altogether and is more focused on digital asset exchange services across many different blockchain networks through its unified infrastructure. It’s a “currency-agnostic platform’’ providing interoperability between multiple blockchains.
One of the best things about Wanchain that differentiates it from the rest of the competitors is its “Cross-chain assets transfer’’ functionality, which enables it to connect to all the major blockchain platforms (like Bitcoin, Ethereum, EOS, etc.) and provide asset conversion without the need to change any of the original properties or by a bridging chain.
All the consortium blockchains, including the enterprise, public and private blockchains, can connect directly to the Wanchain protocol and transfer their assets to the Wanchain platform. This operation can also be reversed where the assets are transferred back to the original blockchain networks.
The Wanchain protocol has unbeatable security and privacy functions built-in, so the assets are all secure during the transfer. It utilizes multiparty computation, threshold key sharing, ring signatures, and disposable addresses.
Wanchain provides an interoperable infrastructure that is more focused on digital asset transfer, trading, investing, lending, and exchange. It doesn’t focus much on data sharing, so if your DApp uses IPFS or any other decentralized cloud storage solution, it won’t be able to read or modify that data. It only deals with the space of “digital assets’’.
In the DeFi space, we need platforms like Wanchain because these bring more liquidity to the market. DeFi is all about digital finance in the decentralized ecosystem, and platforms like Wanchain facilitates all kinds of DeFi services like lending, investing asset transfer, and a full-fledged exchange for trading.
Ren is another impressive project trying to achieve “universal interoperability’’, which means anyone can send any asset to any application on any chain in any quantity. Sounds like magic? Let’s dive deeper into understanding how Ren achieves this.
Ren achieves their universal interoperability through various technologies — specifically the RenVM — a decentralized, permissionless, and trust-less custodian that uses a “tokenized representation model’’.
In the tokenized representation model, there is a custodian where the user locks an asset. The custodian is then responsible for minting a 1:1 ratio-backed token on another chain. The problem with existing solutions working on the tokenized representation model is that, in most cases, the custodian is either fully or partly centralized. RenVM, on the other hand, does this in a completely decentralized and trustless manner.
RenVM uses the RZL MPC algorithm to generate and manage ECDSA private keys without compromising or leaving footprints. It also uses bonding and algorithmically adjusted fees to make sure that attacks are not profitable. RenVM solves many of the technical and economic problems that the existing interoperable solutions have in their design.
RenVM supports three kinds of cross-chain transactions:
Lock and Mint — These transactions are initiated by a user as a first step and involve the origin chain and the host chain, e.g., Sending BTC from Bitcoin to Ethereum. The transaction goes through RenVM, where the assets are “locked’’, and verified, and then the 1:1 token representation is “Minted’’ which is pegged to the locked asset.
Burn and Release — These transactions are opposite Lock and Mint transactions, where the user can send assets from the host chain back to the origin chain. The pegged asset from the host chain is “Burned,’’ and the underlying asset is “Released’’ back to the origin chain.
Burn and Mint — These are very interesting transactions where users can move an asset from one host chain to another. The same mechanism can be achieved by combining “Burn and Release’’ and “Lock and Mint’’ transactions, but that will require the transactions to do multiple rounds on the RenVM, making the overall transaction cost more expensive because of the underlying blockchain fees. To solve this problem, RenVM supports Burn and Mint transactions where the users can “burn” pegged assets from one host chain and “mint” the equivalent amount of pegged assets on another host chain. e.g., BTC from Ethereum to Polkadot.
The DeFi space is evolving rapidly, and the need for cross-chain interoperability platforms was one of its biggest hurdles in growth. Many attempts were made in the past, but they all came with many limitations. However, they provided the foundation and the necessary knowledge base for the platforms of the future.
Among all the platforms mentioned, Fusion most aligns with true decentralization tenets. With its DCRM protocol, true decentralization is achieved, keeping the custodians out of the equation by embracing TSS and secure MPC with sharded keys. Fusion’s DCRM protocol is used by platforms like Anyswap to provide instant liquidity into the digital assets space. The Fusion Foundation envisages a host of other platforms and decentralized applications onboarding to harness lower fees and seamless integration.
The cross-chain interoperability problem won’t be solved by just one platform; we will see many platforms in the future that will work together to solve these challenges.