· Introduction
· What is Cross-chain Technology in Blockchain?
· The Importance of Cross-chain Technology
· 1. Asset Integration
· 2. Improve Liquidity
· 3. Promote Innovation
· 4. Improve Efficiency
· How Cross-chain Technology Works
· Real World Examples of Cross-chain Technology
· Applications of Cross-chain Technology
· Challenges and Limitations of the Cross-chain Technology
· The Future of Cross-chain Technology
· Conclusion
Introduction
You may have heard the term “cross-chain” before and wondered what it is or its function within the world of cryptocurrencies and blockchain. Without cross-chains, many blockchain networks would not be able to communicate with each other.
This article will explore the intricacies of cross-chain technology, its importance, how it works, real-world applications in the cryptocurrency industry, and more. Let’s get to it.
What is Cross-chain Technology in Blockchain?
Cross-chain technology refers to the capability of cryptocurrency assets to be moved and used between multiple blockchains. In the present world of cryptocurrency, there are numerous blockchains, such as Bitcoin, Ethereum, Solana, Avalanche, Terra, Binance Smart Chain, and more.
Conventional blockchain networks operate in isolation and are unable to communicate or interact outside of their hosted blockchain network. Cross-chain technology sets out to fill that gap by allowing sharing and interoperability between independent blockchains.
Cross-chain interoperability is something that is needed for the cryptocurrency and DeFi sectors in order to achieve scalability. This is because blockchains on an individual basis cannot cope with high decentralization and security, therefore facing scalability problems.
As such, cryptocurrency experts proposed that the future of cryptocurrencies should not be limited by a single blockchain network but rather a co-existence and scaling of many cryptocurrency blockchains under one roof, called the multi-chain ecosystem.
The Importance of Cross-chain Technology
Cross-chain technology is very important for the blockchain ecosystem because it solves some of the key problems within the space. The following are some areas in which cross-chain technology helps the cryptocurrency sector:
1. Asset Integration
As the cryptocurrency market has gradually developed, you can hold several crypto assets on different blockchains. The cross-chain technology will help integrate those assets for better management and use.
2. Improve Liquidity
Cross-chain can connect resources and liquidity of different chains, offering you more options in trading and investment, thus enhancing the whole ecosystem’s liquidity of cryptocurrency.
3. Promote Innovation
Cross-chain technology allows different blockchains to interact and collaborate, which inspires new application developments and business models, promoting innovative development in the whole industry.
4. Improve Efficiency
Cross-chain technology can reduce duplication of building protocols and waste of resources so that the blockchain ecosystem becomes more effective and coordinated.
How Cross-chain Technology Works
The principle of cross-chain technology relies on the feature of being able to move assets and information from one blockchain network to another. Interoperability protocols are developed for this purpose, which stipulate the manner in which communications and data exchange between different blockchains are to be carried out.
A very common way through which cross-chain interoperability is practiced today is through intermediary protocols, better known as cross-chain bridges, which enable the facilitation of asset transfers across blockchains.
Cross-chain bridge is a key tool to realize cross-chain interoperability of blockchain. They are special protocols or technologies that enable assets and data originally on one blockchain to be securely transferred to another.
These bridges play the role of connectors, whereby one blockchain locks up tokens and the other mints them, hence creating a perfect bridge between two isolated networks.
This type of technology allows the transfer of assets between different blockchains, such as transferring ETH on Ethereum to Avalanche to become wETH, thus enabling cross-chain use of assets.
Real World examples of Cross-chain Technology
Several projects are pioneers for interoperability between blockchain networks. One such project is Polkadot, which is a decentralized platform that enables multiple blockchain interoperability through its architecture called the Relay Chain.
Polkadot permits many independent blockchains, better known as parachains, to connect to its Relay Chain and share data and assets with other parachains within the Polkadot ecosystem.
Another example is Cosmos, which, in turn, provides the possibility for various sovereign blockchains to interoperate and allow in-channel communication through its Inter-Blockchain Communication (IBC) protocol.
Cosmos is working on the concept of building an “Internet of Blockchains” a chain of several blockchains performing coordinated moves in interacting and transacting with one another.
Applications of Cross-chain Technology
Cross-chain technology opens a wide range of applications and use cases within the crypto space. One of the more notable ones is DeFi, where interoperability between the different blockchain networks has to be enabled for cross-chain asset transfers and the provision of liquidity.
Thorchain and Ren use this same cross-chain technology in an effort to perform a seamless exchange of assets across multiple blockchain networks, which creates further possibilities for liquidity providers and traders.
Also, cross-chain technology has its effects on interoperability regarding the tokens, which has facilitated the transfer of assets between blockchain ecosystems.
Challenges and Limitations of the Cross-chain Technology
Cross-chain technology has to overcome a lot of limitations and challenges. Key among them is ensuring secure interoperability in a trustless manner between multiple blockchain networks.
The security integrity of cross-chain transactions and prevention of possible exploits or attacks require a robust security measure with consensus mechanisms.
Furthermore, achieving widespread adoption of cross-chain standards and protocols across the industry poses a significant coordination challenge, as different blockchain projects may have conflicting interests and priorities.
The Future of Cross-chain Technology
Irrespective of the challenges facing cross-chain technology, the future of the technology looks bright and will continue to see more research and development in overcoming important technical and regulatory challenges.
In the longer term, interoperability will increasingly become fundamental in unlocking new use cases, bringing complete seamlessness into the interactions between blockchain networks.
Cross-chain technology will, therefore, play a significant role in how the future of blockchain technology is and will be shaped, considering innovative projects at the forefront and increasing interest from industry stakeholders.
Conclusion
Cross-chain technology is an important invention in the blockchain field, as it solves not only the incompatibility issue among different blockchains but also brings advantages in liquidity, integration, promotion of innovation, and efficiency improvement.
Cross-chain technology will become an important force to promote the development of the whole cryptocurrency and blockchain industry with continuous technological advancement and application development.
Bridging Blockchains: How Cross-Chain Technology is Transforming Crypto was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.