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Decentralized finance (Defi) is the current rave in crypto circles. It is easy to understand the excitement so generated. After all, Defi promises to disrupt the financial landscape, giving individuals significant say over their financial affairs. Obscured in the enthusiasm is the single most important factor upon which Defis success hinges; cross-chain composability-the technology propelling it.
The question is, what is cross-chain composability? Further, how does it impact Defi? Join me as I unpack this technology powering the revolution in the financial world. First, though, an overview of the term will suffice.
What is Cross-chain Composability?
Cross-chain Composability, also referred to as cross-chain interoperability, is the ability of two or more blockchains to communicate with each other. Every blockchain operates under a specific protocol making it difficult to move assets between networks seamlessly. Cross-chain composability seeks to make all blockchains compatible hence easing the movement of assets across networks.
Attaining Cross Network Transactions
We may look at the push towards easing cross-chain transactions from two angles. On the one hand, we may refer to pioneering thoughts, and on the other hand, are progressive thoughts on the matter. Here now is a brief look at both.
These are the forerunners to the current thinking on cross-platform transactions. They include
Cross-Chain Atomic Swaps
Atomic swaps are instruments that allow for cross-chain P2P value exchanges. Key to the function Atomic swaps is contracts called Hashed Time Lock Contracts (HTLCs). These HTLCs ensure that the parties keep to their ends of the bargain within a given timeframe. This way, they help move value across different networks without actual communication occurring between the systems involved. Though effective, they are limited by the requirement that both blockchains have the same hashing algorithm. Additionally, they should support HTLCs.
Wrapped Bitcoin (WBTC) is a smart contract that facilitates cross-chain interoperability between Bitcoin and the Ethereum network. WBTC is an ERC-20 token pegged to BTC at a 1:1 ratio. For transactions to proceed, one sends a specific amount of coin to a third-party custodian. The custodian then releases an equal value of WBTC(ER-20) tokens to them. To redeem BTC, the user ten executes a burn contract that sends the tokens back to the custodian while releasing BTC to the user.
The downsides of WBTC are that transactions are limited to Bitcoin and Ethereum, and it is centralized.
These are the current approaches to cross-chain composability
Off the Provable Things stable, pTokens seeks to standardize hence make all blockchains compatible. It utilizes a Trusted Execution Environment (TEE). TEEs are servers that interact with the blockchains between which transfers occur. The TEE is akin to the custodian under the WBTC model.
The pTokens have the backing of an underlying asset. Using the pTokens smart contract, anyone can deposit a certain amount of assets (such as EOS or BTC) and request an equal value pTokens representation (pEOS or pBTC).
Cosmos intends to provide reliable interoperability between the blockchains it hosts. The Tendermint Core underpins its function. This Tendermint Core supports the Byzantine Fault Tolerance (BFT) based POS consensus algorithm and P2P gossiping.
For interoperability, Cosmos employs its Inter Blockchain Communication (IBC) protocol. The Cosmos blockchain comprises its Hub and zones. The Hub is the central blockchain, while the Zones are autonomous and independent blockchains connecting to the Hub. The zones can launch and connect to any external network.
The reason behind having the zones in addition to the hubs is because every blockchain communicates differently. Accordingly, blockchain requires a distinct zone to connect with the Hub. As such, the zones are bridges and gateways facilitating exchanges blockchains.
Fusion is a cross-chain interoperability platform tailored for global Defi services for the masses. To this end, it uses its Distributed Control Rights Management (DCRM) technology. Moreover, Fusion deploys finance-related APIs, allowing developers to build DApps that cross-communicate with any supported blockchain protocols.
Anyswap runs on Fusion’s DCRM protocol. It is an Automated Market Maker (AMM). Users may deposit digital assets and exchange them for others in a decentralized environment. It supports Fusion (FSN), Tether (USDT), and Ethereum (ETH). Plans to include Bitcoin, Ripple, and Litecoin as swap pairs are afoot.
There are three main constituents in the Anyswap structure:
- Decentralized Cross-Chain Bridge
- Cross-Chain Swaps
- Programmed Pricing and Liquidity
Polkadot is a network bridging blockchain through its unified platform. It models the Cosmos structure and comprises the following components.
- The Relay Chain — is the main Polkadot chain. It is where all the independent blockchains converge.
- The Parachain — Is a blockchain running parallel to the relay chain.
- The Bridge Chain — These connect external blockchain networks to the main relay chain.
- Validators — These are the nodes that validate transactions on the network and add blocks to the relay chain
- Collators — are nodes that capture the transactions occurring on the Parachains and send them to validators.
Wanchain’s focus is digital asset exchange services across networks through its unified infrastructure. Its Cross-chain assets transfer functionality enables it to connect with the powerful blockchain platforms and ensure asset conversion while negating the need to change a chain’s original properties or bridging it.
All blockchains can connect to the Wanchain protocol and transfer assets to its platform. The reverse is possible too.
Ren seeks to achieve universal interoperability. Through it, anyone can send any asset to any DApp on any chain and in any quantity. It achieves this by utilizing the RenVM technology, a decentralized, permissionless, and trustless custodian using the “tokenized representation model.”
RenVM supports these cross-chain exchanges:
- Lock and Mint
- Burn and Release
- Burn and Mint
As society continues to demand more of the financial sector, so does it continue evolving. In the minute, Defi is all the buzz among crypto enthusiasts. More than decentralizing transactions, it promises to radically transform financial transactions affording individuals greater autonomy over their monetary affairs.
Crucial in its success is cross-chain composability, the technology that makes cross-network transactions a reality. From the initial thoughts about blockchain interoperability to the progressive ones carrying favor now, the dream of attaining seamless cross-platform exchanges grows rosier by the day. That said, there exists wider latitude for enhancement of the available solutions.