Fostering Blockchain and Cryptocurrency Adoption with Cross-Chain TechnologyBy Jun 27, 2019 6 Min Read
Distributed ledger technology like blockchain is considered disruptive partly because of its potential to foster accountability and transparency across a variety of sectors. This helps to rescue the billions of dollars lost each year to corruption and fraud. But before blockchain technology gets fully adopted, there’s plenty of hurdles it has to overcome.
One of such hurdles that popular blockchains (bitcoin and ethereum) face today is scalability. In fact, many people opine that if blockchain scalability is solved, then crypto would completely go mainstream. This line of thinking though is misleading as scalability isn’t the only problem that needs to be addressed before blockchain and crypto get fully adopted.
Right now, the interfaces of many cryptocurrency wallets and exchanges aren’t very appealing to newcomers. And while there’s some improvement to this end, decentralized exchanges in particular still need a lot of technical improvement. Then there is the issue of regulatory compliance, with some jurisdictions banning all crypto related activities while others are just sitting on the fence. Plus, crypto volatility which is a serious barrier that prevents the use of cryptocurrencies for everyday purchases.
From every indication, there’s no way cryptocurrency can be fully adopted if any of these problems are ignored.
Another big challenge within the blockchain/cryptocurrency ecosystem is the inability of blockchains to interoperate. No matter how many transactions per second a particular blockchain can process, it can only handle the issues for which it was designed. For instance, the main purpose of bitcoin is to serve as a peer to peer payment network. Ethereum focuses largely on the building of decentralized applications. For there to be an exchange of value between the bitcoin blockchain and ethereum, an interoperability or cross-chain mechanism must be put in place.
What is blockchain interoperability?
Blockchain interoperability refers to the ability of different blockchains to interact with each other. Such interactions allow for the exchange of tokens and other blockchain specific features like smart contracts, privacy, gaming, etc without the need for an intermediary. Each interoperability platform is designed to handle a specific set of issues, even though the ability to swap tokens is almost always a top priority.
Note: The terms cross-chain technology, inter-blockchain communication, and blockchain interoperability are often used synonymously.
Benefits of blockchain interoperability
1. Atomic swaps.
When most people think about blockchain interoperability, the first thing that comes to mind is atomic swaps, which is the interchange of tokens between two parties via smart contract functionality. The parties involved do not need a middleman and are therefore in full control of their private keys during the swap.
Anatomic swaps can either take place on-chain (blockchain to blockchain) or off-chain (via second layer solutions). The first atomic swap that took place in 2017 between Litecoin and Decred was an on-chain atomic swap. Shortly after that, another atomic swap occurred between Litecoin and Bitcoin, this time around on a sidechain (the lightning network which is a second layer solution).
When interoperability is designed solely for cross-chain atomic swaps, the exchange of tokens does not necessarily require that assets be moved from one blockchain to the other.
For example, Let’s say Bob has Bitcoins while Alice holds Litecoins and they want to do an atomic swap via the atomic wallet. Also, Bob wants to send $10 worth of Bitcoins to Alice so that Alice, in turn, sends him $10 worth of Litecoin. When both parties have fulfilled their requirements for the smart contract of the atomic swap to take place, Bob receives his Litecoins while Alice receives Bitcoins. What has actually happened is the transfer of $10 worth of Bitcoins and Litecoin between the two blockchains. This means Bitcoin still resides on the bitcoin blockchain while Litecoin remains on its own blockchain.
However, with higher level interoperability features like cosmos’ Inter-blockchain Communication (IBM), one could do an “advanced type” of atomic swap where bitcoins actually move from the bitcoin blockchain to the litecoin blockchain. With higher level interoperability comes more sophisticated ways of moving crypto assets.
For instance, let's say Bob owns Ether, Neo, and Nem, but decided to set up his insurance payments only with Ether. In the event that his Ether gets exhausted, higher level interoperability protocols would enable Bob to move either Neo or Nem to the Ethereum blockchain to continue paying for the insurance service.
In essence, different blockchain interoperability platforms allow for different ways of moving cryptocurrencies between blockchains.
2. Other benefits
As earlier mentioned, cross-chain communication also allows for any kind of structured data (smart contracts, privacy or gaming features, etc) to be exchanged between blockchains. For example, let's say Bob has been transacting on the bitcoin blockchain but would want to carry out a transaction that he deems should be private. He would simply move his bitcoins over to a privacy blockchain like Monero to do the transaction and then return to the bitcoin blockchain when privacy is no longer a concern.
Alternatively, Bob could as well want to do a transaction that requires smart contract capabilities. In this case, he would choose a smart contract platform like ethereum and move his bitcoins over to the ethereum blockchain to do the transaction.
Overall, the number of tasks that can be accomplished with cross-chain technology is vast and also depends on what the specific interoperability platform was designed for. Right now, the exchange of crypto assets is considered to be of pressing need in the industry.
How many interoperability platforms?
There are over a dozen technology platforms working to unite the distributed ledger technologies. The purpose of this article though is not to examine all of them, but just to have a quick overview of a few of the interoperability protocols. For now, Cosmos and Polkadot are generally considered to be the biggest names in the industry and share lots of similarities. While Cosmos is already the leading interoperability by market cap, Polkadot is still to be launched later this year.
Cosmos and Polkadot each provide a connective blockchain through which other blockchains can connect namely cosmos hub and Polkadot relay chain. However, the cosmos system is designed in a way that many hubs can exist within the platform. For instance, apart from the cosmos hub, there’s another hub called Iris hub which is designed to cater mainly for enterprise customers.
Another interesting interoperability platform with a unique use-case is Metronome whose tokens are created to avoid dependence on a single blockchain. The metronome token (MET) is designed not just to be able to interoperate with multiple blockchains but also to exist on these multiple chains. This means the death of any of the underlying blockchains on which MET runs poses no threat to the MET token itself.
In conclusion, cross chain technology is going to play a huge role in driving the adoption of blockchain and cryptocurrencies. The ability of blockchains to talk to each other not only allows for the exchange of value but also helps to save time and money that would have otherwise been wasted if each blockchain had to evolve in isolation.