Two different approaches to reaching blockchain Interoperability
Decentralized finances (DeFi) have brought a decentralized alternative to traditional financial services. DeFi protocols have allowed people to use known financial instruments such as borrowing, lending, trading, and asset management without the need for intermediaries. But the majority of DeFi protocols have been confined to a single blockchain, limiting liquidity, increasing transaction fees, and narrowing the user experience. We need connections and interoperability to overcome these limitations and unlock the full potential of DeFi. Let’s explore some concepts; it will help us navigate the landscape later on.
Cross-chain
Cross-chain refers to the ability of different blockchains to interact with each other with the help of a cross-chain bridge. To do so, it creates a specific pool that securely holds assets from the original chain and provides you with a wrapped version of the tokens that are compatible with the other chain. Let’s take a closer look at how it works.
Example:
- Sam puts 10 ETH to the Bridge smart contract on Ethereum;
- The smart contract on Ethereum locks the assets and informs another smart contract on Solana;
- The smart contract in Solana mints (creates) 10 tokens representing blocked ETH (i.e. wrapped ETH);
- The smart contract transfers the newly minted wrapped ETH to Sam’s address in Solana.
So, in a cross-chain exchange, the bridge doesn’t just move an asset between networks, it links an asset in one network to its wrapped version in another network. The problem here is that when you create a pool of assets, it can become a vulnerable target for hackers due to a lack of security. There is a risk that assets could get stuck in the deposit and withdrawal processes, or users could become victims of cyberattacks. For example, there are three biggest attacks in 2022: Ronin Network — $600 million hack, Wormhole — $300 million hack, Nomad — $190 million exploit.
Nevertheless, even after a bunch of attacks on cross-chain DEXs, they remain quite popular. The most popular for now are: Hop, Across, and Synapse.
Multichain
Multichain requires a project to exist across multiple chains. In this case, blockchain is divided into different layers: the consensus layer, which keeps the system secure; and the application layer, which enables different blockchains to interoperate. This kind of projects not only runs on two or more blockchains simultaneously and supports the development of these chains, but also serves as a scaling layer.
The multichain concept was first introduced by the developers of the Cosmos chain, which is a Layer 0 blockchain that provides interoperability between chains. Nowadays, more and more projects are going multichain. In December 2021, Cosmos released its EVM-compatible Evmos blockchain, then the first set of Polkadot parachains was launched in January. At the same time, in January 2022, Vitalik Buterin said that the future of blockchain will move toward multichain rather than cross-chain because of security concerns. Among one of the most fundamental new multichain projects, we can highlight Layer Zero. Layer Zero is an omni-channel communication protocol capable of sending messages to any contract in any chain between two endpoints: the oracle and the relayer.
The multichain approach is a safer and more technological solution, which requires creation of a diverse multichain network. The main sticking points here are related to different architecture of existing chains, such as different programming languages, data structures, consensus mechanisms and scaling solutions.
The difference between Multichain and Cross-Chain and how they can synergize
The multichain creates an additional layer between chains to interoperate and remain secure through a basic level. While the cross-chain uses smart contracts to create synthetic (wrapped) versions of your coins that can interact directly with other blockchains. The second way is easier and faster, but the first one is more solid and secure. Still, it is important to understand that both approaches aren’t mutually exclusive and can be combined in one way or another.
Eventually, true blockchain interoperability will most likely be achieved by combining these approaches. The choice between cross-chain and multichain protocols will depend on the specific needs and preferences of the user. For users who just want to quickly transfer assets between blockchains, a cross-chain bridge will be enough. But for regular use of multiple chain, however, a multichain protocol is better to find or create if it still doesn’t exist. Although, it may be impractical and near to impossible to create a multichain protocol for blockchains with significant differences in architecture.
To sum up:
- The goal of both cross-chain and multichain technology is to enable the transition of data between different blockchains and achieve interoperability.
- Cross-chain uses smart contracts to create synthetic (wrapped) versions of your coins that can interact directly with other blockchains via liquidity pool. This is fast and easy to deploy, but it is vulnerable to hacker attacks.
- Multichain requires a project to exist across multiple chains. It is more safe and technological advanced approach, which is why there are a lot of challenges to achieve it. They are all related to different architecture of existing chains: different programming languages, data structures, consensus mechanisms or scaling solutions.
- Both approaches aren’t mutually exclusive and can be combined in one way or another.
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