Understanding Cross-Chain Technology and Blockchain Interoperability

What we know about blockchain technology on the surface is that it is a decentralized ecosystem based on distributed ledger technology. However, as time passes and individuals continue to delve deeper into the blockchain realm, they have recognized that it is not a cumulative ecosystem and that they want to conduct more transactions that are not tied to a single chain.

Because developers are thinking outside the box as they try to optimize the technology's possibilities, the number of blockchain initiatives has exploded in recent years, particularly during the pandemic. The rising numbers demonstrate that issues in the field continue to exist, providing an opportunity for blockchain projects to demonstrate their utility.

However, because blockchains are mostly isolated, they are unable to communicate with one another. It simply means that one chain's strength cannot be shared with another to compensate for its flaws.

These divisions cast doubt on Blockchain's potential and value, affecting user experience and the industry's growth. The future of Blockchain, however, is bright, thanks to the rise of newer protocols with increased capabilities. Cross-chain technology is one such breakthrough that can handle the industry's ever-growing problems and provide the necessary solutions.

What is cross-chain technology?

When it comes to improving interoperability between blockchains, cross-chain technology is one of the most effective ways to do it. It is a new technology that allows value and data to be transferred across two or more blockchain networks. The rapid adoption of some of the most popular networks, like Bitcoin, Ethereum, and Solana, has resulted in the rise of several major concerns. While these networks allow users to trade their tokens on the Blockchain, there are significant economic and technical limits that must be overcome in order to scale them. Because these chains run independently, users are frequently unable to reap the full benefits of technology as a result of these limits.

Cross-chain technology, on the other hand, eliminates these issues by promoting blockchain interoperability and allowing users to communicate and share data. The cross-chain protocol permits data sharing between many blockchain networks and simplifies interoperability between them. Users can communicate without the use of middlemen using the cross-chain protocol. As a result, blockchains with similar networks can exchange currency and data with one another.

How does it work?

Different networks may employ various methods for blockchain interoperability to enable transactions across several chains without the necessity of third parties or centralized solutions.

The following are some cross-chain approaches −

  • Swaps at the Atomic Level − Atomic swaps are not a true kind of cross-chain communication because two chains do not interact. The technology, on the other hand, allows users to coordinate transactions across chains, facilitating direct peer-to-peer bitcoin trading.

  • Stateless SPVs − It enables a sophisticated smart contract to authenticate a section of Proof of Work history. Because stateless SPVs are often inexpensive, they can be tailored to a wide range of applications.

  • Relays − A smart contract on one chain can validate events on other chains via relays. Relay can inspect a chain's entire history and specific headers on demand. The relay strategy balances the security of the relay with its operational costs. Relays, on the other hand, can be quite expensive to run.

  • Merged Consensus − The usage of a relay chain allows for two-way interoperability between chains. The chain must be built from the ground up to ensure merging consensus. Joined consensus is used in projects like ETH 2.0 and Cosmos.

  • Federations − Federations are used by a small group of trustworthy people to authenticate the actions of one chain on another. Federations are powerful, but they require the trust of a third party. That is its primary issue, as it jeopardizes Blockchain's decentralization.

What is the significance of interoperability?

Both participants must be able to transact across blockchains for transactions to be really seamless. Consider the following scenario: User A wants to send cryptocurrency to User B. If the funds are to be transferred, User B has no alternative except to use the same Blockchain as User A. Thanks to cross-chain technologies, this problem will soon be a thing of the past.

The potential applications do not have to be restricted to financial transactions. If new ideas are conceived, they can be developed further through the use of highly secure blockchain technology. When communication between two parties is not regulated by central oversight or middlemen, it becomes more secure.

Experts believe that interoperability across blockchains will lead to the development of new capabilities between blockchains. A totally decentralized and secure system like this might be the backbone of a fully digital economy.

Multi-token wallets are also being developed, implying that once 100 percent interoperability is achieved, operations such as the exchange of several tokens would be possible. The main benefit will be that users will be able to make all transactions using a single wallet.

Advantages of using a cross-chain system?

While cross-chain protocols play an important role in delivering blockchain interoperability, they also have a number of other advantages. The following are some of the major advantages of cross-chain technology −

  • Two separate blockchain networks are now linked − One of the most appealing features of cross-chain technology is that it allows for efficient communication and a solid link between two different blockchain networks. There is no risk of blockchain incompatibility because it is commonly utilized to initiate asset transfers and token swaps. It also enables the user to send information such as assets, transaction receipts, and virtual contracts.

  • Improved scalability − Due to their restricted compatibility, cross-chain technology allows for more scalability than current blockchain technologies. Because this technology allows users to communicate with numerous blockchain networks, it is now able to take advantage of the speed of several blockchains, which improves scalability.

  • Data flow and token transmission have been improved − In today's Blockchain, the normal approach is for a user to transfer instructions from the source chain. The relayers send these instructions to the destination chain after the validator gets them. With cross-chain technology, however, the transaction is confirmed immediately after it is done, and the transaction arrives at the destination change only when the verification is completed. This simplifies the entire procedure and allows for seamless data exchange and transmission.

  • Large-scale monopolization is discouraged − Cross-chain technology also helps to keep markets stable by decreasing monopolization by large corporations. The most popular cryptocurrencies, for example, are Bitcoin and Ethereum, which account for more than 70% of the global market share. As a result of this hegemony, there is little room in the market for new businesses to test their strategies and get a footing in the current market.

    Cross-chain technology can help in these situations because it creates an ecosystem in which transaction operations are evenly distributed across all networks. The focus will not be limited to a few big blockchain networks but will also include additional networks.