Three Types of Cross-Chain Infrastructures That Are Genuinely Solving the Interoperability Dilemma
Although a relatively new addition to the crypto ecosystem, Decentralized Finance (DeFi) has grown significantly since the yield farming craze in 2020. But is this nascent ecosystem of age to accommodate mainstream adoption?
Currently, there are several smart contract blockchain networks, most of which have been operating in silos. DeFi natives could hardly move assets across different chains until recently; however, the debut of cross-chain solutions/bridges is gradually changing the landscape. By nature, cross-chain bridges are designed to connect independent blockchain ecosystems, allowing a seamless flow of communication and value transfer.
For example, a DeFi user who holds Bitcoin and wishes to interact with DeFi can move their BTC to the Ethereum blockchain through the WBTC bridge. In doing so, they get exposure to a whole range of decentralized applications (DApps) hosted on Ethereum. More importantly, it is also possible to convert WBTC back to BTC.
While cross-chain solutions like the WBTC bridge have only existed for a short period, it is worth noting that different types of architectures have sprung up. Some of these innovations have a wider focus range (connect more blockchains) than others. The big question, however, is which cross-chain infrastructure models make the most sense.
In the next section of this article, we will highlight three main types of cross-chain solutions that are proving to be a worthy shot in integrating the crypto ecosystem.
Parachains are the unique Layer-1 blockchains that are designed in parallel with the Polkadot and Kusama networks. Unlike most smart contract ecosystems, the Polkadot blockchain is built as a Layer-0 multi-chain network powered by a Relay chain. Ideally, this relay chain provides the fundamental features required to develop a blockchain network; security, interoperability, and scalability.
So, how exactly does the Parachain model enable value transfer? Being a Layer-0 network, Polkadot has made it possible for Layer-1 networks to design parallel chains as long as they can prove that every block validation is consistent with the Relay chain. This does not mean that parallel chains have to follow a similar infrastructure to the Polkadot blockchain; each parachain has the flexibility of design, tokenomics, and governance.
On the downside, Polkadot’s parachain ecosystem is limited to 100 slots, and projects that wish to get a slot have to participate in the parachain slot auctions. Additionally, the slots can only be leased for 3 months or a maximum of two years. So far, some of the notable crypto projects that have won a slot include Moonbeam, Acala, Parallel Finance, and Astar.
Open-Source Smart Contract Registry
Smart contract hosting is another method crypto innovators are now adopting to bridge the interoperability gap. As mentioned in the introduction, DeFi platforms mostly operate in isolation; what if there was one universal repository to host smart contract codes? It would be much easier for developers to integrate their DApps and access other smart contracts without going through the pain of technical nuances.
The t3rn smart contract registry is one of the ecosystems that has adopted an open-source smart contract model at the core. This platform provides an innovative solution to interoperability by featuring a multi-execution environment and in-built fail-safe mechanisms. Above all, t3rn gives developers an option to monetize their codes when deployed by anyone else within the ecosystem.
Based on the composable nature of this smart contract hosting platform, DeFi innovators can leverage the t3rn plugin gateways and circuits to integrate with multiple blockchain networks, including Ethereum, Polkadot, and Kusama. That said, the open-source smart contract registry approach is yet to gain similar attention to the parachain model.
Inter-Blockchain Communication (IBC) Protocol
Also dubbed the TCP/IP for blockchains, IBC is an open-source protocol that is being used by the Cosmos ecosystem to allow blockchain interoperability. Most of the existing cross-chain solutions often require a significant level of standardization on the base layer to allow value transfer. Well, that is not the case with IBC; this protocol separates the ‘transport and network layer from the application layer.
Practically, blockchain networks that are connected to the IBC do not require a direct communication channel; instead, the data (assets) are transferred via dedicated packets of information built on smart contract technology. Besides IBC, the Cosmos ecosystem features other tools, such as the software development kit (SDK) and tendermint, to provide a distributed state of finality on its base layer.
Given the potential of the DeFi ecosystem, it is only prudent that stakeholders strive to introduce an interoperable market. After all, it is the norm in traditional finance; players can easily access several markets, including bonds, stocks, and high-risk investments such as private equity. Similarly, the opportunities in DeFi ought to be under one umbrella; blockchain networks are not silos but tomorrow’s pillar of financial ecosystems. While it is evident that there exists a number of cross-chain solutions, the idea is not a competition but collaboration.