What Is Cross-Chain? Open New Horizons For Defi

June 25, 2022 - Around 4 mins mins to read

What is cross-chain?

Cross-chain (or cross-chain) is a solution that helps transfer crypto assets, tokens, or data from one blockchain to another to optimize the combination of blockchains.

Cross-chain ownership is born because each blockchain network has a different structure, so the protocols for moving assets back and forth are minimal. It’s like it’s hard for Americans to use the Japanese yen to pay for expenses in the United States, and it’s also hard for Japanese people to use the USD to pay for expenses in Japan.

Mechanism of action of Cross-chain

To put it simply, the cross-chain mechanism is similar to going to the bank to change USD into Yen and sending it to the Japanese side. For blockchain, we will wrap tokens in this network to become tokens that can be used in the other network.

Example: You want to send BTC to the Ethereum network, and you need to wrap BTC into wBTC (wrapped BTC). Since then, you can use the wBTC on the ETH network.

With the Cross-chain mechanism, DeFi has now added a new app that is seen as an inevitable trend and has attracted many users, the Cross-chain Bridge.

The problem of the current cross-chain

The concept is relatively simple, but, to have wBTC, you must deposit that BTC to a third party. When the third party receives the assets and validates the transaction, they will dig out the wBTC and send them to the brothers.

So we need to be concerned about: “What if a third party is attacked?”

Now they can mine an infinite amount of wBTC on Ethereum, or they can steal all the deposited BTC.

The next step to solve this problem is a Multisig Wallet. Instead of relying on the only one-third party as before, there will be more parties confirming the transaction. Assuming five parties involved, 3/5 valid transaction confirmations will be required for adoption.

However, the above design only solves the problem of transaction confirmation, but the wallet contains a lot of BTC, which is still a fat bait for attackers.

The new Cross-chain solution

To find a better solution, Andre used SushiSwap’s AMM. You must be familiar with swapping assets on AMMs such as UniSwap and Sushi. We exchange the asset A you own for asset B in the pool. That is why AMM is more suitable than the third party above because no one has control over the property in the collection.

The next thing to do is to make AMM usable for Cross-chain. The current pair of transactions on AMM consists of three parts: token A, token B, and price (which varies based on the number of tokens A and B in the pool). That means that, in essence, we only need to know the number of A tokens and B tokens, not require them to be in the same chain.

Example: The liquidity provider (LP) offers ETH liquidity on Ethereum and FTM on Fantom.

The Ethereum trading pair has ETH and no FTM but knows the number of FTMs available on Fantom.
In contrast, the pair on Fantom has FTM and no ETH but knows the number of ETH available on Ethereum.

So how does Fantom know the number of ETH on Ethereum?

In short, this is an Oracle problem that can be solved entirely. The simple solution is to find the parties involved (nodes/servers) to confirm when an event occurs on the contract of Ethereum/Fantom/BSC/… When the majority reaches a consensus, it will be adopted.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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What Is Cross-Chain? Open New Horizons For Defi