Blockchains need to work towards standards for interoperable asset transfers

An emerging economy, including native blockchain tokens, digital tokens, stablecoins, and CBDCs, requires interoperable blockchain standards.

Consider experts

Cross-chain asset transfers have been in place for several years. The concept was developed almost immediately after many blockchains were developed and introduced. In the first application, the transfer focused on exchanges between the native assets and the chain’s tokens, which then resulted in several decentralized exchanges. While asset exchange has its advantages, just as it is becoming increasingly important to allow pure transfer and movement of assets and other data across blockchains without changing their identity.

There are currently 400,000 Bitcoins (BTC) in existence and growing, used for transactions outside of the Bitcoin blockchain. A large amount of Ether (ETH) was also moved to other networks. Some of these are called packaged tokens to distinguish them from the same assets that existed on their native network. The transfer of native assets from more established older blockchains to newer blockchains takes place via a so-called bridge.

However, the processes are developed heterogeneously, tend to concentrate mainly on unidirectional transmissions in newer networks, can lead to considerable slippages or loss of value and are often not easy to navigate for end users.

Current efforts in the pure transfer of value between blockchains

Aside from the bridges that newer blockchains have created to facilitate the transfer of native assets from older chains, there are several other activities going in this direction. This includes several blockchains that have defined inter-blockchain protocols but are more geared towards alternative versions of the same blockchain that have been created by users.

While these may be valuable, they are unlikely to become universal solutions, and most companies are less likely to break their own chains than companies that create banks. Solutions in which a blockchain acts as a custodian to transfer values ​​between all other blockchains are also unlikely to catch on.

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The role of standards in the development of blockchain technology

The establishment of standards and protocols among the implementers of any technology often leads to the advancement of the whole field, easier use and better applications, and benefits for users and end users by providing consistent functionality across different providers. The standards are known for blockchain.

The whole characteristic of a decentralized blockchain network is the adoption of its own standard: an agreement by a group of independent nodes in a decentralized way to execute the exact same code or standard so that they can achieve their goals in the ledger. Other standards in the blockchain have led to significant developments in several use cases. Two such examples are the ERC-20 and ERC-721 standards. These two standards have accelerated the development of the technology in the ways described below.

ERC-20 standard. This standard was developed on the Ethereum network to identify tokens and contains methods by which such tokens must be disclosed in order to comply with the standard. This standard was adopted by the Ethereum block chain. The effectiveness of this standard is realized in many obvious and some less obvious ways.

More obvious is the ease with which tokens can be provided with less technical skill than without a standard. This led to an initial growth in the coin supply, which peaked in 2017 but is still used today to create tokens, some of which are more useful than others. . Less explicitly, the standard shows the advantage that it makes it easier for exchanges to list tokens that conform to the standard, and also for users to move these tokens to multi-blockchain wallet applications.

ERC-721 standard. This standard was developed to identify inedible tokens (NFTs) or simply digital goods. Similar to ERC-20, compliance with this standard enables a uniform interpretation of unique asset tokens across devices and applications, regardless of which blockchain they are based on.

The standard has led to growth in NFTs since then in 2021. This use case is a growing segment of the gaming industry and appears to be bringing new players into the industry from different countries.

The above two examples show the impact of the standards generally accepted by the blockchain industry on growth and user adoption. Standards for the transfer of value between blockchains will provide end users with similar benefits.

For example, consider the current state of the payment system implemented on the blockchain. Making a payment with native blockchain tokens to another party in another network means that this party sets an address in the payer’s block chain and accepts the token, or the payer converts the token token from an exchange to the native one Recipient’s token. The process is not very user friendly in many cases and is afraid of losing money and many users use initial test payments. Users also sometimes need to cache the transaction amount to ensure that in the event of slippage, volatility, or fees, the recipient gets the expected value.

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Another option is to mark your transactions with fiat stablecoins, as stablecoins have already been created on many large blockchains. However, using stablecoins on blockchains faces some of the same hurdles and would similarly benefit from a uniform standard. Interoperable asset transfers between chains also enable the establishment of payment aggregators, which provide simplified options for end users when it comes to moving assets and payments between chains.

Potential elements of standards for cross-chain asset transfers

A look at some of the existing bridge implementations can help understand what the standard for cross-chain asset transfers might include. These bridges primarily take advantage of the collision-free properties of private public key hashing methods to allow blockchain assets to jump across chains using similar address generation algorithms. This simply means that if a user with the private key can access an address on one blockchain, the same user with the same key and address can only unlock and access it on another using the same public address hashing method. This technique was used to create a bridge to transfer ethers to other networks with an addressing system similar to that of Binance Sensible Chain, Avalanche C-Chain, or Toronet Chain. A decentralized Oracle system that monitors blockchains, and when the value is transferred from one address to a specific egress address or gateway (or smart contract), Oracle moves the asset to the same address on the other chain, the owner of the first chain also has the keys to access the same address and thus the contents of the other thread. This is illustrated below.

This background process can be extended to define a universal token transfer standard, even if block chains do not use the same public-private key algorithm. Essentially, the transactional parts of a blockchain consist of message-encrypted elements and the input and output specifications of the transaction. This message can be formatted into a log containing the destination block chain identifier and destination address. Similar to the portal or contract address scan, the same content is received, decrypted and transmitted using the information on the target chain and the target address with the uniform address bridging procedure.

Another aspect of the standard would take advantage of the uniqueness of blockchain transaction IDs to ensure that all transfers from Oracle are matched and only recorded once in the target chain. Alternatively, the portal address can be implemented without a key, so that only signed and verified transactions can trigger incoming and outgoing transfers. This ensures that the system is adjusted automatically and does not contain any manual processes that could compromise the integrity of the portal address or the preservation of the implicit value of the process. The above describes a framework to emphasize the fact that the functions for setting a standard are already in place in most chains and an agreed protocol can simply be the next step in defining such a standard.

An emerging economy

Blockchains and the assets created on them continue to grow and are likely to remain in the long run, albeit with many innovations and technological developments still ahead of us. The asset and payments ecosystem is …