Breaking the Isolation of Blockchain Islands: A Detailed Explanation of How Cross-Chain Technology Shapes an Open, Interconnected Crypto World

As of now, how many public blockchains (L1s & L2s) are there?

It might be hard for anyone to immediately answer this question accurately. According to DefiLlama, there are currently 225 recorded public chains, not to mention numerous emerging and unreleased ones. It’s safe to say that the crypto world is a chaotic universe composed of multiple blockchains. In this multi-chain crypto world, each blockchain has its unique technological characteristics, community support, development tools, and ecosystem. For instance, there are POW public chains led by Bitcoin, EVM-based public chains like Ethereum along with numerous L2s, distinctive high-speed public chains like Solana, and Move-based public chains represented by Aptos and Sui. This diversity indeed offers more possibilities for decentralized applications (DApps) and financial innovation. However, it also brings a series of challenges.

Interoperability, the asset and information exchange between different blockchains, has become an urgent issue to address. In the past, different blockchain systems were isolated from each other, each harboring a wealth of assets and data but unable to interact effectively with other chains. This was a significant obstacle for achieving a truly decentralized crypto world. To address this issue, cross-chain technology emerged, seeking to break down these isolations and enable seamless asset and information exchange between different blockchain systems. For developers and users, cross-chain technology means not only greater liquidity and choices but also a more open and interconnected blockchain world. This article will explore why we need cross-chain technology, its core concepts, categorization, implementation methods, and challenges, as well as how it shapes our future crypto world.

Part 1: The Need for Cross-Chain Technology

Is cross-chain technology truly necessary for achieving a genuinely decentralized, interconnected blockchain future? Many people may have different answers. Influenced by a series of security incidents in the cross-chain field, some have become skeptical, automatically associating cross-chain with “pseudo-propositions” or “traps.” This is both the tragedy of these individuals and the entire industry. However, it’s undeniable that the coexistence of multiple chains is the current market structure, and with the increasing number of public chains and Layer2 (Rollups), as well as their gradually maturing ecosystems, cross-chain technology will inevitably become a fundamental requirement in the current market structure. You might find the answer in the following two aspects:

First, interoperability has become an increasingly apparent pain point. Among the more than 225 public chains, each might have its specific applications, assets, and users. However, if the value created on these chains cannot be transferred to others, their potential will be severely limited. This issue goes beyond asset trading, involving data, logic, and application interoperability.

This is the “island” problem facing the current blockchain world. These islands are rich in resources, but due to their isolation, they can’t fully utilize them. Imagine if the major platforms on the Internet couldn’t communicate with each other; our online experience would be greatly diminished. The situation on the blockchain is similar.

Second, asset liquidity is the core of any financial system. In the traditional financial world, assets can flow freely between exchanges, banks, and financial institutions. However, in the current blockchain realm, the liquidity of assets on different chains is restricted. This not only affects the trading experience of users but also limits the further development of decentralized finance (DeFi).

Therefore, whether considering interoperability or asset liquidity, there is a practical need for cross-chain technology, including traditional asset cross-chain bridges (Bridge) and interoperability protocols (Interoperability Protocol). In the following sections, we will try to categorize all cross-chain solutions from a technical perspective and introduce these two categories separately for better understanding.

Part 2: Categorization of Cross-Chain Solutions

Cross-chain technology has rapidly developed in recent years, providing a range of methods to solve the interaction issues between chains. These cross-chain solutions can be categorized differently based on various dimensions. Here, we introduce a cross-chain analysis framework proposed by Connext founder Arjun Bhuptani, categorizing interoperability protocols (cross-chain bridges) based on their message verification methods into three main categories: Native Verified, Externally Verified, and Locally Verified.

Native Verified

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(Source: Connext, Arjun Bhuptani)

In the Native Verified model, a light client or node of the source chain runs on the target chain to verify messages from the source chain. The primary advantage of this method is its high trustworthiness and decentralization. Since the verification logic of the light client is identical to the block verification logic of other types of nodes, it provides a robust cross-chain verification mechanism.

A key role in this mechanism is the Head Relayer, responsible for transmitting the block header information of the source chain to the light client on the target chain for verification. Challenges of this method include its dependency on the underlying consensus mechanism and potential complexity, especially as the number of chains involved increases.

Projects that adopt Native Verification include Cosmos IBC, Near Rainbow Bridge, Snowbridge, etc. Rollup entry/exit is also a form of Native Verification.

Externally Verified

(Source: Connext, Arjun Bhuptani)

Externally Verified methods involve introducing an external set of validators to verify cross-chain messages. This group typically consists of multiple entities, and the validators can take various forms like multi-party computation systems (MPC), oracles, multi-sig groups, etc. The distinct advantage of this approach is its high scalability, as it can be easily extended to any blockchain (bridges using external verification currently dominate the cross-chain bridge space).

However, it’s important to note that introducing an external set of validators also means introducing new security assumptions. The security in this model is determined by the lowest security level among Chain A, Chain B, and the external validators, potentially increasing the system’s vulnerability.

Examples of externally verified protocols include Wormhole (Portal Bridge), Axelar, Chainlink CCIP, Multichain, and fundamentally, LayerZero also adopts an external verification approach.

Locally Verified

(Source: Connext, Arjun Bhuptani)

Different from the above methods, Locally Verified, also known as peer-to-peer verification, focuses on direct verification between the transacting parties. This method often involves a Hash Time Locked Contract (HTLC), where the parties can mutually verify each other’s transactions. Since the transacting parties usually have conflicting economic interests, the possibility of collusion is significantly reduced.

A notable advantage of this method is its decentralized nature and high trustworthiness for the transacting parties. However, it faces challenges, such as the need for both parties to be online simultaneously and its inability to support general data transfer between chains (meaning local verification is only suitable for Swap bridges, primarily Ethereum cross-layer asset bridges).

Typical examples of Local Verification include Connext, cBridge, Hop, etc.

In summary, each of these three cross-chain technological methods has its advantages and limitations and represents only one dimension of classification. The choice of method in practice depends on specific application requirements, security considerations, and the nature of the involved chains. As the crypto field continues to develop, we look forward to more innovative approaches to address the challenges in cross-chain interactions.

Part 3: Asset Cross-Chain and Cross-Chain Message Passing

Having introduced the basic concepts and classifications of cross-chain solutions, let’s delve deeper into the differences between asset cross-chain and cross-chain message passing.

Asset Cross-Chain

Asset cross-chain enables digital assets to seamlessly migrate from one blockchain to another. It is the most common and popular cross-chain application, solving a core issue: how to represent and utilize the same assets on different chains. The common working principles of asset cross-chain include:

Lock-and-Mint

The most common method in the process of cross-chain asset transfer is lock-and-mint. Simply put, when assets move from the source chain to the target chain, they are locked on the source chain and “minted” on the target chain. (Similar mechanisms include burn-and-redeem, which won’t be elaborated here due to space constraints. A typical example is the cross-chain method adopted by USDC issuer Circle.)

(Image source: web3edge, @0xPhillan)

For instance, when BTC is used as a token on Ethereum, the original BTC is locked, and an equivalent amount of Wrapped Bitcoin (WBTC) tokens is generated on Ethereum. This ensures the total supply of BTC remains unchanged, thereby preserving the asset’s scarcity. Besides WBTC, some Ethereum Layer2 official bridges, such as Polygon Bridge and Arbitrum Bridge, and the Rainbow Bridge that connects Ethereum with the Near ecosystem, also use a lock-and-mint/burn mechanism.

Liquidity Pool Swaps

Liquidity pool swaps involve using a special liquidity pool to facilitate cross-chain transactions. Users deposit their assets from one chain into the liquidity pool and withdraw an equivalent value of assets from another chain’s pool. The advantage of this method is it offers fast transactions and exchanges but might incur fees, as liquidity providers (LPs) usually expect a return on the liquidity they offer.

(Image source: web3edge, @0xPhillan)

In terms of mechanism, the security risks of such cross-chain bridges are primarily borne by LPs. If the pool is hacked, the liquidity provided by LPs could be stolen. Imbalance in the liquidity pool can also lead to the evaporation of cross-chain asset value, transmitting the crisis to cross-chain users. Cross-chain bridges using liquidity pools include ThorSwap, Hop Exchange, Synapse Bridge, among others.

Atomic Swaps

Atomic swaps allow two parties to exchange assets directly without intermediaries. They use Hash Time Locked Contracts (HTLC) to ensure that the exchange is “atomic,” meaning the transaction is either completely executed or not at all. In atomic swap cross-chain bridges, assets are accessed through private keys. If one party acts maliciously, the other can retrieve their assets via the time lock (which opens after a specified time) without needing centralized third-party trust. Typical projects using atomic swaps include Connext, cBridge, and others.

(Image source: web3edge, @0xPhillan)

Cross-Chain Messaging

Different from asset cross-chain, cross-chain messaging involves not just assets but all types of information transferred from one chain to another, such as contract calls and state updates.

State Synchronization

A common method of cross-chain messaging is through state synchronization. This means that a chain’s state or a part of it is synchronized to another chain. For example, Polkadot’s relay chain is responsible for synchronizing the states of its various parachains.

Event Listening and Response

When an event (like a transaction confirmation or smart contract call) occurs on one chain, another chain can be configured to listen to these events and respond as needed. For instance, ChainSafe’s ChainBridge uses this method for handling cross-chain messaging.

In fact, whether it’s asset cross-chaining or cross-chain messaging, the core challenge is to ensure the integrity, security, and timeliness of information. As technology advances, new cross-chain solutions will continue to emerge, providing more robust and flexible support for interoperability in a multi-chain environment.

Part 4: Challenges of Cross-Chain Technology**

• As blockchain technology develops and matures, cross-chain technology has emerged as a significant research focus. Its goal is to facilitate seamless asset and data exchange between different blockchains. However, achieving this goal is not straightforward. Analogous to the “impossible trinity” in individual blockchains, there exists a “trilemma of difficulties” in the realm of cross-chain interoperability.
• According to a framework proposed by Arjun Bhuptani, any cross-chain solution can satisfy at most two of the following three criteria:
• • Extensibility: Supports arbitrary message passing.
• • Trustlessness: Does not introduce new trust assumptions.
• • Generalizability: Can be easily adapted to more blockchains.

(Source: Connext, Arjun Bhuptani)

When it’s impossible to meet all three criteria simultaneously, trade-offs and balances must be made, which may be more complex relative to individual blockchains. These include trade-offs between security and trust, uniformity and diversity, wrapped assets and native assets, among others. These are the challenges that cross-chain technology must address as it continues to evolve. Various cross-chain bridge projects are attempting to optimize or even break through these trilemmas from different angles, aiming to achieve the highest overall performance.

Part 5: Summary and Outlook

Cross-chain technology is a key area in the development of blockchain, even considered the holy grail of the field. It is vital for breaking the blockchain “isolation” and achieving interconnectivity among multiple chains. From asset cross-chaining to message cross-chaining, all Web3 Builders are striving to realize a unified and collaborative blockchain ecosystem.

However, as discussed, cross-chain technology still faces many challenges. But with deeper research and technological advancement, we look forward to overcoming these challenges and achieving a more secure, efficient, and seamless cross-chain ecosystem.

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