What Are Blockchain Cross-Chain Protocols?

We explore cross-chain protocols, what they are, how they work, and everything else about them.

A woman robot staring at a huge digital crossed chains.

Blockchain cross-chain protocols allow people to move crypto assets from one chain to another. These tools are important in the crypto ecosystem because they attempt to solve the interoperability challenge of blockchain technology. 

This challenge is a result of the structural isolation of blockchains. Because of this insulation of chains, crypto assets only work on their native networks. Hence users cannot use one network’s crypto on another network. Instead, they can only complete transactions on a blockchain with assets native to that chain. 

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Blockchain cross-chain protocols attempt to solve this problem by allowing users to exchange their crypto assets for other assets on different chains. However, the way they do this isn’t straightforward. There are still many peculiarities to how these chains work and how they might solve one of the blockchain’s biggest problems. 

The Blockchain Interoperability Problem

The blockchain is a distributed ledger that records information as verifiable blocks. This distributed ledger has certain internal rules and logic that dictate how it works. There are many blockchains, all of which have peculiarities that make them unique. 

The result of these peculiarities is that only certain assets can work on any given blockchain. These assets are usually crypto-minted on the chain and created with the chain’s peculiarities baked into it. 

For example, ETH cannot be used to complete a transaction on a chain outside of Ethereum. It also means an asset incompatible with Ethereum cannot be used on the Ethereum chain. 

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This is what is called the interoperability problem. In practice, this issue disrupts the commerce of the blockchain ecosystem. It means that users cannot seamlessly complete transactions however they want and are limited in some ways in how they can spend their crypto. 

However, the Interoperability problem isn’t an unsolvable enigma. Users get around it and use their assets on different chains in several ways. 

These solutions fall into two rough camps. The first is the use of centralized exchanges. Users who use centralized exchanges solve the problem of interoperability through roundabout means. 

First, they send the crypto they want to spend on another chain to a centralized exchange. Then they exchange that crypto for the asset they can spend on their intended chain. Next, they send that crypto to the blockchain or protocol they want to use it. 

This may sound like a simple process, but it can be quite strenuous, considering the security checks users must complete to finish the transaction. 

Secondly, the risks associated with using a centralized exchange in crypto are hardly trivial. There are multiple examples of centralized exchanges getting bankrupt and misappropriating user funds. 

These exchanges get away with it because they are even less secure than banks since they are unregulated. A good example of this phenomenon is the Mt. Gox crash and the recent FTX failure. 

The second solution is the use of a cross-chain bridge. Users using this solution simply send their crypto to a bridge that holds it in trust and then mints a derivative on their intended chain. They can then spend this derivative on that chain or exchange it for the crypto token they deposited earlier. 

What Are Cross-Chain Protocols?

Cross-chain protocols connect blockchains and allow people to transfer their crypto from one chain to another. 

For example, if user A wants to spend XYZ coin on blockchain C, they only need to deposit XYZ coin on a cross-chain protocol. That protocol then proceeds to mint crypto dXYZ, a derivative of XYZ that works on blockchain C. Afterwards, user A gets dXYZ, which can be spent on blockchain C, and then spends it. 

If user A peradventure wants their XYZ coin back, they only need to deposit their dXYZ coins in the cross-chain protocol. The protocol will burn the dXYZ crypto and give user A their XYZ tokens back. 

However, not all cross-chain protocols are the same. While they operate under the same principles as aligned above, the “how” of their operations is different. In general, cross-chain protocols are of two rough categories. 

Trusted Bridges

A trusted bridge is a cross-chain protocol governed by a centralized entity. This protocol has one controlling authority, and this authority technically had to be trusted. Users who deposit their tokens into protocols like this must trust the entity in two important ways. 

First, they must trust that the entity will not abscond with their tokens. Secondly, they must trust that the entity will keep the prices of the derivatives they receive stable. That means the entity will not flood the market with derivatives just because it can. 

These sorts of bridges are technically centralized and unregulated banks. Users who trust them must understand that they also carry part of the risks of centralized authority. These risks include negligence, intentional mischief, and centralized failure. 

Trustless Bridges

Trustless bridges, as their name implies, are the opposite of trusted bridges. These bridges don’t require trust on the users’ side, as they leverage smart contracts and other permissionless algorithms to carry out their operations. 

In other words, this means that a centralized authority doesn’t run a trustless protocol. Additionally, this sort of protocol provides complete transparency to the user. 

Other Cross Chain Protocols

A cross-chain protocol aims to create a large ecosystem for users to utilize their assets. However, cross-chain protocols aren’t the only way to create this ecosystem. Other solutions are limited but operate under the same principle. 

A good example of such a protocol is Polygon. Polygon is one blockchain that has multiple chains built into it. This means there’s a base layer called the relay layer, and other different chains are built on that sublayer. Within this closed ecosystem of chains, users can transfer tokens from one chain to another with no problems. 

However, the problem with Polygon is that its chains are niched. Since the chains aren’t popular (yet), they don’t have a lot of utility for users. But if these chains have more users in the future, Polygon might finally solve the blockchain Interoperability problem once and for all. 

Importance of Blockchain Interoperability

If one has ten dollars and would like to purchase something that costs 2 dollars in another currency on Amazon, all one has to do is make the purchase. The conversion would be done automatically, and the item’s value would be deducted from one’s dollar account. They wouldn’t have to bother changing their dollars into a new currency. 

Unfortunately for the blockchain, what’s obtainable on Amazon isn’t attainable on decentralized protocols. Users have to change their crypto assets themselves, and the process to do this can be cumbersome and unsafe. 

Be that as it may, blockchain bridges have provided a somewhat good solution to the interoperability problem. While these bridges are not necessarily safe, they can provide a level of ease for users. 

The Risks Of Blockchain Cross-Chain Protocols

These protocols may be important tools for navigating Interoperability in crypto, but they are imperfect. Over the past eighteen months, many blockchain bridges have been hacked. Since these bridges are technically keeping tokens in trust for users, they are very attractive targets for mischievous characters. 

In 2022 alone, hackers stole over $1.4 billion from users through cross-chain protocols. Some of the biggest hacks in the crypto ecosystem have been on cross-chain bridges. 

The $615 million haul that hackers stole from Ronin is the biggest of the hacks. The reason for these hacks is that a lot of cross-chain bridges are simply not secure. Or, as one analyst puts it, their security hasn’t kept pace with the amount of money they safe keep. 

Despite these risks, cross-chain protocols are still popular tools in crypto. Perhaps they will become less popular when the ecosystem finds a way to solve the Interoperability problem without bridges and other such solutions. But till then, we might just have to deal with cross-chain protocols. 

On the Flipside

  • While this article may argue that cross-chain protocols are a necessary part of the crypto ecosystem, other important figures in Web 3.0 certainly disagree. Vitalik Buterin, for example, has said that cross-chain protocols will not be the future of the crypto ecosystem. Instead, multichains like Polygon will be. 

Why This Matters

Cross-chain protocols are important tools in the crypto ecosystem. While they aren’t the safest tools, people should know about them and what they do to decide whether to use them. 

FAQs

What are cross-chain protocols? 

Cross-chain protocols are interoperability tools that allow users to transfer assets from one blockchain to another. 

Are cross-chain protocols safe?

Cross-chain protocols can be unsafe and are prone to attacks by hackers. In 2022, over a billion dollars worth of crypto was stolen from cross-chain protocols. 

What are examples of cross-chain protocols? 

Some examples of cross-chain protocols include Cosmos, Binance Bridge, and InterSwap

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Victor Fabusola

Victor Fabusola is a Blockchain & Crypto Content Writer. He excels in crafting long-form educational guides, opinion pieces, and reviews in niches such as DeFi, NFTs, and Web 3.0. Outside of his work at DailyCoin, he loves conscious hip-hop and classical music and engaging in intellectually stimulating conversations with his friends.