Evolution of Cross-chain Solutions — A Brief History

From asset bridging to message bridging

The journey from a blockchain to a network of blockchains

The Bitcoin network was designed as a global, peer-to-peer payments network that could replace the fiat currency-based centralized payments network of Web2. As bitcoin grew in popularity, we soon realized that a peer-to-peer payments system was not enough, and the industry demanded complex fintech products to be built on top of blockchain technology.

The Ethereum network introduced smart contracts to address this need. Smart contracts are a type of account on the blockchain which are not owned by anybody. Instead, they run as programs on the blockchain. With smart contracts, the Ethereum blockchain evolved into a decentralized virtual computer, which could run complex programs without any human intervention. This enabled the formation of Dapps, DEXs, lending protocols, NFTs, and yield farming strategies on the blockchain.

As Smart contracts exploded in popularity and use cases, the Ethereum network quickly became congested. The scarcity of block space and the nature of the network to prioritize security over scalability (high speed and cheap fees) skyrocketed the gas price to a point where the network became unaffordable for small-scale transactions. It was evident that the Ethereum network alone is not sufficient to address the demand for Defi.

Soon, numerous smart contract blockchains came into being to fill this vacuum. Some of these chains were scalable and secure, while lacking in decentralization, while some were decentralized and scalable, but lacked optimal security standards (scalability trilemma).

• Security — The cost of compromising the network, by gaining control over a majority of the nodes.
• Scalability — The cost of using the network, and the time it takes to process a transaction. The faster and cheaper a chain is, the more scalable it becomes.
• Decentralization — How decentralized is the network, a network with low barriers to entry and many nodes is considered decentralized.

The rise of cross-chain solutions

With the evolution of Defi into a multi-chain ecosystem, the characteristic differentiation of chains specializing in scalability, security, or decentralization made them incompatible with each other, as they followed distinct block production and consensus rules. The isolation of networks forced users to commit to one environment or split their funds (which is not an efficient strategy).

What if you needed the security of BTC, but the smart contract capability of the Ethereum network to build financial products on top of it? This is where cross-chain technology comes into play.

What is cross-chain communication?

Cross-chain communication lays down the infrastructure that enables these isolated chains to exchange information with each other. As use case-specific blockchains grew, users felt the need to be able to move their funds across different networks. Initially, centralized exchanges were the only means to do so, but it forced investors to give up their anonymity, that is until the emergence of cross-chain technologies that enabled interoperability.

Interoperability — A technology that allows blockchains to communicate with one another, to exchange tokens, arbitrary data and commands.

For instance, one would use the Ethereum network for complex trading and yield farming strategies and would ultimately store their funds in the Bitcoin network, owing to its stability and security.

The innovations made in cross-chain technology can be broadly classified under two ideas –

• Scalability solutions — A new, layer-2 blockchain on top of the Ethereum mainnet that offloads some of its congestion and borrows its security.
• Interoperability solutions — Independent Layer-1 chains that are connected to Ethereum (and one another) via blockchain bridges.

Let’s get into some of the details about these cross-chain technologies –

Scalability solutions

Cross-chain scalability solutions were primarily built for the Ethereum network. The early scalability solutions were state channels, sidechains, plasma, and the lightning network and rollups. These technologies enabled the Ethereum network to work around the scalability trilemma.

Need for scalability solutions

Despite the availability of many networks, most of the Defi activity still takes place in the Ethereum network. Every major DEX, lending protocol, NFT marketplace, or the Metaverse offers native support to the Ethereum network. Moreover, it is the most secure smart contract platform and has the highest number of active users. Therefore, we need to scale Ethereum so that its secure environment can be accessed by more users.

The technologies that helped scale the Ethereum network are –

• State channels

This is a setup where users lock their funds in a multisig contract to transact off-chain multiple times, and then only submit the final state of accounts to the blockchain. The method is useful when there are many state updates, the participants are available all the time, and are always known. Connext is one of the scaling solutions that implement state channels.

• Sidechains

Popularly known as Layer-2 solutions, side chains are blockchains that run parallel to the parent blockchain. Sidechains have the liberty to use a different consensus model than the parent chain, to which it is connected via a two-way bridge. Polygon PoS is one of the most popular side chains on the Ethereum network.

• Plasma

Plasma is a framework for scaling monolithic blockchains by having multiple blockchains that run in parallel to the parent chain, with the ability to have separate consensus. In plasma, the so-called child chains borrow the security of the parent chain by periodically updating their state to the parent chain. Polygon is a well-known implementation of plasma

• Lightning network

The Lightning Network is a scaling solution for the Bitcoin network. It is an off-chain layer-2 solution where the involved parties can conduct as many transactions as they want in a separate channel. Once the channel is closed, only the final state of accounts is uploaded to the Bitcoin blockchain. This effectively scales the Bitcoin network to the point where it becomes economical enough for every day, low-volume transactions.

• Rollups

In rollups, multiple transactions are processed on a layer-2 blockchain that has high throughput. Then, after verifying the validity of these transactions, they are bundled together(or rolled up) to form a single cryptographic proof for the entire bundle. This proof is then recorded on the Ethereum mainnet. Therefore, this mechanism scales Ethereum by borrowing its security and processing transactions in a scalable environment. Optimistic rollups and zk rollups are some popular examples.

Interoperability solutions

Cross-chain interoperability lays the framework for communication between two layer-1 chains, Like Bitcoin and Ethereum. Typically, cross-chain interoperability work by locking funds in a smart contract on the origin chain. Then, a cryptographic proof of this lock is sent to the destination chain. Once the proof is verified, the desired synthetic assets are sent to the user’s address on the destination chain. To bridge the assets back, the synthetic assets are burnt and the original assets are unlocked in the origin chain.

As new, highly specialized layer-1 blockchains entered the market to cater to the shortcomings of Ethereum, some new issues emerged –

need for interoperability solutions

By making layer-1 chains interoperable with one another, users can leverage the best qualities of each chain and are shielded from each other’s weaknesses at the same time. It allows users to access Dapps from one ecosystem that offers a better experience and lucrative opportunities through funds from another ecosystem.

Interoperability also addresses the fragmentation of liquidity across different chains by allowing the easy flow of value. Free flow of liquidity is crucial for accurate market-making, profitable yield generation, and reduced volatility.

The technologies that enabled interoperability are –

• External validators/ Notary schemes

This is one of the earliest and technologically simplest cross-chain operations. A trusted party (an individual or a group) verifies to the destination chain that an event on the origin chain took place (locking of assets in a smart contract). The notaries agree on a consensus algorithm and then issue a signature that can finalize the event on the destination chain (through a multisig address on the destination chain).

The security of such agreements is made more secure and decentralized with the use of threshold signatures. Think of multisig as a box that needs multiple keys to open (each signer has access to a key), then, a threshold signature would be breaking a single key into multiple pieces (no one party has access to a whole key). Multichain, Wormhole and Harmony are some popular examples.

• Light clients and relays

A relay is a smart contract on the destination chain that works as a light client of the original chain. Unlike full nodes, a light client only stores the minimum required information to validate the transactions on-chain (state data). This mechanism is used to bridge assets across chains, where the cross-chain transaction is verified by the native validator network of the connected chains. Cosmos IBC, Polkadot’s snow bridge, and Rainbow bridge deploy lite clients.

• Hash-locks

A smart contract acts as an escrow of funds between two parties. After locking their funds, one party sends a secret key to the other party, who has to submit the proof of transfer on time, otherwise, the funds are returned.

• Liquidity networks

This mechanism works like a peer-to-peer network, where the liquidity in the involved chains is utilized to make the transfer possible. There are locking and dispute mechanisms set in place, where the routers have to lock collateral both in source and destination chains to ensure a trustless cross-chain transfer. Connext, Hop protocol, and Celer are some examples

The next phase of cross-chain technology: cross-chain messaging

The cross-chain communication methods that we have covered so far focus purely on the transfer of tokens across chains. True cross-chain communication goes beyond this. Let’s take SushiSwap as an example –

SushiSwap is a DEX native to Ethereum but has grown to support various chains including Fantom, Binance, Polygon, MoonbeamNetwork, and more. While the DEX exists on all these chains, this integration is merely on a UI level, the markets and liquidity pools still operate very much independently. A swap between the DAI and SUSHI on the Ethereum chain would not affect the price of the respective tokens on the Binance chain, this is a typical and a prominent instance of liquidity fragmentation across networks.

Ideally, there would exist an aggregated DAI-SUSHI pool based on all the available liquidity from similar pools across all the networks, which would enable cross-chain swaps and would affect the price of respective tokens on all the chains.

This is possible when cross-chain bridges can bridge not just tokens but any arbitrary data (including data, events, state, and contracts) across chains. This would allow them to share information about state and swap events with other chains and would enable cross-chain contract calls as well.

Therefore, cross-chain data sharing would eliminate forking Dapps to different chains. Instead, it would lead to multi-chain Dapps that share application logic and work as one unified application. Some prominent cross-chain messaging protocols are Chainlink, Celer IM, and Multichain’s anyCall.

Multichain’s anyCall

anyCall is a generic cross-chain messaging protocol, it can be used to send any arbitrary data across chains. the anyCall contract is connected to a network of MPC nodes, that can securely relay that required information. With anyCall contracts on one chain can be sued to directly call contracts on another chain.

Celer IM

Celer Inter-chain message framework is used to build inter-chain native Dapps. With Celer IM Dapps that are usually forked in other chains can instead function as one unified cross-chain entity. Celer IM can enable the Dapps to execute cross-chain transactions in just one step.

Benefits of cross-chain messaging –

• DEXs will enable cross-chain swaps.
• Cross-chain liquidity farming strategies will emerge.
• Chain agnostic lending protocols.
• Cross-chain governance.
• Multi-platform NFTs, chain agnostic Metaverse, and NFT marketplaces.

Closing thoughts: What’s next?

Cross-chain communication is the frontline of innovation in Defi, as more chains get connected and share information, the technology is evolving rapidly. We have gone from a single, all-purpose blockchain to multiple, use case-specific chains that actively share resources. This innovation begs the question — to what limits can we push cross-chain technology?

Amid so many bridge attacks we believe that the next phase of innovation would steer towards making cross-chain bridges as efficient as they can be, that is — making bridges as secure, scalable, and decentralized as the underlying blockchains being connected.