With the continued proliferation and growth of blockchain-based networks, it has become pretty clear that technologists and investors who dominate the crypto market are creating a multi-chain world. This may cause tribalists of any particular chain considerable consternation but many chains have and will continue to attract capital, users, entrepreneurs, and developers despite anyone’s particular objections.
Many in the crypto community have dreamed of connecting these different chains in ways that end the era of insular, isolated networks we’ve been in and move us towards a highly interoperable techno-financial system. This has remained mostly a dream but thanks to incredible developments over the past 5 years we’re now at the very beginning stages of realizing these dreams with live networks and applications.
When we look over the history of technological development the evolution from small, independent networks to a massive interoperable crypto-system shouldn’t be surprising. The internet itself is an amalgamation of protocols that make different hardware and software implementations interoperable. Railways built by different groups in different countries developed to be highly interoperable. Electrical grids and sewage systems built and maintained by disparate organizations and governments have developed to be interoperable. Crypto networks are following this same pattern.
Interoperability, in the specific case of crypto networks, means that assets, data, smart contracts, and applications can interact with many different chains. Users, applications, and developers won’t be stuck to a particular chain and will be able to easily move about a multichain crypto-verse. This freedom of movement and development is important for a few reasons: load balancing, reducing single points of failure, and the facilitation of relentless innovation.
As networks such as Bitcoin and Ethereum have grown in popularity, congestion has naturally increased, making economic activity prohibitively expensive for many use cases and users. Although each chain has its own flavor of scaling solutions, interoperability can serve indirectly as a way to scale usage above what would be possible by these networks on their own. Use cases and users being able to easily migrate to other networks when appropriate spreads demand over a larger surface area reducing congestion on every network. Secondly, although a disruption or failure of a major network would do damage to a multichain ecosystem, an internet of chains would render that failure non-existential as many protocols can pick up the slack for the failed protocol in the same way that a failure of one node in a crypto network is not an existential threat to the entire network. And lastly, interoperability between a myriad of networks enables boundless combinatorial innovations that we’re probably unequipped to completely foresee at this time. Given the expansive possibility space interoperability between crypto networks create, international financial institutions and Big Tech may be made completely obsolete in their current forms, forcing them to adjust or be relegated to economic history.
In the following sections, we’ll give very brief introductions to some of the projects that are making the dreams of interoperability a reality. Keep in mind these aren’t all the projects we could list and there are many others that we’re not aware of.
The simplest technology that promotes interoperability is an asset bridge. As the name implies, asset bridges are connectors that allow representations of assets native to one chain to be used on non-native networks.
For example, one of the oldest, most used asset bridges in the crypto-asset space is Wrapped Bitcoin (WBTC) facilitated by multi-signature wallets managed by BitGo, Kyber, and Ren. Wrapped Bitcoin allows Bitcoin holders to mint an ERC-20 equivalent that is redeemable 1:1 for their native Bitcoin (BTC). WBTC is accepted by the market as a synthetic Bitcoin that commands a near-identical price as native BTC and is available for use on the Ethereum network. There is currently over 8 billion USD worth of WBTC available for use on Ethereum!
Wrapped Bitcoin would be considered a fairly centralized asset bridge given only a few entities control a user’s ability to mint and redeem. Users rely on these entities’ commitment to a good reputation and internal controls to maintain the value of WBTC on Ethereum. This is obviously not the decentralized set-up we all want, but there are a few bridges that distribute the responsibility of minting and redeeming more broadly and many others are in the works.
These projects include, but are not limited to RenVM, tBTC, PolkaBTC, Chorus One, Rainbow Bridge, & Gravity. All of them attempt to move assets between ecosystems in as trustless a manner as possible.
Bridges are a necessary starting point but we’re starting to move up conceptual levels with some soon to launch projects that are best described as Multi-chain Dapps. These are decentralized applications that can operate in some fashion on or with multiple networks and facilitate activity between multiple networks on behalf of users. Some are their own chains, some are not. This is an emerging category that has until very recently not existed. The dominant Dapps right now exist on only one chain, but in the not too distant future, we could see the most impressive dapps exist on a variety of chains facilitating asset movements across many ecosystems.
Thorchain (RUNE) is a highly anticipated cross-chain DEX (decentralized exchange) that enables users to swap native tokens from different chains without taking on counter-party or custody risk. Thorchain uses economic incentives via its native token RUNE and threshold signatures to secure the execution of cross-chain swaps. Instead of swapping BTC to ETH through a centralized exchange, or swapping synthetic versions of the assets on a DEX, like wBTC to wETH, a user would be able to swap native BTC for native ETH through Thorchain vaults which observe incoming deposits and process outgoing transactions.
Thorchain is an application-specific blockchain with its own token, consensus, and governance built with the Cosmos SDK. By using the Cosmos framework, Thorchain can communicate and utilize other Cosmos-based chains such as Terra (stablecoin platform), Binance DEX, Akash (Cloud Computing), and any other project that leverages the Cosmos SDK. We’ll discuss Cosmos later in this post.
Anyswap is also a cross-chain DEX that has its own asset bridges that allow users to mint synthetic representations of those assets on a non-native network for exchange on those networks. Anyswap is not its own blockchain like Thorchain, but it can be accessed through four different networks such as Ethereum, Binance Smart Chain, Fusion, and Fantom.
Popsicle Finance aims to deposit assets on behalf of users on multiple AMMs (Automated Market Makers), on multiple chains, spreading users’ assets optimally amongst a rising sea of opportunities across chains. Users will be able to gain access to yield across the ecosystem and save on transaction costs by pooling their money in a common protocol that moves funds throughout the different AMMs and the networks on which they operate. Popsicle plans to launch with support for AMMs on Ethereum and Binance Smart Chain and intends to expand to Fantom, Polkadot, and Solana when appropriate.
And the last Dapp we’ll briefly cover is Compound Cash, a cross-chain money market brought to you by the same team that pioneered decentralized money markets on Ethereum with the Compound Dapp. Compound Cash will run on the Gateway blockchain, which is designed specifically for a multi-chain future where assets live on multiple chains and where Dapps’ smart contracts run on multiple chains simultaneously.
The Compound team built Gateway with the Substrate framework, making Gateway natively compatible with the Polkadot network, meaning they could easily become a Polkadot parachain in the future. If the Compound team builds out what they intend, Compound Cash would be a gateway, pun intended, to a multi-chain interest rate market that is no longer constrained by the limitations of any one network and is open to vast seas of liquidity and opportunities.
Chain(s) of Chains
We’re going to move up another conceptual level to protocols that provide an interface for different blockchains to communicate with each other. These protocols were built on the thesis that the future will have many blockchains that need to interoperate with each other rather than one blockchain to rule them all, or individual blockchains existing in isolation.
The following protocols have been around for some time as ideas, proof of concepts, and young projects, but are very quickly starting to mature into what their builders have been aiming for. We encourage interested readers to check out their rapidly expanding ecosystems as there isn’t enough space, time, or resources to cover any one of these projects in depth, as each project would require a book of information. We are merely scratching the surface in this post.
The Polkadot (DOT) network has been a popular project for investors and technologists looking to stretch the capabilities of blockchains. Lead by Gavin Wood, co-creator of the Ethereum blockchain with Vitalik Buterin, which itself was an extension of what Bitcoin could do, Polkadot attempts to go beyond what Ethereum can do.
2020 was a big year for Polkadot, with hundreds of projects launching or being funded, established projects building on Polkadot, validator sets increasing, and the native asset DOT moving into the top 10 in terms of crypto-asset market capitalization. As the ecosystem starts to mature and bridges between other networks come on line in 2021 we wouldn’t be surprised to see an explosion of activity on Polkadot as well as activity between Polkadot and other networks in late 2021 and beyond.
Polkadot is designed to support a hundred interconnected, application-specific blockchains called parachains. Each app-chain or parachain within the Polkadot ecosystem uses the same Substrate framework we mentioned previously when discussing Compound Cash. The Substrate framework allows developers of parachains to use specific components that suit their specific use-case(s) best. The entire ecosystem of parachains plugs into a base chain known as the Relay Chain that all parachains outsource security and consensus to. This common Relay Chain between the parachains allows for inter-parachain communication, cross-chain transactions, and applications that straddle multiple parachains simultaneously taking advantage of each parachain’s competitive advantage.
For example, an application that straddles multiple parachains can have a smart contract that exists on one parachain route a message to another parachain in which another smart contract is called that makes a transfer of some assets within that other parachain. This could be seen as an efficient division of labor between parachains that are leveraged for their unique capabilities. Instead of one chain expected to be everything to everyone, specialization can start to take root, increasing the scale and quality of all applications.
And not only is Polkadot ready for cross-parachain applications but it’s also capable of supporting applications that straddle Polkadot and other blockchains. For instance, the Moonbeam parachain is designed to support hybrid applications we just described between Polkadot and Ethereum. Application builders could use both the Moonbeam parachain and the Ethereum network to power their application, using the components on each that suit their particular application best.
Cosmos (ATOM), is another protocol in that’s tackling interoperability. With the success of some of the chains in the Cosmos universe such as Terra and Binance Chain as well as the anticipated launch of the cross-chain DEX Thorchain, Cosmos is positioned to thrive in 2021.
A major difference between Cosmos and Polkadot is the relationship between the major chain in the case of Cosmos called a Hub and in the case of Polkadot called the Relay Chain and the minor-chains or sub-chains that connect to them. The Cosmos hub named “Gaia” does not provide security and consensus to its periphery chains. Each minor chain is independent of the others and they’re expected to provide their own security and consensus mechanisms, whereas Polkadot parachains rely on the Relay Chain for these purposes. Cosmos chains can be thought of as more independent and self-sufficient compared to their parachain counterparts.
The various Cosmos chains are connected to each other through the Inter-Blockchain Communication (IBC) protocol which allows them to communicate and interact with each other. Cross-chain applications can be built on top of the IBC, such as cross-chain token transfers, multichain smart contract applications, or decentralized oracles. The role of IBC is to take care of messaging (including data transport, authentication and ordering) while the various chains provide their own security and consensus as we mentioned earlier.
App chains like Thorchain (DEX), Terra (Stablecoins), and many others in the expansive Cosmos universe of chains can all interact with each other through the IBC giving the Cosmos universe of developers many tools to experiment with. Add in connections to chains like Ethereum, Bitcoin, and maybe Polkadot, the possibilities for crypto-finance and crypto based technology services are somewhat endless.
And lastly, another project that’s tackling interoperability is Polygon, formerly known as Mattic. Polygon is a protocol and framework for building and connecting Ethereum-compatible networks so they can share data, assets, logic, tooling, and applications. Projects such as Polkadot, Binance Smart Chain, Near, Fantom, and Harmony, to name a few, are all Ethereum compatible. Polygon seeks to be the protocol that connects them all.
Given the proliferation of asset bridges, emerging cross chain dapps, and maturing interoperability protocols, although messy right now, it’s not hard to see the entire crypto ecosystem connecting and overlapping into an incredibly complex web of interrelationships that make it easy for capital to flow around smoothly and optimally for different types of users all over the world.
How many of these protocols, dapps, and bridges will stand the test of time remains to be seen. Will there be a massive expansion of the types of projects we’ve listed in this post or has this been the expansion and we’re heading towards consolidation? It’s hard to tell but it’s clear that our financial system(s) will be increasingly automated, open, fluid, and less reliant on corporate middlemen, legal systems, governments, or any one blockchain to handle all the demands of a global financial system.