The Future of Crypto is Multichain

If L1 blockchains are worlds and L0 are universes, these interoperable technologies are like your ‘bridges’ that serve as a way to connect to different blockchains, making the multichain future a reality.

If you want to understand the different layers of blockchains, you can read this blog first before proceeding below.

The whole is greater than the sum of its parts
Aristotle

Blockchains may be isolated, but they’re composable and modular. Composability is a critical concept in crypto that enables these cross-chain and multichain technologies to communicate. It means that smaller components of a system can be integrated into a more extensive system like the Lego blocks.

Software like: dApps, smart contracts, protocols; bridges, rollups, and atomic swaps are mostly open-source in nature and in general, composable.

Bridges

Blockchain bridges operate like how we move from one land to another land in real life.

Blockchain Bridges — the current cross-chain technology that we use — connect disparate blockchains to allow the transfer of assets and information.

We use bridges in a variety of cases to:

  • Benefit from lower transaction (Tx) fees by bridging to L2 or sidechains
  • Access DeFi protocols on other chains that may offer higher yields than the mainnet or other chains
  • Explore dApps in different blockchain ecosystems
Bridges enable the swapping of assets to another blockchain by locking or wrapping the asset on Blockchain one and minting the mirror asset on blockchain two.

The bridging contract locks the funds to enable seamless transfers by locking or wrapping the tokens in the original chain.

To incentivize and maintain liquidity in a bridge, protocols deploy Liquidity Pools (LP), which lets you stake coins and earn an interest calculated annually (Annual Percentage Yield).

Stargate, an ‘omnichain’ protocol, enables swaps between 7 EVM compatible blockchains, from Ethereum mainnet to Binance Smart Chain, Avalanche, Fantom, and L2 solutions like Polygon, Arbitrum, Optimism.

Portal by Wormhole network has eight chain integrations that move both tokens and NFT assets from Solana mainnet, to Ethereum, Terra, BSC, Polygon, Avalanche (C-Chain), Oasis, and Fantom.

Poly Network is another bridge that enables both token and NFT transfers on 11 chains. It connects L1: Bitcoin, Ethereum, Avalanche, BSC, NEO, Ontology, HECO; L2: ETH L2 like Polygon, Arbitrum, and Optimism; and L0: Cosmos.

Rollups

Rollups — the Scaling Layer or L2 tech — enable computation of transactions offchain and periodically post transaction data to the mainnet by batching. Other than low-cost Tx and speed of execution, security is the most significant benefit since it derives its features from the ethereum mainnet.

Rollups got their name from batching individual transactions and rolling them into one.

Rollups are distinct by the type of ‘Proof’ they’re implementing on the chain.

Optimistic Rollups

Optimistic Rollups don’t compute transactions but use an incentive system called Fraud Proofs to ensure that transactions are legitimate and there’s no fraudulent activity on the chain.

Fraud proofs are like insurance that requires a bond upfront which serves as a guarantee during the arbitration. Those who correctly provide the evidence will get the bond, while the bad actors get penalized, and their bond slashed.

Optimism and Arbitrum are examples of Optimistic Rollup that run their L2 parallel to the ethereum blockchain while maintaining a bridge to connect both chains.

Zero-Knowledge Rollups (ZK-Rollups)

ZK Rollups use Validity Proofs to check transactions by validating the cryptographic proof called ZK-Snark rather than each transaction data, hence it is called having ‘zero-knowledge’.

This type of rollup benefits a faster transaction finality on the main chain by rejecting the batch that doesn’t match the proof. Since computation is more intensive, validity proofs are feasible on chains with large onchain activity.

Starkware is an example of this tech that powers payments and orderbook-based DEXes like Loopring and derivatives like dYdX.

Polygon is another sidechain to the ethereum network that uses a slower L2 solution called Plasma which is transitioning to ZK Rollups for bridging.

Atomic swaps

Atomic swaps are like Peer-to-Peer exchange but natively executed onchain. You do not need to use a bridge contract to maintain the transfer of the assets.

Each protocol will need to deploy assets and wallets on other blockchains and require DEX and CEXs to build atomic swaps in their apps and services.

Bob and Alice initiate an atomic swap which requires both parties to accept the contract within a time frame.

Atomic Swaps use a more complex hashing called HTLC or Hashed TimeLock Contracts.

The main thing that separates HTLC from other smart contracts is that its time-bound. It requires that both parties agree to the condition of swapping within a specified time frame. If one or both of the parties declined or fails to confirm the transaction, the funds will be returned.

This eliminates counterparty risk, where one of the parties decides they won’t fulfill their end of the bargain. This type of risk often happens to large payment platforms like Paypal, where bad actors initiate a chargeback refund after a transaction takes place.

The Lighting Network from Lightning Labs uses atomic swaps called submarine swap that trades Bitcoin held onchain and bitcoin held offchain in their L2 network.

Conclusion

There are several ways to link different blockchains together, depending on the use case, speed of transactions, and security.

These bridges and other multichain tech are just part and parcel of the DeFi ecosystem that presents opportunities through staking, lending, borrowing, trading, and many more.

Pro-tip: If you want to explore and connect to different EVM-powered chains without typing the whole string of characters, you can check this tool: Chainlist.

Learn more about DeFi and multichains by signing up on our website.

Defy Trends provides advanced analytics and actionable insights for cryptocurrencies and NFTs. Created by a female-led team of data scientists and global markets experts, Defy Trends brings together crypto, NFT trading, and research operations. The goal is to empower everyday individual investors as well as institutions ranging from exchanges and marketplaces to research firms. Defy Trends is committed to making crypto accessible to all. Dare to Defy.

Connect via Twitter | Telegram | LinkedIn | Instagram | Medium | Linktree

Disclaimer: This article is for educational purposes only and must not be treated as financial advice.

As always, please conduct due diligence and manage your risks accordingly.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store