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