Each blockchain is a complete digital environment in which all applications are connected through the underlying network. But with the continuous increase of blockchain networks and the lack of connectivity between blockchains, there is an increasing demand for cross-chain infrastructure to provide users with interoperability between multiple blockchain networks .
Without cross-chain infrastructure, blockchains are as disconnected as individual applications today.
Perhaps one of the most important primitives for the Web3 ecosystem is cross-chain swap, a service that enables the seamless exchange of one digital asset for another. Just as decentralized exchanges were the first primitive of a single blockchain network, cross-chain swaps promise to be a fundamental building block of an interconnected, cross-chain world.
What is a cross-chain swap?
In short, a cross-chain swap is a mechanism for exchanging tokens issued by one blockchain with tokens issued by another blockchain between different blockchains in a way that minimizes trust.
Although users already have access to cross-chain swap functionality through centralized exchanges today, this introduces multiple layers of friction (e.g., transfer tokens to an exchange, exchange them directly or indirectly through an intermediary, such as USD, and then transfer transfer back to a wallet on a different blockchain). Additionally, the process requires users to utilize escrow services and temporarily relinquish control of their assets. For operations as basic as cross-chain swaps, this becomes a critical hurdle in building a world driven by ownership of sovereign digital assets.
What is the principle of cross-chain exchange?
Cross-chain swaps can be achieved in a number of ways. Many current implementations rely on cross-chain bridges that encapsulate and lock tokens on the source blockchain to create a one-to-one representation on the target blockchain.
Simplified diagram showing how locking and minting token bridges work.
To perform a cross-chain swap, users must lock their tokens on the base blockchain, mint the wrapped tokens on the target blockchain, and then swap using a local decentralized exchange to buy their desired digital assets. This process can be automated on the backend by the cross-chain exchange protocol, users only need to specify the assets they want to exchange and the digital assets they wish to receive. While this is a proven method of facilitating cross-chain swaps, users must trust the security implemented by the underlying bridge.
Chainlink Proof of Reserve (PoR) enhances bridge security by providing strong collateralized data and reducing unsecured minting.
There are other ways in which bridge protocols are designed. The above example is a "lock and cast" bridge model. Other bridge protocols may adopt a "burn and mint" approach where tokens are burned on the source blockchain and tokens minted on the target blockchain; or a "lock and unlock" model where tokens are minted on a different blockchain Stand alone local supply. Nonetheless, cross-chain swaps using bridge protocols all follow the same framework: lock or burn tokens on the source blockchain and acquire an equal amount of tokens on the destination blockchain before the swap can take place.
atomic swap
Another way to facilitate cross-chain swaps is to use time-locked smart contracts, a process often referred to as atomic swaps.
Let us assume that there are two counterparties (Alice and Bob) in an atomic swap, each wishing to exchange one digital asset for the other's digital asset. Alice and Bob lock the correct amount of tokens in smart contracts on their respective blockchains. They can only be unlocked when both parties put the correct amount of tokens into their respective smart contracts. Alice obtains the digital assets originally locked by Bob, and vice versa.
While atomic swaps are one of the most decentralized options for facilitating cross-chain swaps, it is not a general or scalable model. For example, atomic swaps typically require the blockchain to use the same hash function, both parties agree on the quantity and exchange price, and be able to wait an indeterminate amount of time for the exchange to complete.
Cross-chain liquidity
Cross-chain infrastructure, including cross-chain bridges and exchanges, plays a key role in unlocking cross-chain liquidity securely . With the increasing number of blockchains in the Web3 industry, and the increasing use of old and new blockchains, liquidity is constrained in these digital environments. Fragmented liquidity reduces market efficiency across all blockchains, diminishes the utility of digital assets, and presents a barrier to developers looking to attract users across many blockchains.
Cross-chain bridges, decentralized exchanges, centralized exchanges, and other tools enable various types of cross-chain liquidity pools—connection points that help different blockchains access or transfer funds from another blockchain. fluidity. This is critical to creating a unified Web3.
Chainlink for cross-chain applications
In essence, the cross-chain problems faced by the blockchain today can be attributed to the transfer and synchronization of data between blockchains. After all, a token is just a specific type of data stored on a blockchain decentralized ledger.
The Cross-Chain Interoperability Protocol (CCIP) is an open standard for cross-chain interoperability under development. It aims to leverage Chainlink decentralized oracle networks (DONs) to enable programmable token bridging and secure, arbitrary, and trust-minimized messaging between blockchains. The core goal of CCIP is to establish a universal connection between blockchain networks, including public chains and private chains, to unlock isolated tokens and empower creativity in cross-chain applications .
CCIP aims to be the cornerstone of Web3 infrastructure, an open standard that helps developers build various cross-chain applications.
In the context of cross-chain exchanges, CCIP can make routing between liquidity easier by enabling secure and seamless data transfer between various blockchains, including liquidity conditions, token balances, and more indicators efficient. Additionally, programmable token bridges could enable any Web3 developer to build cross-chain environments without directly managing the underlying bridge infrastructure. Cross-chain exchanges can build better user interfaces, exchange at a lower cost, and provide a wider selection of assets due to the unparalleled connectivity brought about by the adoption of open standards.
in conclusion
Cross-chain swaps eliminate the need for centralized intermediaries by enabling the direct exchange of value and information between blockchain networks. In short, they provide a more secure, transparent and seamless way for users to trade assets between various blockchains.
The cross-chain interoperability protocol aims to connect various blockchains and the applications built on them.
As Web3 continues to evolve and more applications and tokens are built on top of the growing blockchain ecosystem, cross-chain infrastructure like CCIP plays a role in creating a unified user and developer experience increasingly important role.
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