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Why Cross-Chain Technology Matters in The Crypto World

Why Cross-Chain Technology Matters in The Crypto World
Image credit: Courtesy of Stankevicius MGM
By Stankevicius MGM

Blockchain technology has transformed the digital finance industry in major ways since its introduction almost a decade ago. Individuals and businesses are now acquiring assets and executing complex trade finance deals all made possible through cryptocurrencies.

Despite the strides the industry has made, blockchain technology faces a major hurdle that to some extent limits its potential to impact swathes of industries. Digital asset fungibility and cross-chain transactions cannot reliably take place without a fully functional cross-chain technology.

Understanding the Cross-Chain Landscape

Well, a cross-chain is basically a scheme that makes possible the transfer or communication of value inform of tokens between block chains. This interoperability is important for businesses and individuals as it helps them to exchange value with minimal risks and costs.

There are various types of cross-chains designed and developed to help in the exchange of value across block chains. The main ones include:

  • Atomic Swap
  • Sidechains
  • Interledger Protocol

When looking at the structure of any cross-chain, the most important features to study are atomicity and trustlessness.

Atomicity means all-or-nothing. It is either a transaction goes through in totality or fails completely, there is no intermediate space. Trustlessness, on the other hand, is the degree to which a scheme can operate in a trustless environment without exposing the participants to the inherent risks.

Atomic Swap

Also known as atomic cross-chain trading, Atomic Swap is a cryptocurrency trading technology that came about as a result of the need to exchange bitcoins with altcoins. On this scheme, participants on two separate chains which can be on-chain or off-chain such as Bitcoin Lighting Network, exchange their coins. They do this by simply agreeing on a trading price and complete the transaction immediately without involving centralized parties.

In terms of features, atomic swap has both atomicity and trustlessness. Each of the parties deposits their coins in separate safe boxes and generate secret numbers also known as hash pre-image. The boxes unlock simultaneously based on a hashed-time lock contract.

 The recipient can only claim the coins when they reveal the secret number and acknowledge the payment by generating a cryptographic proof of payment.

If the time lapses before the payment is claimed by the recipient, the whole process fails and the coins are returned to the respective parties. The hash pre-image safeguards both parties from any risk of fraud.

Side-chain

This is another blockchain token transfer scheme where a separate blockchain known as a side-chain is pegged to another blockchain referred to as a parent chain. To transfer of bitcoins from the parent chain to another blockchain, a specific number of tokens is locked in the parent chain and sent to a special multi-sig address. The side-chain is then notified and unlocks an equivalent number of tokens.

To move the tokens back to the parent blockchain, they are rechanneled through the side-chain. Once the token gets to the side-chain, they unlock the tokens in the parent chain.

There are there three main protocols used to notify the side-chain whenever the parent blockchain’s tokens lock and vice versa.

  • Federated peg- this is where a group of third-party notaries is introduced to decide on the locking and unlocking of the parent and side chain through a multi-sig scheme.
  • SPV Peg- here the side chain becomes automatically aware of the status of the parent chain and locks or unlocks accordingly upon receipt of an SPV Proof. However, for this to happen, there must be compatibility in protocol between the blockchains.
  • Alternatively, the side chain can be entangled with the parent chain through merged-mining or embedded chain technique to facilitate the transfer.

Interledger Protocol

This is the third cross-chain scheme used to transfer payments(coins) across different payment systems. The sender and the receiver are on different accounts or ledgers hence the name interledger.

One way to make this happen is to introduce a connector that is trusted by both parties in the transaction. Earning that trust is not easy and, in most cases, multiple connectors are introduced most of whom again fail the trust test.

The solution is to bring in or integrate an escrow system. A trusted third-party, escrows the two sets of payments from the transacting parties. The following are the processes involved in this scheme:

  • Sender preparation- this is where the sender escrows his payment
  • Connector preparation- Following a notification by the escrow that the sender is prepared, the connector also escrows his fund
  • Connector execution- The escrow notifies the receiver that the connector is prepared and proceeds to execute the payment.
  • Sender execution- This is where the receiver confirms the payment thus sending a trigger for the first payment.

The ultimate solution, therefore, is to introduce a crypto leger as the escrow such as Lighting Bitcoin (LBTC). This a fully decentralized exchange and peer-to-peer transactions platform for secure and instant global payments. The LBTC ecosystem brings together all the participants into the decision-making process.

It meets the trustlessness condition and with a cryptographic condition, it can also perfectly constrain the behavior of participants when exchanging non-crypto assets. The Pre-Shared Key scheme on LBTC ensures secure payments even in the inherently trustless and decentralized crypto world environment.

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