What is cross chain crypto?

• Cross chain crypto was invented to make major blockchains interoperable and more scalable

• Cross chain messages must be sent in a common blockchain language

• Goals of cross chain in addition to scalability and interoperability are decentralization, ease of use, risk diversification and tokenization

• The cross chain bridge was invented as a workaround during the time when DeFi was popular and Ethereum in particular suffered from congestion and high transaction costs

• The multi chain is the opposite of a cross chain bridge and lets everything happen within a blockchain, creating smart contracts to communicate with other popular networks per blockchain

• Multi chains are much safer than cross chain bridges and are preferred by Vitalik Buterin, but they are also more complex

• Cross chain atomic swaps allow you to eliminate the middleman and reduce transaction costs, but these are usually too technical matters for ordinary users

• The NFT has become important enough to evolve into a cross chain item that you can use on multiple blockchains with certain token standards

• Cross chain gaming was created to allow in-game items to be freely exchanged between blockchains, making the Web3 revolution a seamless experience

• Cross chain DeFi is the main application of cross chain technology and can simplify decentralized finance a lot, but it can also leave a fragmented landscape

• A cross chain DEX can benefit any users of decentralized exchanges, which are able of cross chain communication

• With the rise of multi chains, the question is whether cross chain bridges will become less popular or whether they will continue to co-exist

Why does cross chain exist?

Over time, many new blockchains have been created, all of which cannot communicate with each other. If you want to buy bitcoin on the Ethereum network, this is impossible unless there is some kind of cross chain technology.

This was seen by many as a shortcoming and led to cross chain technologies such as the cross chain crypto bridge, the multi chain, the cross chain DeFi app and many other techniques to make blockchains interoperable, so they don't all remain isolated.

Another major reason for cross chain technology is the lack of scalability of certain coins, such as Ethereum and Bitcoin. Cross chain bridges have improved the speed of transactions and reduced the cost of trading.

How does cross chain work?

If you are going to send data or crypto from one to another blockchain it is imperative that you do so in the programming language of the target blockchain. You can compare it to sending a message from a Dutchman to an American. You will then have to have a translation program and translate the message into English first, otherwise the recipient will not understand anything about your message.

It works the same way with cross chain technology. Once you want to use tokens or data from one blockchain on another blockchain you will first have to convert it into a form that the other blockchain recognizes.

Goals of cross chain technology

The goals of cross chains are:

1. Tokenization. Converting cryptocurrency into tokens that can also be used on other blockchains expands the possibilities of use.

2. Interoperability. Communication between blockchains are enabled with cross chain functions.

3. Decentralization. Cross chain atomic swaps allow you to exchange peer to peer crypto without a third party.

4. Reading data on other blockchains.

5. Ease of use. Extend the capabilities of users of one blockchain to other blockchains, simplifying trading.

6. Increase scalability of popular blockchains. This does take quite a bit of effort.

7. Risk spreading because there is no single point of failure.

What forms of cross chain exist?

Over time, cross-chain techniques have proliferated. Not surprising given the explosion of blockchains. We will discuss the most common ones.

Cross chain bridge

A cross chain bridge is built to transfer value between different blockchains. The most common kind of this was built in the days when DeFi was very popular. At that time, the Ethereum blockchain was overloaded with transactions. As a result, it became slow and expensive. The cross chain bridge filled the gap and made it possible to do a transaction via a workaround on Ethereum for a fraction of the cost and time.

These days there are quite a few crypto bridges, as many more popular blockchains have been added. There are bridges to the Ethereum and Bitcoin blockchain, of course, but also to blockchains such as Avalanche, Tron, Base, Solana and the Binance Smart Chain. The more popular the blockchain, the more cross-chain bridges exist for it.

Main type of crypto bridges

The main type of bridge is from layer2 to layer1 networks. The best known of these are Arbitrum, Optimism and Polygon. The main reason for these bridges is to make Ethereum faster and cheaper. This type of bridge also exists for Bitcoin, such as Stacks, but Ethereum has by far the most supporting bridges. It is therefore used the most.

Functioning of blockchain bridges

If you want to start exchanging data or tokens, firstly a smart contract should be created for it, which determines what happens when you deposit Solana tokens to start trading on Ethereum, for example. The bridge's smart contract first takes your money and then replaces your deposit with tokens from the target blockchain.
You can think of this process as burning the tokens on the current blockchain and then mint them on the target blockchain. In our example you would receive WBTC (Wrapped Bitcoin) on the Solana Network, for your Solana.

Vitalik Buterins Vision on crypto bridges

Vitalik Buterin had his reservations about this variant and was more in favor of the multi chain system, which we will talk about more later. After all, a crypto bridge can be attacked with a 51% attack, where crypto loot can be made by double spending, inflating the token supply. This is not possible on many main chains because the rules of the protocol on the main blockchain prohibit double spending or other fraud. As a result, validators and nodes reject these blocks and thereby making a 51% attack worthless.

So as long as you still have tokens in a bridge contract like Solana WETH you are susceptible to such an attack, especially if there is a lot of money in the bridge. This also happens frequently, so it's not a bad idea to quickly swap these kinds of bridged coins to native coins from the target blockchain, in this case to Ethereum. Of course, you can also issue the Solana WETH, because you don't exchange Solana for fun.

As the number of chains increases in a bridge system and all sorts of bridges are built between chains, an attack on 1 can be an attack on all and all the bridges can collapse at once. This is the danger of cross chain crypto bridges, especially if there is more and more money in them, and why Buterin does not think this is a good system.

Multi chain in a nutshell

Multi chain technology is very similar to cross chain bridges, only it works exactly the other way around. In multi chain blockchains, smart contracts are created that operate on other blockchains. All of these smart contracts are connected in a single network. Although the transformation from native smart contracts and bridges to multi chain seems logical, there are quite a few technical challanges that a blockchain with multi chains must solve.

Features of multi chain technology

Users can perform transactions on different blockchains on a multi chain without having to transfer funds to other blockchains, as it is the case with bridges. This is much safer since popular and well-stocked bridges are often targeted by hackers or 51% attacks. Bridge coins like Solana WETH then become redundant, because assets never leave the blockchain and so this is cheaper.

In a multi chain blockchain or application, developers create smart contracts for each major blockchain. Of course, this can take quite a bit of work, but does a bridge. The main difference, then, is security, which is much higher with a multi chain.

Objective multi chain

The point of multi chain is that there are many more possible users for dApps if the major blockchains can also participate. This could become important in the Web3 revolution, which is increasingly gaining branches. Since you no longer have isolated tokens, multi chain allows you to use all your funds in other connected blockchains, dApps and other ecosystems.

Just imagine playing a play to earn game and you earn coins that you can only use on the same blockchain. If you wanted to exchange them for Ethereum, the transaction fees would often cost more than the coins you want to transfer, even if you were to use a bridge. With multi chain, you can simply exchange these coins because they can also be used on other popular blockchains. You could also use these coins to play another game on another blockchain and use the earned coins to buy in-game items on a connected blockchain.

Advantages multi chain

With multi chain, you can reduce congestion in popular and expensive blockchains by processing transactions in parallel. It is also possible to build specialized ecosystems made to meet specific needs, such as privacy, speed, a DAO or consensus protocols. For example, a game will have very different needs than a DeFi app.

Disadvantages multi chain

There are also some downsides about the multi chain. Because all smart contracts are isolated by blockchain, liquidity can become fragmented, which can make it difficult to sell your coins and increase transaction costs again.

Multi chains are also technically tricky. You have to write out a new contract for each major blockchain, and this code must be error-free, or the problems begin. With every emergence of a popular blockchain, the developers can start all over again. Other aspects include the delays that can be incurred because of the permission a multi chain must get from nodes to access a blockchain and the high cost of hardware for each connected network.

Atomic swap

This is a method of exchanging cryptocurrency on a peer to peer basis, without the involvement of a third party. It uses what is known as a hash timelock contract (HTC), where timelock represents the maximum time a transaction is given to execute the smart contract.

An HTC works with funds that traders deposit that work like a vault. When the terms of that smart contract are met, the coins are released and the transaction is complete.

Example of an atomic swap

An example would be if party A has 10 tokens X and wants to exchange them with party B who has 5 tokens Y on a 2:1 basis. A deposits 10 tokens X into an HTC with a certain end date and gets a private key. From this key, A sends a cryptographic hash to B.

With this cryptographic hash, B can verify that 10 tokens X have really been deposited. With this hash, B creates a new contract and deposits 5 tokens Y into it. A is shown this new hash and can claim B's tokens, after which A's private key is shown to B, who can then retrieve his 10 tokens X within the timelock time, after which the atomic swap is completed. If B does not do this in time, the tokens claimed by A are automatically returned to B.

The advantage of cross chain atomic swaps is elimination of the middleman and lower transaction costs. Disadvantages are the complexity for the ordinary trader and the risk of attacks.

Cross chain NFT

A cross chain NFT is a non fungible token or non-exchangeable token that can be traded on multiple blockchains. Often a token standard worked that is interoperable, such as Ethereum's ERC-1155 token, which fits both fungible and non fungible tokens. Multiple blockchains already have an equivalent of this on their own blockchain.

For example, you could create an NFT on a very secure blockchain and then move it to a cheaper and more scalable blockchain to trade it.

Usecase cross chain NFT

The usual applications of cross chain, such as a bridged NFT or a wrapped NFT are possible with this technique.

An NFT that you can only trade on one blockchain limits your audience and reduces your chances of trading. By being able to offer it cross chain, more people can bid on your NFT and your chances of winning are higher.

The future of certain Web3 applications, such as games, may depend on further developing the cross-chain NFT standard so that users do not have to use isolated tokens.

Cross chain gaming

This refers to the technique of freely exchanging in-game data and assets between blockchains. Thus, you could use in-game items from one game in another game with cross chain gaming.

Cross chain gaming is part of the Web3 revolution, where components of a game seamlessly connect to other Web3 ecosystems. The shortcomings of certain blockchains can be circumvented by, for example, mining large amounts of NFTs for a game on cheap and scalable blockchains and extracting security on another blockchain.

Another technique is the multi chain approach, where smart contracts are used to trade assets between blockchains one blockchain at a time.

Cross chain DeFi

Cross chain DeFi is the use of decentralized finance between different blockchains. Its purpose is to allow you to exchange data and tokens across different blockchain ecosystems through financial applications.

The importance of cross chain DeFi

DeFi has proven to be an important component of the crypto market, but the division of DeFi into all those separate platforms has spread liquidity to the point that it has become an increasingly inefficient market as more platforms are added. By applying cross chain in DeFi, universal pools can be created with tremendous liquidity.

Another aspect is the increase in trading fees and reduced revenues of DeFi platforms if an Automated Market Maker has to shop financial products through a variety of blockchains. Capital then yields less, the effectiveness of markets decreases, and adoption and innovation are put at risk. Because there are so many separate dApps, scalability also gets out of sight.

Cross chain smart contracts in DeFi

Cross-chain smart contracts allow dApps to create multiple separate smart contracts for different blockchains that can communicate with each other, creating a single merged app.

A separate smart contract could then be written per blockchain for each feature of cross chain DeFi, where you use a very secure blockchain for security features, such as when depositing collateral, and use a scalable blockchain for fast processing of data and transactions when buying crypto for your collateral. Also, you could lend out tokens on a market with low liquidity for higher interest rates and lend them back on a platform with high liquidity at lower interest rates.

Advantages cross chain DeFi

Cross chain DeFi can bridge the distance between blockchains and expand liquidity, making markets more efficient and reducing slippage. Capital can be more easily used across multiple protocols and dApps. The danger of a single point of failure is also greatly reduced.

With the advance of technology behind this, users will not even be aware of all the features they are benefiting from. The Cross Chain Interoperability Protocol is one such tool, where Synthetix works with synthetic possessions and Aave with cross chain governance, where the drivers are decentralized oracles (retrieves data from the real world) from Chainlink, for example.

Cross chain DEX

A cross chain decentralized exchange (DEX) can tap the liquidity resources of multiple blockchains, lowering slippage and raising revenues for liquidity providers. With a cross chain smart contract on a decentralized exchange, you can also exchange ETH for SOL directly without using wrapped tokens or centralized exchanges.

Cross chain staking allows you to strike assets on one blockchain and obtain revenue on another through decentralized finance. This allows you to secure multiple networks with staking and expands Web3 capabilities. It also allows cross chain farming to provide more revenue because you don't have to move the funds to other blockchains.

The future of cross chain crypto

Cross chain has long proven its value. It is widely used and you see wrapped tokens and layer2 networks rank high in CoinGecko. Not only is it convenient, but it also provides cost savings and delivers scalability.

Multi chains are also on the rise and could beat cross chain bridges, as the stories of looted bridges are getting quite common. The multi chain does not have this problem, but writing a flawless smart contract for every major blockchain is also not everything and takes a lot of time and resources.

Cross chain or multi chain?

Cross chain has long proven its value. It is widely used and you see wrapped tokens and layer2 networks rank high in CoinGecko. Not only is it convenient, but it provides cost savings and delivers scalability.

Multi chain is also on the rise and could well beat the cross chain bridge, as stories of looted rich bridges are quite common. Multi chain does not have this problem, but writing a flawless smart contract for every major blockchain is also not easy and takes a lot of time and resources.