Cross-Chain or Multichain: What’s The Difference?
|— Interoperability in the blockchain industry is important to allow networks to interact with one another. The integration of networks will create a rich, truly decentralized industry.|
— A multichain blockchain means a project is deployed across multiple networks so that they can communicate with one another.
— Cross-chain technology refers to a tool that allows assets to flow between unrelated blockchains. It uses a smart contract to allow networks to interact seamlessly.
Cross-chain and multichain. These are two terms you’ll no doubt be familiar with as you engage with the crypto ecosystem – but do you understand the difference?
Each of these technologies contributes something important to the blockchain space. They do so in different ways – and understanding the function and limits of each one is essential for anyone trying to comprehend the crypto space and its future.
So what exactly do these terms mean – and how do they impact blockchain as a whole? In this article, Ledger Academy answers that question.
Before we answer that, we need to talk about something extremely important in the industry: Interoperability.
What Is Interoperability?
Interoperability means different networks and projects can “talk” to each other. This allows users to send data and value from one network to the other seamlessly.
As it stands, though, most blockchains are designed as a silo, without the ability to interact with each other. This results in a pretty major problem of inefficiency and inhibits innovation in the space. More critically, it limits users’ freedom over how to use their digital assets.
Essential for Truly Decentralized Finance
An example of interoperability in traditional finance is the ability to send money from one bank to another. While there are still fees and delays in this, the systems are not isolated from one another and can interact with each other. So having money with one bank doesn’t mean it’s stuck there.
In the crypto space, we could apply the same analogy to blockchains and platforms instead of banks. Having value (coins) on a particular blockchain doesn’t mean you can carry that data and value over into other networks, because they each speak a different language. This is well illustrated by the current DeFi system: being predominantly based on Ethereum. DeFi cannot interact with coins and tokens from other blockchains. This means these assets have much more limited options when it comes to decentralized finance services, unless you exchange them into Ethereum-based tokens.
The result? A rather centralized DeFi system, where one major blockchain is dominant.
Essential for the Metaverse to Thrive
The fast development of the Metaverse further underlines the importance of interoperability: say you bought some NFT fashion, an avatar or a vehicle on one platform, and wanted to bring it with you onto another Metaverse ecosystem. The platforms, and your assets, would all need to be able to communicate, in order for you to have this level of freedom in how you used your assets.
The alternative? You’d be limited to using your digital assets only on platforms with the same underlying blockchain. Such limited control of how to use your assets is not true ownership. So while interoperability might sound like a technical term, it relates to your digital sovereignty, and the ability of the digital space to become as “real” as real life.
This is why we need interoperability between networks. Ensuring users have the freedom to explore different digital platforms, be it DeFi or virtual worlds, without being locked into one system.
Multi-chain technology and cross-chain technology are two of the main strands of development being deployed to overcome this problem. So let’s take a closer look at what they are, and what each one means for you.
At the heart of it, a multichain blockchain refers to a project using multiple chains that are designed to communicate with one another. For this to work, the project needs to be based on at least two blockchains at the same time. By existing across multiple blockchains, it allows easy communication and interaction between the blockchains. So that users can utilize the project across different networks.
How does multichain technology work?
The multichain approach creates a sort of internet of blockchains that allows users to transact across multiple chains simultaneously without needing to move their assets from one network to the other.
It achieves this by splitting its underlying blockchain into different layers: the consensus layer – which is what keeps the system secure – is the base layer for the entire network. This common strand keeps all of the different blockchains within the multichain system secure.
By contrast, the network’s application layer, which sits on top, is programmable. This enables different individual blockchains to co-exist and communicate freely, despite each one being a unique ecosystem. Cosmos is a great example of this dynamic in action, ushering in a new era of interoperability between blockchains without compromising on security.
Where multichain networks refer to projects that exist across networks, but share an underlying security infrastructure, a cross-chain protocol enables interoperability between totally unrelated blockchain ecosystems. In other words, it acts as a blockchain bridge.
What do we mean by this? Well, imagine you’re trying to access DeFi services, but you only have Bitcoin in your wallet. The vast majority of the DeFi is based on Ethereum – Bitcoin is a foreign language. This means you’d need to use an exchange to swap your Bitcoin into ERC20 in order to get started, a costly, inconvenient and time-consuming process that leaves you depending on the exchange.
However, a blockchain bridge eliminates the need for any third-party intermediary like an exchange platform. Enabling you to use your Bitcoin directly within the Ethereum ecosystem. This not only gives individuals more control as they navigate crypto, but also contributes to the decentralization of the entire ecosystem.
How do cross-chain bridges work?
A blockchain bridge acts as the missing link between two blockchain ecosystems. Making the transfer of information, data and tokens across them fairly easy.
This is established by creating a protocol that keeps your original assets in a pool and gives you back coins of an equivalent value that – through the power of smart contracts – are compatible with the other network. This provides a way to transfer information, data, and assets across different blockchains seamlessly, using these “wrapped” assets.
Why are blockchain bridges vulnerable?
Blockchain bridges provide a solution to the lack of interoperability between blockchains in the crypto ecosystem. But we’d be remiss if we didn’t mention their downsides. Bridges are becoming notorious for being vulnerable to hacks, with the Ronin Network Bridge Exploit in March 2022 proving to be the biggest crypto hack of all time.
The reason for this is simple: by maintaining a pool of assets within their protocol (the ones you swapped for wrapped coins), blockchain bridges create a central point of failure. Doing so makes that protocol a target for hackers, hence their growing reputation as a beacon for hacks.
This is not to say bridges have no use – simply that if they are to continue to have utility. The technology would need to develop past its current state in order to overcome these security issues and benefit the space as a whole. This is a sentiment famously shared by Vitalik Buterin, even prior to Ronin.
Multichain and Cross-Chain Compared
So to summarize, multichain technology creates an internet of blockchains capable of communicating freely while remaining secure thanks to a shared underlying security layer. While cross-chain technology uses smart contracts to create synthetic versions of your coins that are able to interact with other blockchains directly.
The Future of Blockchain
Removing the barriers between different blockchains will define the future of the space – and how far the technology can go. So understanding the different approaches to interoperability, as well as their limitations, is an essential lesson for anyone trying to deeply comprehend the crypto arena and where it might take us in future.
Now you understand the different approaches to developing interoperability, you’re empowered to make well-informed decisions as you explore the digital space yourself!