Cross Chain Meaning
What is Cross Chain in Crypto?
A cross-chain solution connects two or more blockchains to transfer digital assets and information seamlessly.
Generally, digital assets and their native blockchain are isolated, and can’t communicate with other networks. Interoperability solutions like cross-chain bridges solve this problem. Cross-chain protocols also allow users to transfer cryptocurrencies from one blockchain to another.
Let’s say Alice wants to exchange some Bitcoin for Ethereum. However, Alice’s Bitcoin is on the Bitcoin blockchain, and she wants to receive Ethereum on the Ethereum blockchain. To do this, Alice can use a cross-chain protocol to facilitate the transaction.
First, Alice’s Bitcoin is locked into a smart contract on the Bitcoin blockchain. This smart contract generates a unique hash that represents the locked Bitcoin. This hash is then sent to a cross-chain bridge, which acts as an intermediary between the Bitcoin and Ethereum blockchains.
The bridge then generates a corresponding hash on the Ethereum blockchain, which represents the locked Bitcoin. Alice can then use this hash to unlock an equivalent amount of Ethereum on the Ethereum blockchain.
Once Alice has completed the transaction, the bridge releases the locked Bitcoin on the Bitcoin blockchain, and the unlocked Ethereum is sent to Alice’s Ethereum wallet.
In this example, data (the unique hash) and value (the Bitcoin and Ethereum) are exchanged between two different blockchains, facilitated by a cross-chain protocol. This process allows Alice to trade one cryptocurrency for another without having to go through a centralized exchange or intermediary, and without having to worry about the different blockchain standards or network fees associated with each cryptocurrency.
Benefits of Cross-Chain Technology in DeFi
Cross-chain technology offers many benefits in the decentralized finance ecosystem, including:
- Interoperability: The technology allows different blockchain networks to interoperate with each other, creating a more connected and cohesive ecosystem. This can enable users to move assets and data across different blockchains, without the need for intermediaries.
- Scalability: The technology can help to improve the scalability of blockchain networks by allowing them to offload some of the data or processing to other compatible blockchains. This can help to reduce the burden on a single blockchain and improve its performance.
- Token swap: You can use a cross-chain bridge smart contract to swap tokens for an equivalent version within another blockchain. This feature promotes direct peer-to-peer trade and eliminates the need for intermediaries.
- Data and value exchange: Before cross-chain solutions, you could only make transactions within DeFi protocols with tokens from identical blockchains. This technology allows traders and investors to use their tokens freely within other blockchains without intermediaries.
- Access to diverse DeFi projects: The protocol enables users to access data and transact with other DeFi protocols without leaving the protocol.
What are Examples of Cross-Chain Crypto Projects?
- Polkadot: Polkadot uses this technology to create a network of layer-one blockchains. This network provides interoperability to blockchains and allows users to transfer data and assets across the blockchains within the network.
- Blocknet: Blocknet leverages the technology to create a protocol that offers peer-to-peer asset exchanges, as well as a permissionless and trustless network for communication.
- Cosmos: Cosmos is a DeFi protocol that reduces fragmentation in blockchain networks by allowing them to communicate with each other.