What is cross-chain? Open up new horizons for DeFi

What is cross-chain? What are the benefits that Cross-chain brings to DeFi? Learn more about Cross-chain working mechanism and application here!
Cross-chain is a term that has gained a lot of attention in recent times. Especially DeFi godfather, Andre Cronje (father of Yearn) recently shared a lot about the new cross-chain product. So what is cross-chain, what are the benefits that they bring? And does Andre’s new product really work?

Let’s find out in the article!

What is cross-chain?

Cross-chain is a solution to help transfer crypto assets, tokens or data from one blockchain to another, to optimize interoperability between blockchains.

The reason Cross-chain was born is because each blockchain network has a different structure, so the protocols for them to transfer assets between each other are still very limited.

Cross-chain transfers assets from one Blockchain to another

Cross-chain working mechanism

Simply put, the cross-chain mechanism is similar to going through a bank to change Vietnamese money into Yen and then send it to Japan. For blockchain, we will wrap the token in one network to become a token that can be used in the other network.

Example: You want to send BTC to the Ethereum network. What you need to do is wrap BTC into wBTC (wrapped BTC). From there you can use wBTC on the ETH network.

With the Cross-chain mechanism, DeFi has now appeared a new application that is considered an inevitable trend and has attracted a large number of users, which is Cross-chain Bridge – Cross-chain bridge.

Read more: What is Cross-chain Bridge? Open the way of trade between blockchains

The problem of the current cross-chain

The concept is relatively simple, but in fact to have wBTC, you will have to deposit that BTC to a third party. When the third party receives the assets and validates the transaction, they will mine the wBTC and send them to you.

So the issues that we need to pay attention to are: “What if the third party is attacked?”

They can now mine an infinite amount of wBTC on Ethereum, or they can steal all the BTC deposited.

The next step to solve this problem is Multisig Wallet, instead of depending on only 1 third party as before, there will be more parties validating transactions. Assuming there are 5 parties involved, it will take 3/5 valid transaction confirmations to pass.

However, the design above only solves the transaction confirmation problem, but the wallet itself containing a lot of BTC is still a lucrative prey for attackers.

New Cross-chain Solution

To find a superior solution, Andre used SushiSwap’s AMM. Surely you are familiar with the asset swap on AMMs like UniSwap and Sushi, we exchange the asset A owns for the asset B in the pool. That is why AMM is more suitable than the third party above. Because no one has control over the assets in the pool.

The next thing to do is to make the AMM usable for Cross-chain. The trading pair on AMM currently consists of three parts: token A, token B, and a price (which changes based on the amount of tokens A and B in the pool). Meaning, in essence, we only need to know the quantity of token A and token B, not requiring them to be on the same chain.

For example, Liquidity Providers (LPs) provide ETH liquidity on Ethereum and FTM on Fantom.

• The trading pair on Ethereum has ETH and no FTM but knows the amount of FTM available on Fantom.
• In contrast, the pair on Fantom has FTM and no ETH but knows the amount of ETH available on Ethereum.

So how does Fantom know the amount of ETH on Ethereum?

In short, this is an Oracle problem and can be solved. The simple solution is to find the participants (nodes/servers,..) to confirm when an event occurs on the contract of Ethereum/Fantom/BSC/… When the majority reaches consensus, it will be through the.

Cross-chain example

Putting it all together Andre has created a cross-chain-enabled AMM.

Product example:

The pool contains 100 ETH on Ethereum and 200,000 FTM on Fantom. Anyone can add and withdraw liquidity.

A puts 1 ETH into the pool and withdraws 2,000 vFTM (virtual FTM).

The oracle network has 10 nodes and when 7 nodes (2/3) confirm that A has added 1 ETH, they will update to Fantom and add 1 vETH (virtual ETH) and then send 2,000 FTM to A.

Note: This solution raises the issue of how to secure users if a large number of nodes are behaving badly. Andre Cronje has also emphasized on this and will have an article about the solution in his product in the next articles.

Epilogue

Cross-chain opens up a whole new horizon for DeFi. Currently, Bitcoin capitalization is approaching 900 billion dollars and at one time it was more than 1,500 billion dollars. What if a small part of that goes into DeFi when TVL is only close to $40 billion at the moment?

This will be a major breakthrough in the DeFi space and if successful, will bring the combination of projects to a new level, thereby helping to maximize the benefits for users.