Blockchain interoperability and how does it work? (Part 75)
Welcome to the 75th part of the 100-part series on Blockchain.
Blockchain interoperability refers to a Blockchain’s ability to actively communicate and freely exchange data with other Blockchains. A common analogy is that of emails; someone with a Gmail account can send emails to someone with a Yahoo or Hotmail account.
Types of Blockchain Interoperability
Blockchain interoperability would allow users on any Blockchain layer to transact or send messages to an outside chain. Interoperability can be split into two parts:
(i) Exchange of digital assets: This means the ability to transfer and exchange assets originating from different Blockchains. For instance, making bitcoin spendable in distributed applications (Dapps) built on Ethereum. Or, while you are working with an application on the Ethereum network, you can make a direct payment to a separate chain like Cardano or Cosmos.
(ii) Exchange of data: This is the ability to exchange data or send messages between two or multiple Blockchain platforms.
Blockchain interoperability solutions
Notary Scheme Solutions
In this solution, the transactions between the two users on different Blockchains are managed by a trusted third-party called a notary. The notary’s job is to verify that a Blockchain event occurred and feed this information to a second Blockchain. For this, the notary should have accounts on both the Blockchains, i.e., source and target. Suppose the transaction has to happen between two users; one user is on Blockchain A, and another is on Blockchain B. For this, user 1 on chain A transfers the assets to the notary account (on source chain A). The notary will lock and confirm the assets and then transfer the corresponding assets from its account (on target chain B) to user 2 on chain B.
Two types of notaries may be used; a single-signature notary or a multi-signature notary.
Single-signature notary: A single-signature notary, also known as a centralized notary, collects transaction data from the source chain Blockchain A, validates it, and initiates the execution of the transaction on the target chain Blockchain B. The notary group consists of many nodes, each of which should have funds in the notary account. Each node, also called a notary, has a reputation value in the notary group, and all members in the notary group jointly maintain the party’s credit standing. The node with sufficient funds and with high reputation will be randomly selected, and that single node will undertake the tasks of data collection, verification, and transaction confirmation in the process of the cross-chain asset or data excahange.
Limitations: (i) Single-signature notary schemes are one of the simplest ways to achieve cross-chain interoperability with high transaction speed. However, it requires depending on a centralized body, which is against the Blockchain’s decentralized nature. (ii) An additional disadvantage is its vulnerability to the failure or misbehavior of any node.
Multi-signature notary: With a multi-signature notary, a cross-chain request initiated by user 1 on ‘Blockchain A’ needs to be successfully verified by the majority of nodes/notaries. Once verified, the signatures of multiple nodes are published on the corresponding transaction to be executed on ‘Blockchain B.’ In order to tolerate Byzantine faults, a Byzantine-fault-tolerant consensus algorithm is used, according to which the cross-chain transactions can be processed and transmitted to the target Blockchain only if more than two-thirds of notaries achieve consensus and sign the transaction.
Examples of platforms using notary solutions for Blockchain interoperability: Herdius (a decentralized exchange platform) and Bifrost use notary schemes to facilitate cross-chain transactions on multiple Blockchain platforms.
Hash locking technology
Hash-locking or hash-time locking is another technique for the cross-exchange of assets on different Blockchain platforms without the need for trusted third parties/notaries. The cross-exchange of assets is also called atomic swaps. This technique does not permit the transfer of a token from one Blockchain to another but enables users to hold its ownership by the user on a different Blockchain. By that, users are free to choose on which Blockchain they want to keep their assets.
The atomic swap takes place with the help of a special type of smart contract between the users on different Blockchains called a hashed time lock contract, or HTLC. One of the users (user 1) must be the first to time-lock their assets into an HTLC. These assets remain locked and illiquid until either the swap is completed or the HTLC expires. After getting confirmation that user 1 has locked assets on chain A, user 2 would time-lock their assets into the corresponding HTLC on the other chain B, completing their side of the collateral. After the locking of assets from both users, they can each claim their swapped assets; otherwise, the locked assets are transferred back to the users.
Time lock: It is a type of locking or a restricting mechanism that locks out the assets until a preset or a predetermined time is not reached. In terms of cryptocurrency, it means that a certain amount of coins will be locked out and will not be spent until a preset or predetermined time is reached.
How hash-locking scheme works?
Suppose the transaction has to happen between Alice and Bob, who possess accounts in Bitcoin and Ethereum Blockchain networks, respectively. They come to an agreement whereby Alice will give Bob 10 BTC in exchange for, say, 12 ETH.
(i) Alice’s contract generates a secret key (random number), e.g., s, and computes its hash value, e.g., h = hash(s), then sends the hash value h to Bob. By doing so, Bob only has access to verify the locked Alice’s 10 BTC, but Bob she cannot access or withdraw the funds — at least not yet.
(ii) After verification, Bob also locks his assets, i.e., 12 ETH, into a smart contract until a certain lock time. He also needs to send the hash of his secret key to Alice. Smart contracts have certain pre-defined rules:
· If the secret s is provided by Alice to Bob within lock time, i.e., 2t, then Bob can verify 10 BTC locked by Alice and can claim his ownership over them; otherwise, the BTCs are sent back to Alice.
· On the other hand, if Bob provides the correct secret to Alice within the pre-defined time t, then the ownership over 12 ETH is transferred to Alice; otherwise, the ETHs are sent back to Bob.
(iii). After verification of assets by both the users, the ownership of assets is transferred, and its transaction is stored on both the Blockchains to prevent double-spending.
Cross-chain bridges
A Blockchain bridge, also known as a cross-chain bridge like a physical bridge, connects two Blockchains. It facilitates communication between two Blockchain networks by facilitating the transfer of data or digital assets.
How do cross-chain bridges work?
The cross-chain bridges do not permit the transfer of a token from one Blockchain to another in the sense that a specific amount of assets is locked on the source Blockchain, and the same number of equivalent assets are released on the target Blockchain. This is generally performed using smart contracts.
Users send their tokens to a smart contract on the source Blockchain. Once the smart contract locks and has custody of the user’s crypto coins, it automatically communicates this to a smart contract on the target Blockchain, which then releases the equivalent amount of coins. In some cases, the released coins may be freshly minted, whereas in other cases, they are derived from the liquidity pools on the target chain.
Binance Bridge, Celer cBridge, Multichain, and Wormhole are among popular cross-chain bridges.
Sidechains
Sidechains, layer 2 scaling solutions also provide Blockchain interoperability. Sidechains are separate Blockchains that are connected to the main Blockchain through a two-way peg to improve the scalability by helping process some of the data from the main Blockchain. It also adds an interoperability function by validating data from other Blockchains. And has the ability to import and export digital property (i.e., coins, assets, etc.) from other Blockchains at an agreed-upon price or exchange rate. It allows the transfer of digital properties between the two Blockchains using Simplified Payment Verification (SPV) proofs. Through SPVs, the nodes on the sidechain can verify if the transaction has been initiated on the other Blockchain and are not required to download the whole main Blockchain every time the verification process is needed.
The 2 way peg, abbreviated as 2WP, acts as an intermediary which locks an asset in one Blockchain to reserve it until the transfer to the other one is completed. Sidechains have already been discussed in detail in Part 16 while discussing Layer 2 scaling solutions.
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