This article delves deeper into cross-chain technology along with cross-chain DEX (Decentralized exchange).
- What is DEX?
- What is the working principle of DEX?
- What is Cross-chain technology?
- An Overview of Mainstream Cross-chain technologies
- What is Cross-chain DEX?
- How Cross-chain DEX works?
- Benefits of Cross-chain DEX
What is DEX?
DEX, or decentralized exchange, is a peer-to-peer marketplace that allows transactions between crypto traders. Decentralized exchanges (or DEXs) are a way to enable financial transactions without the involvement of banks, brokers, payment processors or other intermediaries. Uniswap, Sushiswap, and other popular DEXs use the Ethereum blockchain. They are part of a growing set of Decentralized Finance (DeFi), which makes a wide range of financial services directly available from a compatible cryptocurrency wallet.
What is the working principle of a DEX?
DEX’s overall principles are similar to CEX (Centralized exchange). It allows users to buy, sell, and exchange crypto assets. They operate independently of intermediaries that validate and clear transactions. The non-custodial DEX framework allows for self-executing smart contracts, which are the basis of exchanges between DEX users. This implies that only users have access to their assets and private keys. In this case, users are responsible for managing the money and wallet. Now, a DEX works depending on its level of decentralization and the underlying Blockchain technology. Below image shows how a DEX operates.
DEXs are often built using open-source code. This means that anyone can view how they work. This also allows developers to adapt existing code to create competing projects.
What is Cross-chain technology?
A cross-chain bridge is an independent technology that eliminates the need for third parties to exchange tokens between two different blockchains. As a result, governance becomes decentralized, and transaction costs also become low as users do not need to pay additional fees other than gas fees to move assets. It promotes seamless communication as the technology brings interoperability to the blockchain ecosystem. Different blockchain networks adopt different protocols, as a result, interoperability is not standardized at the current development stage.
Blockchains are distributed decentralized ledgers, and different blockchains correspond with different distributed ledgers. Let’s take the example of Bitcoin and Ethereum. BTC is always available on the Bitcoin blockchain and ETH on the Ethereum blockchain. However, BTC cannot be transferred to ETH and vice-versa. Cross-chain technology allows for the interconnection of blockchain networks through exchanging and transferring information and value. So, we can use cross-chain to connect these two blockchains in order to exchange information and transfer value.
Cross-chain technology enables the exchange, mutual communication, transfer, and interchange of assets, data and functional states across different blockchains. It also increases the scalability and interconnection of all blockchain technologies. In a nutshell, it breaks the siloed mode of blockchain data. Examples of cross-chain bridges are Tezos Wrap Protocol Bridge, Binance Smart chain, Solana, Avalanche Bridge, etc.
Cross-chain bridges can be either centralized or decentralized.
In a centralized approach, an institution needs to be involved before users can trade, lock, or mint their assets or tokens between two networks. In addition, the institution is responsible for verifying the transaction records.
On the other hand, for a decentralized approach, bridges use smart contracts in a non-custodial manner, so they remain independent, and the whole process becomes automatic. Before transferring the assets to another blockchain, the assets are locked in a smart contract, and the destination blockchain then generates the new tokens. If users want to revert their actions, the newly created tokens are burned, whereas the previously locked asset will be unlocked. In addition, a number of validators have been incentivized to assist the decentralized system in verifying transactions.
Polkadot, Blocknet, Cosmos, and Wanchain are some of the most prominent cross-chain projects. Each focuses on a different aspect. Also, some projects created cross-chain solutions for specific governments or organizations. The processing of transactions and data is different across these cross-chain projects.
Polkadot, for example, aims to increase the sharing of smart contract data among distributed platforms. Its main chain is the relay chain which allows several different parachains to access the relay chain in the form of “slots.” Relay chain transfers assets and information to other parachains which have already used the slot.
Blocknet, on the hand, focuses more on a DEX that operates between blockchains. Other than these major projects, some projects, such as Stellar (XLM) and VeChain (VET), focus on supply chain and payment networks.
Some industries, including healthcare and decentralized financing (DeFi), require cross-chain technology. Inter-blockchain connectivity allows token swaps between networks in the DeFi, which is critical for the financial ecosystem to flourish. Besides, cross-chain technology allows users to avoid common trade-offs between distributed platforms and tap into various consensus mechanisms to help them get the best of both worlds.
An overview of mainstream Cross-chain technologies
A notary can introduce a trusted entity. Let’s say A and B don’t trust one another. You can introduce a third party, trusted by A and B, to act as a notary in order to establish indirect mutual trust. Examples – Interledger and Corda. We can break down the notary mechanism into three types:
- One signature with strong centralization
- Signed in a distributed manner
Sidechains/ Relay chains
The sidechain works in relation to the main chain and can analyze and verify the block and ledger data for the main chain. Two-way peg technology is the basic technology for side chain implementation. Two-way peg technology allows digital assets to be locked onto the main chain while releasing equivalent assets into the side chain. The opposite is true; if the assets in the sidechain are locked, they can be released. Example: BTC-Relay
A relay chain (also known as a repeater) is a channel that is built between two chains. It contains a particular data structure to allow the two chains to interact. Relay chains only act as data collectors. The relay chain that receives data will complete the transaction confirmation and data completion after it has received the data. Example: Polkadot, Cosmos.
The lighting network of bitcoin was the first to offer hash-locking or Atomic Swaps. This technology uses a hash lock, time lock, and a third-party notary to complete transactions successfully. Hash-locking employs a time lock and hash lock to make the receiver determine the deadline for collection and generate a certificate of collection for the payer. Otherwise, it will return the asset. Example: lighting network.
Distributed private key control
Distributed private key control is the use of private keys in distributed nodes to control assets in a blockchain network. This allows the on-chain assets to be transferred to the decentralized system while mapping assets from the original chain to those on the cross-chain. After being broken into multiple parts, the asset’s private key is transferred to decentralized networks or organizations for management. The user retains control of it, and the asset will remain in the hands of users. Example: Wanchain.
How does a Cross-chain interaction works?
Cross-chain protocols, also known a-tomic swaps, allow users to exchange one cryptocurrency for another, no matter, whether it is between two different blockchains and without the help of a third party. It is a variation of hash time-locked contracts (HTLC) and smart contract technology. This contract is usually created between two parties who don’t trust each other but want to exchange coins or tokens. It works as a temporary escrow for the funds of both parties. In this scenario, both parties need to confirm funds receival when the exchange is complete, and it should be within a limited timeframe. The transaction gets canceled if one party fails to confirm. The swap happens only in case both parties confirm the transactions. This ultimately removes the counterparty risk of token exchange across blockchains.
Technically, cross-chain interaction depends on the following:
Atomic swaps – It allows two parties to trade their tokens through exchange facilitators on multiple blockchains. This method does not require a third party to initiate or finalize the trades, but users can trade directly on a peer-to-peer basis. This approach neither initiates nor ends the process.
Relays – This allows blockchain networks to monitor transactions on other networks. It does not require distributed nodes and works on a chain-to-chain basis. A single contract can be used as a central client on multiple chains. On-demand, all transactions can be verified. This method increases security, but expensive.
Merged consensus – It uses relay chains to enable two-way interoperability among chains, which must be implemented in the chain from the beginning.
- Atomicity is the fundamental principle of this technology.
- It allows sharing of the networks across multiple platforms.
- It helps to maintain consistency among several interconnected blockchains.
What is Cross-chain DEX?
Cross-chain interoperability is a vital component of the success of several DeFi projects. Cross-chain DEXs build on aggregators and of the current DEXs development work . They create a pool of liquidity via a new multi-chain network protocol. They enable users to trade across many blockchain ecosystems by leveraging smart algorithms, asset diversity, increasing liquidity and trading volumes and growing the market for decentralized finance. Cross-chain DEX is necessary for DeFi to fully experience the power of interoperability and liquidity across different chains.
Basic features of cross-chain DEXs
- Bridge between chains
- Blockchain agnostic
- Ultra fast
- High liquidity
- DEX aggregation
Best cross-chain DEX protocols
The following are some of the most popular cross-chain DEXs protocols:
How a Cross-chain DEX works?
Cross-chain DEX aggregators draw on the experience of other DEXs and aggregators. They use innovative multi-chain network architectures such as EmiSwap to pool liquidity from multiple blockchains. Cross-chain aggregators use the interoperability offered by linked blockchain architecture to bring more liquidity and asset diversification to the decentralized finance industry.
Cross-chain DEX aggregators use intelligent algorithms to determine the best routes across multiple blockchain ecosystems to fulfill trade requests. Aggregators can execute orders at the lowest price across multiple protocols, and this allows users to switch between tokens on different networks quickly. You can build cross-chain DEX aggregators on Polkadot and Solana’s Binance Smart Chains, Kucoin and Polygon. One of these is EmiSwap.
By allowing users freedom to operate in an unrestricted environment, decentralized finance is an alternative to relying on centralized infrastructure. DeFi is now one step closer to achieving this goal with the raise in cross-chain DEX aggregators.
Benefits of Cross-chain DEX
Cross-chain DEXs have simplified and expedited the process of DeFi users exchanging multiple chain tokens. One possible way to do this is by pooling distributed liquidity from various blockchain protocols onto a single platform. Cross-chain transactions conducted normally might take as little as a few minutes or as long as several days that also incur significant processing fees. However, recent security breaches have made consumers understand that security may be the primary consideration when selecting a cross-chain DEX, in addition to efficiency and prices.
Here are some of the benefits of cross-chain DEX:
- Seamless trading: cross-chain trading removes bottlenecks and simplifies crypto trading.
- Truly decentralized cryptocurrency trading: Users can perform a seamless exchange of digital assets without the intervention of third-party governance with cross-chain trading.
- Reduces third-party risk: Cross-chain DEX ensures token holders have complete control over their tokens. Holders can maintain full control over their digital assets as they are the sole owners of their private keys.
Cross-chain technology, which is still in its infancy, has a lot to do to improve blockchain interoperability and eventually allow blockchain to spread to more industries. This technology holds great potential to offer more interoperability options in the future, and this will make it possible to mass-adopt blockchains and the crypto sector in the future.
At the same time, cross-chain DEX allows crypto traders to trade across multiple blockchain platforms. This gives them freedom and opportunity across DeFi, and crypto market, and to exchange data. Users’ assets can flow freely across multiple blockchains. However, there is still room for improvement in the current market solutions. Businesses will adopt cross-chain DEX more easily if it is secure, scalable and cost-effective.
If you are looking for cross-chain DEX services, then LeewayHertz experts can help you build your project. Please connect with our blockchain experts and share your idea!
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