Everything About Cross-chain Stablecoin Payments
The advent of bitcoin and blockchain technology marks the beginning of a new chapter in digital payment. There are nearly 6000 cryptocurrencies that together have paved the way for a revolutionary virtual payment system through a distributed network with no intermediaries involved. Due to their unique features and permissionless nature, cryptos have become enormously successful in many industries, including finance, healthcare, retail, supply chain, and more.
However, the adoption of cryptocurrency in the payment industry has been constrained because of the volatility in cryptocurrencies. In this regard, blockchain enthusiasts continue to present a better approach to address the existing challenges. One such popular approach is using Stablecoins pegged to the value of an underlying asset, mainly US dollars. Stablecoins are relatively new. Hence, most people seem confused about it. Let’s answer their queries and understand Stablecoin along with its impact on cross-chain payments in this insight.
- What is a stablecoin?
- What is cross-chain technology?
- What are cross-chain stablecoin payments?
- What is the role of stablecoins in cross-chain payments?
- System workflow for cross-chain stablecoin payments
What is a stablecoin?
A stablecoin is a digital currency pegged to a ‘stable’ value, such as the US dollar or gold. In comparison to cryptocurrencies, stablecoins have a higher potential to address volatility issues. That is so because cryptocurrencies have relatively small market capitalization, which often experiences fluctuations and high volatility with daily buy and sell orders. Thus, stablecoins are the best form of digital currency to suit everything, from daily e-commerce transactions to crypto token exchanges on blockchains.
For a thorough understanding, we can assume stablecoins as a tokenized representation of real-world or fiat currencies. Put more simply, if 1USDT (Tether) equals 1 USD, a stablecoin is expected to maintain this peg regardless of market fluctuations. Stablecoins are mainly of four types: Fiat-backed stablecoins, cryptocurrency backed, commodity backed and algorithmic stablecoins. To learn more about stablecoins, read our detailed insight.
What is cross-chain technology?
Cross-chain technology refers to an emerging technology that enhances interoperability between independent blockchains. Every blockchain is designed to perform specific actions to address the limitations of existing blockchains. For example, Bitcoin was introduced to replace traditional currency with digital cryptocurrency. At the same time, Ethereum came up with smart contract technology to empower the use case of blockchains across the fintech industry. Due to the lack of interoperability and the siloed nature of both Bitcoin and Ethereum, users cannot share information between these blockchains.
The good thing about blockchains is that they are unique but share identical basic infrastructures, which is where cross-chain technology comes in. With the rapid expansion of blockchain networks and the constant introduction of new blockchain projects, cross-chain interoperability becomes crucial. It allows blockchains to interact with each other even though they exist on their separate chains. With this technology in place, blockchain can share information, tokens, data, and, more importantly, stablecoins between diverse blockchain networks. This way, users can enjoy enhanced blockchain Interoperability with cross-chain stablecoin payments.
Technologies like cross-chain swap, cross-chain token exchanges, and the decentralized token bridge are perfect examples of how cross-chain-powered innovations have been bridging the gaps between blockchain and its real-world implementations. By enhancing blockchain interoperability, cross-chain preserves blockchain’s decentralized nature and unlocks various utilization opportunities across newer industries.
What are cross-chain stablecoin payments?
Cross-chain stablecoin payment is much like the cross-chain crypto exchange. Particularly in the context of stablecoins, cross-chain technology allows two inherently different blockchains to interact with each other for sharing stablecoins or making payments in stablecoins. For instance, a user A on Ethereum blockchain wants to send Ether to anther user B on Binance Smart Chain. In return, A is entitled to receive Binance USD from B. Since BSC and Ethereum are two unique blockchains, they cannot allow blockchains to interact and exchange stablecoins. Cross-chain technology enters the game to solve this scalability issue. It establishes secure connections between these two blockchains and facilitates instant stablecoin exchange.
Cross-chain has enabled stablecoin payments to bring many benefits to the issuers. They can mint and buy back coins and redeem the outstanding stablecoins whenever needed. With the ability to quickly convert volatile assets into stablecoins, one can escape from the risks of crypto market fluctuations. Moreover, first and second-generation blockchains, Bitcoin and Ethereum, do not efficiently support everyday transactions due to their scarce computing resources and relatively high fees. As a result, users seek the freedom to choose the desired blockchain protocol that suits their day-to-day payment and settlement requirements. Their search ends at cross-chain stablecoin payment options, where payments can be done in any stablecoin without any complexity.
What is the role of stablecoins in cross-chain payments?
A peer-to-peer decentralized payment system is one of blockchain technology’s most prevalent use cases. The idea was to eliminate third-party entities from the payment process and allow people worldwide to participate in a trustless distributed network. Also, note that blockchain initially appeared to power cryptocurrency transactions. However, the overgrowing popularity of alternative currencies such as stablecoins and the rapid rise in their circulation has encouraged many organizations (banks or financial institutions) to issue their stablecoins for block-based payment purposes.
Like crypto tokens, stablecoins have also been circulated on various blockchains that remain isolated. Before the advent of cross-chain technology, stablecoins transfer between blockchains was enabled by a centralized entity or middleman. Users first need to deposit their stablecoins to this middleman. This approach of giving custody of money to a middleman is against the ideology of blockchain, which is creating a permissionless and decentralized ecosystem.
System workflow for cross-chain stablecoin payments
Here we are considering cross-chain stablecoin payments between two different blockchains with the same stablecoins.
For the workflow, we are considering an instance of the sender blockchain and an instance of the receiver blockchain. The nodes on each blockchain are considered full nodes that act as the validators of blockchain transactions. An intermediary between the two blockchains is referred to as a P2P system and facilitates interactions between them. We must be aware of the following terms as part of the process flow.
Relayer – This node in the P2P system relays event information from the sender chain to the receiver chain and vice versa.
Signer – This node creates receiver chain transactions out of sending chain transactions and subsequently signs those transactions.
Validator – A node that validates on-chain transactions on the P2P system.
Lock – Stablecoins, by default, are locked within their blockchain and use smart contracts on the sender chain.
Mint – Stablecoins are locked on the sender chain; at the same time, an equivalent number of stablecoins are minted on the receiver chain.
Burn – You can burn stablecoins on the receiver chain to reverse the cross-chain transaction.
Unlock – You can unlock the stablecoins on the sender chain, freeing the asset. For this, an equivalent number of tokens needs to be burnt on the receiver’s chain.
The interoperability services between the sender and the received work here in the process.
The flow chart below demonstrates the transfer of stablecoins from one blockchain to another.
To transfer the stablecoins from the sender blockchain to the receiver blockchain, we can lock the tokens on the sender blockchain. As the locking information transmits to the receiver blockchain, an equivalent amount of tokens generates on the same. The token locking is accomplished using the sender and receiver chain interoperability. Now the tokens on the sender blockchain turn stagnant, which is accomplished using escrow smart contracts. Once tokens are locked, they become limited to the sender chain and cannot be moved to another address. This prevents double spending of the tokens.
Let’s now understand the process associated with each step in the flow chart in detail. The process described here represents the cross-chain transfer of stablecoins between the sender and the receiver chain.
The start of the flowchart indicates the transfer initiation from the sender chain to the receiver chain. In this case, both the blockchains should be up and running, along with the deployment of the smart contracts governing the conversion.
The witness node acts as the listener to the events on the sender blockchain. Specifically, it would be listening to the lock event.
Once the sender blockchain validates the transaction for the lock, the witness node waits for a preset number of blocks before it sends the lock message further to the P2P system.
The lock message is then forwarded to the signer, which then creates a lock message for the receiver blockchain, which signs the same, and then relays it to the receiver chain.
The bridge module, which acts as a bridge between the sender and the receiver blockchain, receives the message and converts it to a generic oracle claim.
Once the oracle claim is received, the oracle module waits for the consensus on the chain. Here, consensus depends on 2/3rd of the validator’s agreement to it.
Once the consensus is achieved, the claim attains finality and gets registered on the receiver blockchain.
Once the claim is registered on the receiver blockchain, the bridging module mints new stablecoins and sends them to the receiver chain recipient address.
Thus, new tokens are added to the receiver’s address, and the originating tokens are locked on the sender blockchain.
The newly minted tokens can freely move in the receiver blockchain and be sent to any other recipient address in the receiver chain.
If the sender and receiver chain interchange their role (the sender chain becomes the receiver chain and vice-versa), the process would work similarly except for the selection of interoperability service.
The emphasis of stablecoin has always been on creating less volatile and high liquidity-backed assets. That being said, this industry has to undergo many challenges to position itself in today’s competitive financial ecosystem. The stablecoin industry should collaborate with regulators and discover a more advanced framework that can address the challenges of cross-chain stablecoin payment. This industry has the potential to alter the way virtual payments are done. Stablecoins, with their basic cash-like features, make digital payments frictionless and instantaneous on various blockchains.
If you are looking for a reliable stablecoin development service, contact LeewayHertz. Our stablecoin developers will assist you throughout the development process, from ideation to designing your token and developing it.
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