Beyond Islands: Crypto Interoperability is the New Black
I’ve been following crypto development for years now. I think the technology is absolutely game-changing and I find that too few people are focussed on communicating why, rather than giving investment advice, speculation and such.
If it’s just tokens and speculation, then what are we doing?
- Charles Hoskinson
One of the things I have been excited about recently is this idea of interoperability between different chains — different crypto currencies. Building crypto-systems that can communicate with each other, in a lot of ways is reminiscent of the early work building out the Internet. Before we had The Internet, there were a lot of different networks, running all sorts of different communication protocols. At scale, this doesn’t make sense. Throughout the 70’s and 80’s a lot of work was done to unify and create a common protocol scheme for all of these networks. This is the reason you can just hop on any computer, and access everything.
In the same way, rather than crypto systems being their own small islands, interconnectedness will enable even further innovation within each system. If you are building a decentralized application on e.g. Ethereum, you should probably be able to access a service running on a different system.
Okay, why?
Each chain or system has different properties when you consider things like security, speed, cost. This is not a matter of one chain being better than any other (although some are). As a developper you want to pick the service, that gives you the properties you care about for that specific project. Being locked into one single chain, ecosystem or set of ideas, is not a net positive.
From a user and developper perspective you don’t want to think too much about this either. If I’m calling an API on the internet, I’m not thinking about what software it is running under the hood or what connection protocol I should be using. What enables this is a shared set of low-level protocols and some clever ideas. In crypto we are already seeing some of these clever ideas being developed.
Bridges
One such thing is cross-chain bridges. This is the idea that you can take a token on one chain and move it to another. Moving a token like this is not really possible. So what a bridge does, is essentially to lock the token that is being send to another chain. And then distribute a token on the other chain. This way, you could lock a bitcoin on the bitcoin chain and create a wrapped bitcoin on the ethereum chain. Then to go the other way, lock the wrapped bitcoin on the ehereum chain and unlock the bitcoin on the bitcoin chain.
Technically this could be implemented in a variety of ways, typically with smart contracts that burn and create tokens. These may have security holes, which would be a huge problem for the underlying value of tokens that the bridge distributes.
Babel Fees
Babel fees is a concept being developed on the Cardano chain, that will allow people to pay transaction costs in any natively supported token / currency. If you have read Douglas Adams’ classic The Hitchhiker’s Guide to the Galaxy, you will recognize the name. In this book, a Babel Fish is a creature that will allow you to hear any language as your own. Using Babel fees, a person or application can issue a transaction on Cardano, in any (supported) token, that will be automatically converted into ADA, the native token on Cardano (all tokens are first class native citizens on Cardano, so really it’s the native native token :).
With babel fees you still need to have tokens, that live on the Cardano chain, but you don’t actually have to own any ADA, to make a transaction. This also means that the transaction can be made up of what is actually being transacted. So e.g. if you were sending some 2.000 X-tokens from Cardano to Ethereum, you could just pay in that token!
I should note that what makes this possible is the pre-determined price that Cardano transactions have. This setup would not be possible in the same way in variable priced transactions like the ones Etherium has.
Future
Ideally this would allow for tokens to fly in and out of different chains, all transaction costs would be paid in those tokens, without the users having to worry about acquiring a million different tokens (one for each chain that the token moves through) just to account for the (hopefully really small) transaction costs.
This gets even more useful if services start to get layered, so that calling one service may end up calling out to many sub-services (such as it is the case with APIs and internet services today). All these could be settled using just one single token, that is automatically converted under the hood by different chains.
I believe this highlights why a crypto system is much more than just a token. And why it is necessary to think carefully on the design of these systems. In the case of Cardano, a lot of work went into designing the underlying settlement model (E-UTxO) in addition to many other fundamental things. I think Cardano will be reaping the benefits of this down the line.
Wow, you made it to the end! Thanks for sticking with me through my musings on crypto systems. If you enjoyed reading this, I’d be thrilled if you hit that follow button — it really means a lot. Cheers to you!
