Blockchains need to move toward standards for interoperable asset transfers

by Gordon James

A major barrier to blockchain adoption today is that assets can only be transferred between blockchains if they have compatible security and transaction types. A new proposal wants to make these interoperable, providing one standardized interface for a variety of different kinds of transactions.

Blockchain technology has been around for a while now. However, it is still in its infancy and needs to move towards standards for interoperable asset transfers. Read more in detail here: what’s blockchain.

The concept of cross-chain asset transfer has been around for a long time. The idea came about practically as soon as numerous blockchains were created and started to gain traction. The transfers first focused on swaps between the chain’s native assets and tokens, leading to the creation of multiple decentralized exchanges later on. While asset exchange has its uses, the simple transfer and movement of assets and other data between blockchains without changing identities is just as significant and growing more common. 

Currently, 400,000 Bitcoin (BTC) exist and are utilized in transactions outside of the Bitcoin network, and this number is growing. Ether (ETH) has also been ported to other networks in large amounts. When they exist on their native network, some of them are referred to as wrapped tokens to distinguish them from the same asset. Bridges are used to transfer native assets from older, more established blockchains to younger blockchains.

However, the existing methods are not standard, tend to concentrate primarily on a one-way transfer to newer networks, might result in considerable slippage or loss of value, and are often difficult for end-users to traverse.

Inter-blockchain pure value transfer activities currently underway

There are various more projects in this area, in addition to the bridges that the newer blockchains have built to permit transfers of native assets from the older chains. Some blockchains include established inter-blockchain protocols, however they are primarily targeted toward users creating other copies of the same blockchain.

While these ideas may have validity, they are unlikely to become the dominant answer, and most firms are unlikely to start their own chains in the same way as they are unlikely to start their own small banks to have access to superior financial services. Solutions that entail one blockchain acting as a custodian blockchain for all other blockchains’ value transfers are likewise unlikely to succeed.

Building multichain is becoming a new need for DeFi solutions.

The importance of standards in the advancement of blockchain technology

Establishing standards and norms among practitioners of any technology has typically led in the growth of the whole industry, in simpler to use and better applications, and in end-user benefit by offering uniform functionality across various providers. Standards are well-known in the world of blockchains.

The whole ethos of a decentralized blockchain network is based on the acceptance of a standard: an agreement by an independent set of nodes to execute the same code or standard in a decentralized way so that they can achieve consensus on a shared ledger. In other application cases, other blockchain standards have already resulted in considerable development. The ERC-20 and ERC-721 standards are two examples. In the approaches detailed below, these two standards have sparked a lot of progress in the evolution of technology.

The ERC-20 standard is a set of rules for cryptocurrencies. This standard was created on the Ethereum network to describe a token, as well as the methods that such tokens must expose in order to comply with the standard. The Ethereum blockchain isn’t the only place where the standard has taken hold. The impact of this criterion is felt in a variety of ways, some of which are evident and others which are less so.

The simplicity with which tokens might be distributed with less technical expertise than without the standard is more clear. This sparked the emergence of initial coin offerings, which peaked in 2017 but are still being used to issue tokens today, some of which have greater use than others. This standard has a less evident advantage in the simplicity with which exchanges may offer tokens that adhere to the standard, as well as the ease with which users can transfer tokens to multi-blockchain wallet apps that comply to the standard.

The ERC-721 specification. Nonfungible tokens (NFTs) or, to put it another way, unique digital things are defined under this standard. Adherence to this standard, like ERC-20, enables for a consistent interpretation of unique asset tokens on devices and apps, independent of the blockchain on which they are constructed.

Since then, in 2021, the standard has generated growth in NFTs. Aside from being used to tokenize digital art, this standard is presently driving the expansion of NFTs in the gaming sector, as well as the pay-to-win phenomena. This use case is a rising area of the gaming business, and it looks to be attracting new players from all around the world.

Blockchains need to move toward standards for interoperable asset transfers

The following two instances demonstrate the impact of generally accepted blockchain industry standards on growth and user acceptance. End-users would also benefit from inter-blockchain value transfer standards.

Consider, for example, the present status of blockchain-based payment systems. Making payments to another party on a separate network using native blockchain tokens requires either the receiver setting up an address on the payer’s blockchain and accepting the tokens, or the payer changing the native tokens into the recipient’s native blockchain tokens through an exchange. Many customers resort to early trial payments since this method is not very user pleasant and loaded with fear of losing cash. Users may also be required to buffer transaction amounts in order to guarantee that the recipient receives the desired value in the event of slippage, volatility, or fees.

The blockchain industry’s future lies on a multichain strategy.

Another alternative is to denominate their transactions in fiat stablecoins, which have been developed on several of the main blockchains. Using stablecoins across blockchains, on the other hand, has some of the same challenges and would benefit from a unified standard. Interoperable asset transfer across chains would also enable the creation of payment aggregators, which would provide end-users with simpler alternatives for transferring assets and making payments between blockchains.

A cross-chain asset transfer standard’s potential components

A look at some of the current bridge implementations might help you understand what a cross-chain asset transfer standard would involve. These bridges primarily rely on the non-collision features of private-public key hash techniques to allow blockchain assets to hop across chains with comparable address creation algorithms. Simply said, if a person possesses the private keys to access an address on one blockchain, the same user will be able to unlock and access the same address on another blockchain that employs the same private-public key hashing mechanism with the same key. This method has been used to create bridges that allow Ether to be transferred to other networks that employ a similar address structure, such as the Binance Smart Chain, Avalanche C-Chain, or Toronet chain. When value is moved from an address to a designated exit or portal address (or smart contract), a decentralized oracle system monitors the blockchains and moves the asset to the same address on the other chain, knowing that the owner of the first chain will also have the keys to access the same address, and thus asset, on the other chain. This is seen in the diagram below.

Blockchains need to move toward standards for interoperable asset transfers

Even if the blockchains do not utilize the same private-public key algorithm, this basic method may be expanded to establish a global token transfer standard. Message-encrypted pieces, as well as the transaction input and output specification, make up the transaction sections of a blockchain. This message may be converted into a protocol with a destination blockchain identification and address. The same oracles that scan a portal address or contract in the homogeneous address bridge technique would pick up, decrypt, and transfer the asset utilizing the destination chain and target address information.

Another feature of the standard would be to make use of the unique nature of blockchain transaction IDs to guarantee that the oracle matches and records all transfers only once on the destination chain. Furthermore, the portal address might be established without a key, allowing only signed and verified transactions to initiate transfers to and from it. This assures that the system is automatically reconciled and that no human operation might compromise the integrity of the portal address or the implied value conservation underpinning the process. The preceding outlines a framework to emphasize that most chains already have the qualities needed to build a standard, and that an agreed-upon protocol might simply be the next step in creating one.

A new economy is on the rise.

Blockchains and the assets built on them are growing in popularity and are expected to be around for a long time, despite the fact that the technology is continuously evolving. Several blockchains, blockchain assets, digital and cryptocurrency tokens, stablecoins, and central bank digital currencies are anticipated to be part of the growing asset and payment ecosystem (CBDCs).

The notion among some blockchain practitioners that their chosen chain will ultimately become the lone one has stifled the demand for interoperable blockchain standards. This is a maximalist viewpoint that is unlikely to be realized. Experts in this industry would do the technology and users a favor by not seeing any chain’s success as a zero-sum game. Existing conventional financial institutions, particularly those that adapt to fast evolving technologies, should not be left behind. Blockchain applications have the ability to reach a large number of unbanked and underbanked people, allowing numerous chains in the developing economy to succeed.

Furthermore, no big human technical solution has matured into a unified platform or ecosystem of providers. Not conventional banking or payment systems; telecommunications providers or platforms; car manufacture, including, more lately, electric vehicle production; social media networks; or even private space exploration, as expensive as it is. Due to geopolitical issues and the evolution of CBDCs, an ultimate end state will most likely consist of a mix of platforms, suppliers, and technological variants.

Currently, there is no application in which the use of blockchains has totally superseded the usage of any other technology previously used in the same application. Fast cross-border payment systems, decentralized finance, securing digital art or digital assets of value, such as music and video, gaming systems to record in-game assets and rewards, fan and loyalty tokens, transparent and accountable grants and charity dispensation systems, agricultural subsidy and loan tracking applications, and, to some extent, payment systems are all showing signs of promise.

Blockchain interoperability may be aided via trustless bridges.

Many of the above application areas, including payment systems, would benefit greatly from the development and implementation of cross-blockchain asset transfer protocols. It will also assist in moving the technology away from its present tendency of growth being dictated by quadrennial Bitcoin halving cycles rather than broad acceptance or underlying real-world economic and financial activities.

There is no financial advice or suggestion in this article. Every investing and trading choice has risk, and readers should do their own due diligence before making a decision.

The author’s views, ideas, and opinions are entirely his or her own, and do not necessarily reflect or represent those of Cointelegraph.

Ken Alabi is an IT professional, programmer, and published researcher with multiple peer-reviewed articles in several sectors of technology. He has a PhD in engineering from Stony Brook University and a master’s in computer-aided engineering from the University of Strathclyde. The author has also written on blockchains, decentralization of corporate processes that are analogous to blockchain technology, and blockchain interoperability.

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