The Potential Of DeFi Is In Compatibility Between Cross Chains

Users may engage with DeFi in whichever way they see fit, regardless of the public blockchain they happen to be using. The fragmented structure of the current implementation of blockchain technology and Web3 is one of the main obstacles preventing their widespread adoption. Users of a single blockchain, like Ethereum, can easily engage with the distributed apps created on that blockchain, but users of other blockchains, like Polkadot or Avalanche, still have a hard time talking with one another. This forces consumers to spread their funds out over many chains, whereas developers waste time and energy on unrelated projects.

Token trading on controlled markets is one method consumers connect across blockchains at present (CEXs). A major feature of CEXs is the facilitation of purchase and sale transactions between members, much like a standard stock market.

Cross-Chain Interoperability

Cross-chain interoperability requires an understanding of why two blockchains can't communicate with one another in the first place. A blockchain is a distributed ledger that records all of the transactions that take place on it and do so in a way that makes it impossible to alter the original data. If two blockchains want to communicate information, they must first settle on a common state and then retain an immutable record of every transaction made on the other blockchain. This technique is not easily scalable due to the large volume of data that must be sent between the two blockchains. Consider implementing this for every possible pair of blockchains that want to communicate with one another.

This issue is addressed by cross-chain interoperability, which facilitates the transfer of data and value across blockchain networks. It allows two blockchains to communicate with one another without the need for a central exchange.

Why Is Cross-Chain Compatibility Crucial For DeFi?

The value of the whole DeFi ecosystem has increased to $40.82B, with Ethereum being responsible for approximately 58% of that total. However, without blockchain compatibility, consumers of non-Ethereum blockchains like Polygon and Avalanche are excluded from the greatest DeFi ecosystem's value creation. You may think of each DeFi ecosystem as its own economy, but without the ability to communicate with others, it would be impossible for any of them to grow to any significant size.

More people will use DeFi if transactions can be sent and received across different chains. More value will be generated for users interacting with DeFi if they are permitted unrestricted access to its protocols on all blockchain networks. More people may utilize Web3 and DeFi if they are easier to obtain. As the DeFi community grows, so does the sum of money available for banking, lending, staking, and increasing crop yields.

As a result of cross-chain compatibility, customers are no longer restricted by the peculiarities of a single blockchain; for example, they may avoid the greater fuel prices of Ethereum as well as the poor stability of other platforms. To facilitate the movement of crypto assets among chains, programmers may also make primitives.

DEX-Based, Cross-Chain Trade

Using a method known as atomic swaps, users of decentralized exchanges (DEX) like Ethereum Code may trade tokens amongst each other. Atomic swaps are a kind of trustless peer-to-peer trading that uses smart contracts to connect two separate digital wallets.

The hashed timelock contract (HTLC) is used in atomic swaps to determine when the exchange must be finalized. Both parties must present cryptographic evidence of ownership of the assets being exchanged before a swap may take place. If either party fails to provide the required evidence within the allotted period, the HTLC smart contract will automatically restore the digital content to the respective wallets.

Blockchain Systems With Interoperability

IBC technologies are the third and, perhaps, most successful method for facilitating cross-chain cooperation. Employing smart contracts hosted on each respective blockchain, IBC enables decentralized networks to seamlessly share information and assets with one another. At now, IBC is primarily utilized by the blockchain systems in the Cosmos environment, whose ultimate goal is to create a decentralized blockchain web.

The LayerZero protocol is yet another implementation of IBC. It aspires to serve as the foundational layer upon which all blockchains rest, including Layer1 and Layer2 blockchains, facilitating interoperability between them.

Cross-chain Interoperability Threats

Though advancements have been made to allow for the transfer of value across different blockchains, there are still significant restrictions.

For instance, a bridge is a complicated technique because it must negotiate between two independent blockchain ecosystems written in different languages. Because of its complexity, there are more ways for it to be hacked or exploited. There are certain security concerns with bridging, and Vitalik Buterin has voiced those concerns as well.

The bridging procedure is also vulnerable since it results in massive pools of assets being trapped in a single contract on a single chain. By combining resources in one place, hackers have access to a possible weak spot in the system. Chainanalysis, a business that analyses data on cryptocurrency theft, estimates that bridging hacks will account for 69% of all cryptocurrency lost in 2022. However, atomic swaps may be complicated and time-consuming due to the number of processes involved.

Conclusion

Cross-chain interoperability techniques are still widely used because they provide customers with low-cost, high-speed access to the potential of DeFi and Web3.

Since MMI is interoperable with all EVM protocols, it gives businesses the most possible flexibility in how they use it. While all EVM blockchains and Layer2s are accessible through MMI, a company's actual use of these features is contingent on the EVM chains maintained by its selected custodian.

Screenshots and transactional notes for a total of 13 EVM chains are only two of the reporting options made available by MMI. MMI is the only provider that can provide secure, efficient, and compliant DeFi access for any institution.