Blockchain Cross-Chain Interoperability Technology: Principles and Financial Application Scenarios

Topic Description

Cross-chain interoperability refers to the ability of different blockchain networks to exchange data and assets. In the fintech field, cross-chain technology can solve the problem of asset silos between chains, such as enabling decentralized exchanges between Bitcoin and Ethereum, or building cross-chain lending, synthetic assets, and other applications. The topic requires explaining the core principles of cross-chain interoperability, typical technical solutions, and their challenges in financial applications.

1. Core Requirements of Cross-Chain Interoperability

• Background Problem:
  Different blockchains (e.g., Bitcoin, Ethereum, Polkadot) have independent ledgers, consensus mechanisms, and smart contract environments, making assets and data unable to directly interoperate. Users need to use centralized exchanges (CEX) for cross-chain transfers, but centralized mechanisms involve custodial risks and high costs.
• Core Objective:
  To achieve inter-chain asset transfer, state verification, and information synchronization through decentralized technology without trusting a third-party intermediary.

2. Basic Principles of Cross-Chain Technology

Cross-chain solutions need to address two core issues:

1. Cross-Chain Asset Transfer: How to ensure that equivalent mapped assets are generated on the target chain after the original chain's assets are locked.
2. Cross-Chain Message Verification: How to prove that a transaction or state on the target chain genuinely occurred on the original chain.

Key Mechanisms:

• Asset Locking and Mapping:
  Users send assets to a specific locking contract (or multi-signature address) on the original chain. The target chain verifies the locking proof and generates an equivalent amount of mapped assets (e.g., Wrapped Bitcoin WBTC).
• Cross-Chain Verification:
  Verifying the authenticity of the original chain's transactions. Common methods include:
  • Relayers: Relay nodes monitor events on the original chain and forward transaction hashes, block headers, and other information to the target chain.
  • Light Client Verification: The target chain deploys a light node of the original chain to directly verify the original chain's block headers (e.g., Cosmos IBC protocol).
  • Multi-Party Computation (MPC): Multiple nodes jointly verify cross-chain transactions through threshold signature technology (e.g., Thorchain).

3. Comparison of Typical Technical Solutions

(1) Hashed Timelock Contract (HTLC)

• Principle:
  Uses hash locks and time locks to achieve atomic swaps. Both parties agree on a hash preimage (Secret). If the preimage is revealed within the time limit, the transaction is completed; otherwise, assets are refunded.
• Process Example:
  1. Alice generates a random number S, calculates the hash H = Hash(S), and sets a timelock T1.
  2. Bob creates a transaction on the target chain: If S is provided within T1, he receives the assets; otherwise, assets are refunded to Alice.
  3. Alice creates a similar transaction on the original chain, but with a timelock T2 < T1.
  4. Bob uses S to obtain assets on the original chain within the time limit, and Alice uses S to obtain assets on the target chain.
• Limitations:
  Only supports simple swaps, cannot support smart contract calls, and requires both parties to be online and cooperative.

(2) Relay Chain/Sidechain Model (e.g., Polkadot, Cosmos)

• Polkadot:
  • Uses a Relay Chain to uniformly verify the state of all Parachains, sharing security.
  • Cross-chain messages (XCMP) are verified by the Relay Chain before being passed to the target chain.
• Cosmos IBC:
  • Each chain runs a light client of other chains to directly verify the other chain's block headers.
  • Relayers are responsible for transmitting data packets, but verification is performed by the on-chain light nodes.

(3) Notary Schemes

• Principle:
  A group of trusted nodes (notaries) jointly sign to confirm the validity of cross-chain transactions. It is categorized into single-signature (centralized) and multi-signature (semi-decentralized).
• Examples:
  • Ripple's Interledger Protocol (ILP) uses notaries to coordinate cross-ledger transfers.
  • Multi-signature schemes (e.g., WBTC) involve custodians controlling the locking of assets on the original chain.

4. Financial Application Scenarios and Challenges

Application Scenarios:

1. Decentralized Exchanges (DEX):
   Users can directly trade native assets from different chains (e.g., Uniswap supports multi-chain assets via cross-chain bridges).
2. Cross-Chain Collateralized Lending:
   Users collateralize Bitcoin to borrow USDC on Ethereum (e.g., Aave cross-chain version).
3. Cross-Chain Synthetic Assets:
   Generate derivatives pegged to assets from the original chain on the target chain (e.g., Synthetix cross-chain synthetic Bitcoin sBTC).

Technical Challenges:

1. Security Risks:
   • Cross-chain bridges become focal points for hacker attacks (e.g., Poly Network's $600 million theft).
   • Dependence on third-party validation nodes may lead to collusion attacks.
2. Efficiency and Cost:
   • Multi-chain verification increases latency and gas fees.
3. Degree of Decentralization:
   • Notaries or relayers may be centralized, contradicting the original intent of blockchain.

5. Future Development Trends

• Zero-Knowledge Proof Verification:
  Use ZK-SNARKs to prove the validity of original chain transactions (e.g., zkBridge), reducing data transmission volume.
• Modular Cross-Chain Protocols:
  Decouple the verification, transmission, and execution layers to enhance flexibility and scalability (e.g., LayerZero protocol).

Through the above steps, you can systematically understand the technical logic, strengths and weaknesses of cross-chain interoperability solutions, and the trade-offs in practical financial scenarios. Subsequent research can delve into the code implementation details of specific protocols (e.g., LayerZero, Cosmos IBC).