This Blockchain Is Finally Fixing Cross-Chain Bridges
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Much has been written about the importance of blockchain interoperability, which refers to the ability of two or more independent networks to exchange data and value. It’s a fairly straightforward concept, but it’s one that has proven extremely elusive in the real world. However, it is absolutely necessary to implement if blockchain is ever going to live up to its full potential.
The open and decentralized nature of blockchain has resulted in an explosion of networks. Today, there are easily more than 100 blockchains up and running, and they all exist independently of one another with no way of communicating. Because these networks can’t communicate, it’s impossible for a user on the Bitcoin blockchain to interact with someone on the Ethereum network, and vice versa.
In an interview with Bitcoin.com News, Flare Network co-founder and Chief Executive Hugo Philion highlighted the problems this lack of interoperability causes, and how it places a major obstacle in the way of mass adoption. He explained that while DeFi has become the biggest use case of blockchain today, it is severely handicapped by the lack of communication between networks.
“The lack of adequate cross-chain communication has constrained the size, participation, and efficiency of the Defi market,” Philion said. “Not only have existing designs resulted in the loss of billions of dollars of capital, but they are also hard to use, limiting participation to more sophisticated users. As a result, market size, liquidity, and returns have been constrained.”
With users unable to swap Bitcoin for Ethereum without going through a centralized exchange service, decentralized finance has a big problem, because the possible use cases are substantially reduced. And with only a few, limited applications, adoption remains stagnant.
“Furthermore, use cases leveraging communication that could drive adoption have remained undiscovered,” Philion added. For instance, a simple use case might involve purchasing assets on a smart contract chain while making payment in Bitcoin, he said. If this were possible, he believes it could potentially revolutionize applications around digital ticketing, gaming and payment gateways and more.
Why Can’t Blockchains Talk?
Philion explained that blockchain’s lack of interoperability is really by design. Quite simply, blockchains were created as distributed ledgers whose task is to process native transactions only.
“They haven’t been designed to relay information between themselves, so the Bitcoin chain cannot tell you what happened on the Ethereum chain at block #1083438,” Philion said. “This creates a communication problem: how can information about different chains be reliably gathered and validated with decentralization analogues to the chains themselves? Furthermore, how can this be achieved while accounting for the risk of chain rollback?”
A number of solutions to this problem have already been implemented, but the majority of them have failed miserably. As Philion points out, existing blockchain bridges have emerged as one of the biggest targets in the crypto ecosystem, with hackers constantly probing them for vulnerabilities, and very often discovering them. During 2021 and 2022, we saw numerous experiments with new cross-chain bridge protocols, and the results were nothing short of disastrous for thousands of users.
“Ultimately, many performed abysmally with more than $2 billion of funds exploited in the last 12 months,” Philion noted.
The failure of these experiments shows us that the industry is yet to deliver on a sufficiently secure and decentralized mechanism to acquire and confirm the state between two separate blockchains, Philion said. And this lack of a reliable solution is severely hampering development across the crypto space.
Cross-Chain Communication Based On Consensus
In order to protect against bridge exploits, Philion says it’s necessary to integrate decentralized cross-chain communication that’s similar to the actual consensus mechanisms used by blockchains themselves. Doing so would make them significantly safer, he argues, because it would allow cross-chain communication to benefit from the same underlying security that protects each blockchain transaction.
He explained that Flare has been able to achieve this with the creation of two unique protocols, the Flare State Connector and Flare Time Series Oracle, which are natively integrated with its network. “They are native because they are built directly into the blockchain using the FLR token to incentivize data provision, and they use the network itself to secure accurate data provision,” Philion said.
Those protocols enable two general models known as “payment triggers” and “bridging” that can be used to upgrade non-smart contract chains, Philion said.
Payment triggers refer to a smart contract function on one chain that’s triggered by a transaction on a separate chain. It will enable simple yet important functionality, such as paying for an NFT on Ethereum with Bitcoin or an alternative token. To do this, Flare’s State Connector taps a decentralized data acquisition protocol that involves a number of participating validators who’re incentivized to prove that a transaction on a specific chain has taken place. The validator’s job involves querying and acquiring transaction data, and then reporting it to the second chain. Once an event has been reported, the smart contract on the second chain can then be triggered.
As for bridging, this brings full smart contract features to tokens like Bitcoin, similar to how existing bridges work. Flare State Connector enables secure data acquisition, while the Flare Time Series Oracle uses a similar, validator-based mechanism to bring natively-available on-chain decentralized prices. Flare can then create synthetic versions of assets such as Bitcoin on smart-contract chains without additional collateral. This is superior to existing bridges as the user only has to provide the underlying token.
“This removes the over-collateralization requirements and eliminates the direct market risk from the user, meaning that they do not need to actively manage the position,” Philion said. “These 1:1 representations of assets like bitcoin can then be deployed in DeFi and other decentralized applications.”
In simpler terms, the Flare State Connector and Flare Time Series Oracle can be thought of as “sensors” that enable one blockchain to see what is happening on other networks. Then, they can make a note of these transactions and base their own decisions upon it.
“This is similar to how our senses allow us to see what’s going on around us and interact with the world,” Philion clarified.
Why This Matters
If Flare is truly able to solve blockchain’s interoperability problem it will have massive implications for the wider DeFi industry, Philion believes. He points out that around 70% of the current total market capitalization of digital assets is composed of non-smart contract assets such as Bitcoin, XRP and Dogecoin.
If we’re able to bridge these assets to smart contract protocols, it would provide a clear and massive boost in liquidity to the DeFi market. Decentralized applications would have access to a much larger available market, Philion said, while token holders will have decentralized access to those dApps. Moreover, by on-ramping non-smart contract tokens to chains like Ethereum, it creates an alternative payment rail for those assets.
“We believe that Web3 needs greater scope, utility and consumer appeal through sufficiently decentralized and reliable communication protocols between blockchains and non-blockchain networks,” Philion said. “We want to enable tokens like Bitcoin to be used with these applications.”
Flare believes it has solved the problem of blockchain interoperability and it’s a project that is now being taken very seriously. Later this month, Flare will hit a big milestone with its initial token distribution event, and the project has gained the support of numerous cryptocurrency exchanges that will distribute its FLR token within two weeks of its launch. It’s a serious solution that has gained some serious backing, and that makes Flare one to watch in the months ahead.
