Cross-chain Defi Development: Ensuring Interoperability
Cross-chain DeFi Development: Ensuring Interoperability
The implementation of blockchain technology and its various use cases have brought about a substantial revolution in numerous sectors. Various enterprises across industries leverage it presently to expedite and fortify their operations. The financial industry has also greatly benefited from it.
Financial institutions have utilized blockchain support to transform their services and substitute their traditional centralized infrastructure. Implementing blockchain technology has facilitated the streamlining of their banking operations, including loan disbursement, digital asset exchange, and other related activities.
Exploring the Fascinating Field of Cross-chain DeFi
Blockchains can be thought of as a series of parallel lines that never intersect, terminate, or cross each other. While the underlying technologies may be similar, it’s important to note that most independent blockchain networks are not interoperable. Similar to the behavior of water and oil, these two entities are immiscible, meaning they flow alongside each other without undergoing complete mixing.
Blockchains cannot interoperate due to their primary function of enabling users to coordinate and maintain a shared ledger without communication. In order to merge two blockchains, both chains must reach a consensus on a single state for each compatible chain and subsequently track all transactions on the other chain. This is necessary because each blockchain maintains its own ledger. This procedure is highly inefficient and poses various issues.
Due to the complexity of maintaining multiple ledgers, even in a blockchain fork, the newly created chain can only operate in parallel with the original chain.
The restricted characteristic of Layer-1 blockchains presents a notable challenge for decentralized finance (DeFi) protocols that aim to expand their offerings across multiple networks. Multiple causes for these problems have arisen, including:
- The native assets of popular blockchains, including BTC for Bitcoin, XRP for Ripple, and DOT for Polkadot, cannot be used in the Ethereum DeFi ecosystem due to incompatibility.
- The Ethereum network’s elevated transaction fees are prompting users to shift to alternative DeFi ecosystems that are better equipped to handle surges in demand.
- Developers seek to maximize their yield by utilizing multiple platforms instead of confining themselves to a single ecosystem.
How is cross-chain interoperability achieved?
Cross-chain interoperability refers to the capacity of a blockchain system to communicate with other blockchain networks that utilize a comparable underlying technology to exchange data. In the context of blockchain development, the term “cross-chain” refers to a distinct concept from “multi-chain.” The former pertains to the ability of a blockchain to interact with other blockchains, while the latter refers to a project that operates concurrently on multiple blockchain networks.
By utilizing cross-chain technology bridges and communication channels, developers can enable users to transfer value through token bridges across various networks in a secure and seamless manner. The interoperability of blockchain networks could facilitate communication between them, much like two parallel lines converging. This would greatly benefit the DeFi sector.
How crucial is cross-chain compatibility in DeFi?
DeFi protocols were unable to serve the blockchain’s crypto community until the advent of cross-chain interoperability. The predominant blockchain ecosystem had restricted decentralized finance participation exclusively to Ethereum users.
The lack of interoperability has restricted DeFi protocols to function solely on the blockchain they were initially built on. They inherited all the inherent challenges associated with their local network.
This issue led to decreased transaction speed and increased gas fees on the Ethereum network. Certain others were impacted by low liquidity and a smaller customer base. Thus, the introduction of cross-chain interoperability has altered the dynamics of the decentralized finance landscape.
With the advent of cross-chain bridges, developers can now easily transfer digital assets between blockchains, eliminating the need for projects to build exclusively for one network. Moreover, developers can enable asset transfers across networks, facilitate token farming without limitations, support liquidity deposits, loan collection, and repayment, and enable cross-chain token exchanges. Cross-chain compatibility enables DeFi accessibility to previously excluded users, thereby expanding the market to both institutional and retail clients.
Key Differences Between Cross-chain and Traditional DeFi
Cross-chain technology makes interoperability across different DeFi protocols much more straightforward, enabling the use of each protocol’s unique capabilities. The network paves the way for interoperability between various blockchain-based DeFi platforms, allowing for the seamless trading, lending, and exchanging of assets.
Businesses, financial institutions, and other organizations who struggle to offer their customers a multichain experience will find relief in this technology. Users can easily move their cryptocurrency from one blockchain to another.
When compared to standalone systems, cross-chain DeFi technology has the potential to increase scalability by allowing developers to make use of the combined speed and efficiency of many blockchain networks. Integrating a dApp into the Ethereum blockchain allows programmers to use the high TPS and low costs of alternative blockchain protocols, such as the XDC Network.
Cross-chain DeFi allows developers to move collateralized digital assets from the Bitcoin blockchain to more sophisticated blockchains such as Cardano, Ethereum, or Polkadot. Similarly, a programmer can make it possible for loans secured by digital assets to be made on various blockchains. If a DeFi platform doesn’t have cross-chain technology, the lender and borrower are limited to working inside the confines of its blockchain protocol.
Cross-chain DeFi uses interoperability to ensure full disclosure across disparate but related DeFi networks. The potential for fraudulent actions and exploitation of fractional reserve privileges is reduced when there is greater transparency since automated real-time auditing of collaterals is made possible. Without cross-chain components, DeFi infrastructure cannot promote transparency outside of the ecosystem in which the DeFi solution is developed and implemented.
Several DeFi applications may find relying on a single blockchain for “on-chain” data storage prohibitively expensive. In addition, keeping huge files on some decentralized networks can be challenging. DeFi habitats can increase their storage capacity by using spare space in other compatible ecosystems.
DeFi customers can benefit from improved speed and efficiency of micro-transfers in dynamic settings by employing cross-chain technology. Several industries, like blockchain gaming, e-commerce, and branding, place a premium on this quality.
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What Platforms Are Relevant Today?
Due to the increasing popularity of cross-chain DeFi, developers are launching numerous interoperable and feature-rich DeFi platforms on a regular basis. The following platforms are highly valued in the trading and finance industries:
Cross-chain DeFi lending platform
Cross-chain DeFi lending platforms utilize cutting-edge technologies to enable users to effectively manage their savings by providing the ability to supply and lock them for interest-earning purposes across various chains. By providing access and integration with various lending platforms, developers can enable users to manage their funds efficiently, offer loans to interested parties, and potentially increase their profits.
The uniqueness of a DeFi lending platform lies in its ability to operate across multiple blockchain networks. The platform incorporates modern functionalities including automated market maker (AMM) interoperable smart contracts, multichain DeFi Wallet, atomic swap, liquidity pools, unified dashboard, and more. Cross-chain DeFi enables mass adoption of DeFi across various industries, including gaming and e-commerce, where cross-chain transactions and trading are crucial. This is in contrast to a non-interoperable DeFi lending platform.
Cross-chain DeFi staking platform
DeFi staking platforms allow developers to implement a feature that enables users to earn extra income on their funds by locking a designated amount of the platform’s native token. DeFi staking allows developers to become validators in any proof-of-stake (POS) blockchain platform.
Utilizing the interoperability feature, our cross-chain DeFi staking platform facilitates staking across multiple distinct blockchain ecosystems rather than being limited to a single blockchain network. This suggests that developers can enable users to act as validators for multiple blockchains and profit from their staking activities.
Cross-chain DeFi exchange platform
The cross-chain functionality of a DeFi exchange platform facilitates the lending and borrowing of various cryptocurrencies across numerous DeFi platforms that operate on separate chains. By enabling users to borrow or earn interest from various platforms, they can effectively stake their digital assets to optimize interest and fulfill their responsibilities as validators.
DAO-enabled cross-chain DeFi platform
Recently launched DeFi projects that are futuristic in nature are enabled with decentralized autonomous organization (DAO). Irrespective of the objectives of a cross-chain DeFi platform, such as staking, liquidity, and decentralized exchange, the DAO enables self-governance throughout the organization that initiates and oversees the DeFi platform.
Developers can enable users to invest, trade, and stake their digital assets on DAO-based cross-chain DeFi platforms without being subject to regulations imposed by a centralized hierarchy.
How Does Cross-chain Technology Work in DeFi?
The exponential growth of DeFi can be attributed to the significant increase in crypto investments and the recognition of decentralized technology’s potential by various industries. The siloed decentralized ecosystem of second-generation blockchains has resulted in several challenges, including high transaction costs, insufficient liquidity, and slow transaction execution, which have hindered the widespread adoption of DeFi. Cross-chain technology emerged as a solution in the blockchain industry.
Cross-chain DeFi technology enables multi-chain smart contract transactions, providing interoperability elements to the DeFi ecosystem. Web 3.0 blockchain projects such as Polkadot are designed to promote interoperability among blockchain networks that are not interoperable. This is achieved through the use of parachains and native bridges.
The introduction of additional blockchain networks with cross-chain technology has enabled greater interoperability within the DeFi space. This allows for the interconnection of independent DeFi platforms, DeFi marketplaces, and DeFi dApps, ultimately supporting a cost-effective and efficient DeFi economy. Cross-chain DeFi enables developers to provide users with access to various DeFi platforms through a single point of entry.
Cross-chain DeFi provides inter-blockchain connectivity functionality that facilitates immediate token swapping between distinct and segregated blockchains. Suppose you possess in your wallet a substantial quantity of Ether, Ethereum’s native cryptocurrency, and you intend to invest these tokens in a DeFi platform constructed on a blockchain distinct from Ethereum. In that case, you need to leverage Web3 bridges such as Polkadot bridges.
Interoperable bridges enable developers to create decentralized applications that allow users to convert their tokens from one blockchain network to another without the need for centralized exchanges. Bridges enable developers to facilitate cross-chain token swaps, generating an equal number of tokens on the corresponding blockchain as needed.
The Present State of DeFi Interoperability
The trend toward enabling blockchain interoperability is becoming increasingly prevalent among various DeFi projects, indicating that DeFi has transcended mere buzzword status. Although interoperability has played a crucial role in promoting DeFi adoption and facilitating the transfer of billions of dollars in liquidity to DeFi, several factors indicate that the DeFi ecosystem is still in its nascent stage.
Unsolved bridge vulnerabilities
Bridges are susceptible to exploitation by hackers seeking to target significant liquidity pools, posing a severe threat to the DeFi ecosystem.
As per Chainalysis, the aggregate of funds pilfered from the crypto industry in 2022 was mainly composed of funds obtained through cross-chain protocol hacks, accounting for 69% of the total. Nomad, a cross-chain bridge, was recently targeted by hackers who managed to steal over $100 million. This marks the seventh significant cryptocurrency bridge hack of the year. In 2022, a security breach on Wormhole, a bridge connecting Ethereum and Solana, led to an exploit of $320 million. Similarly, in March, the Ronin sidechain of Axie Infinity was also exploited, resulting in a loss of over $622 million.
It is important to acknowledge that ensuring bridge security is a significant task that the cryptocurrency community has yet to fully address. Bridges are inherently attractive for attackers due to various factors. The prevalent approach for designing a bridge involves the process of locking the native assets on the source blockchain and subsequently minting wrapped assets on the destination blockchain. As a developer, it’s important to note that the current model leads to a significant number of assets being locked on the source chain within a single contract or wallet. This presents a potential vulnerability as bad actors may concentrate their efforts on a single contract to reap a high reward.
In addition, it should be noted that bridges are susceptible to various security concerns, including their susceptibility to 51% attacks, as emphasized by Vitalik Buterin, the founder of Ethereum. In a Reddit post, Vitalik contended that if a blockchain network is subjected to a 51% attack, the assets native to user wallets will remain secure, while the value of bridged assets is susceptible to dilution.
Overreliance on Ethereum and the EVM
In addition to security risks, DeFi interoperability has not yet become widely adopted. The Ethereum platform continues to dominate the decentralized finance space with 78% of all dApps being native to Ethereum. However, the majority of dApps do not facilitate cross-chain interoperability.
Ethereum Virtual Machine (EVM) compatibility hinders the widespread adoption of interoperable applications.
EVM is an integral part of each Ethereum node. It receives smart contracts, typically coded in high-level languages such as Solidity, and transforms them into EVM bytecode.
EVM compatibility refers to the development of a code execution environment that can handle EVM bytecode. This allows developers working with Ethereum to transfer their smart contracts to other blockchains without the need to start from scratch. Polygon, Binance Smart Chain (BSC), and Avalanche are among the most widely used chains compatible with EVM. The lack of EVM compatibility in certain blockchain networks poses a challenge for developers, as it restricts the deployment of their smart contracts on such chains. Developers must ensure their applications are compatible with EVM-based chains to avoid limitations in porting them to other chains.
Privacy concerns associated with Layer-1 blockchains
Because bridges are publicly accessible, the implementation of DeFi interoperability may potentially compromise privacy, transparency, and individual autonomy. The issue of privacy is a significant concern among users of blockchain networks, particularly when their transaction records are distributed across multiple blockchains. In addition, ensuring smooth interoperability between private and public blockchains poses unique challenges for developers.
Panther suggests a range of solutions to facilitate private cross-chain interoperability and achieve the next breakthrough in the face of challenges such as slow adoption, security, and privacy concerns in DeFi interoperability.
How to Create a Cross-chain DeFi Platform
Cross-chain DeFi solutions have been optimized to facilitate interoperability between blockchains, allowing seamless inter-blockchain transactions. To ensure interoperability for your DeFi project, it is recommended that you develop and deploy it on a blockchain. This will enable the dApps created within the ecosystem to be interoperable from the outset.
To build the cross-chain bridge, developers must initiate a new session with their preferred visual code editor, code and compile the smart contract, and design the user interfaces.
This guide provides instructions for developing a cross-chain DeFi platform on the interoperable Web3 blockchain Polkadot, as well as its identical blockchain Kusama, using the Substrate framework.
Step 1. Installing dependencies
Step 2. Run
Step 3. Removing vulnerabilities
Step 4. Bench Bot
Step 5. Testing data migration
Step 6. Use parachain-launch for running local testnet
Top Blockchain Protocols Supporting Cross-chain DeFi Technology
The XDC Network is a hybrid blockchain that supports global trade and finance through interoperable smart contracts. It is enabled with XDPoS and designed for enterprise use. DeFi decentralized applications developed on the XDC ecosystem possess the capability to interoperate with DeFi dApps that operate on different blockchain networks.
Polkadot is a blockchain network that facilitates interoperability through the use of parachains, the Substrate framework, and an interoperable bridge. DeFi solutions developed on Polkadot possess the ability to interoperate with other parachains based on substrate and blockchain ecosystems such as Ethereum through the bridges on Polkadot.
The NEAR Protocol team has launched the Rainbow Bridge to facilitate cross-chain communication between NEAR and Ethereum, recognizing its significance in the DeFi ecosystem (where most prominent dApps are developed). DeFi solutions developed on the NEAR ecosystem can interoperate with the DeFi solution developed on Ethereum.
The Avalanche ecosystem is designed to support the launch of cross-chain DeFi solutions that are both highly scalable and interoperable, with the potential to revolutionize global finance through near-instant transaction finality. Due to the rapid expansion of the DeFi ecosystem across multiple chains, Avalanche enables DeFi solutions developed within its ecosystem to communicate with solutions operating on a range of interoperable and non-interoperable DeFi platforms.
The Cardano blockchain has been developed with scalability, sustainability, and interoperability in mind, to enhance the infrastructure of multiple industries. Cardano aims to improve the conventional banking and financial infrastructure by facilitating the creation of innovative cross-chain DeFi solutions within its ecosystem. These solutions facilitate the transformation of legacy businesses in the finance and banking industries by leveraging the potential of decentralized technology.
Launch Your Cross-chain DeFi Project with EvaCodes
The DeFi market has undergone significant transformations over time. Given the increasing adoption of cross-chain technology, significant shifts are anticipated within the DeFi sector. Because of the changes, developers have noticed a substantial increase in enterprise interest regarding the implementation of their own cross-chain DeFi solutions.
EvaCodes provides cross-chain technology solutions to finance companies, enabling them to enhance their financial operations’ trust, scalability, and transparency. This revolutionizes their core financial processes.
The DeFi space is expected to bring about a significant change in the financial markets as the cross-chain decentralized finance industry continues to gain momentum. Therefore, most corporations have initiated their interest in creating their own cross-chain DeFi solutions to establish their dominance in their respective markets. If you are interested in developing cross-chain DeFi solutions for your enterprise, please contact our expert teams today.
COO & Co-founder
Written by Vitaliy Basiuk
COO & Co-founder at EvaCodes | Blockchain Enthusiast | Providing software development solutions in the blockchain industry