What is a cross-chain transaction?

Each blockchain is a complete digital environment where all applications are connected through the underlying network. However, with the continuous increase in blockchain networks and the lack of connectivity between blockchains, there is an increasing demand for cross-chain infrastructure to provide users with interoperability between multiple blockchain networks.

Without cross-chain infrastructure, blockchains are as disconnected as individual applications are today.

Perhaps one of the most important primitives for the Web3 ecosystem is cross-chain swaps, a service that enables the seamless exchange of one digital asset for another. Just as decentralized exchanges were the first primitive for a single blockchain network, cross-chain swaps are expected to become a foundational component of an interconnected, cross-chain world.

What is a cross-chain swap?

In short, cross-chain swap is a mechanism for exchanging tokens issued by one blockchain with tokens issued by another blockchain between different blockchains in a trust-minimized manner.

While users can already access cross-chain swap functionality today through centralized exchanges, this introduces multiple layers of friction (e.g., transferring tokens to an exchange, either directly or indirectly through an intermediary exchange such as USD, and then transferring the swapped tokens back to a wallet on a different blockchain). Additionally, this process requires users to utilize custodial services and temporarily give up control of their assets. For something as basic as a cross-chain swap, this becomes a critical barrier to building a world driven by sovereign digital asset ownership.

What is the principle of cross-chain exchange?

Cross-chain swaps can be achieved in a variety of ways. Many current implementations rely on cross-chain bridges, which encapsulate and lock tokens on the source blockchain to create a one-to-one representation on the target blockchain.

Simplified diagram showing how the locking and minting token bridge works

To conduct a cross-chain swap, users must lock their tokens on the base blockchain, mint a wrapped token on the target blockchain, and then exchange using a native decentralized exchange to purchase the digital asset they want. This process can be automated on the backend by the cross-chain swap protocol, with users only having to specify the asset they want to swap and the digital asset they wish to receive. While this is a proven method to facilitate cross-chain swaps, users must trust the security of the underlying bridge implementation.

Chainlink Proof of Reserves (PoR) enhances bridge security by providing robust collateral data and reducing uncollateralized minting

There are other ways that bridge protocols can be designed. The above example is a “lock and mint” bridge model. Other bridge protocols may adopt a “burn and mint” approach, where tokens are destroyed on the source blockchain and then minted on the target blockchain; or a “lock and unlock” model, where local supplies exist independently on different blockchains. Nonetheless, cross-chain swaps using bridge protocols all follow the same framework: lock or burn tokens on the source blockchain and obtain an equal number of tokens on the target blockchain before the swap can be made.

Atomic Swaps

Another way to facilitate cross-chain swaps is to use time-locked smart contracts, a process often referred to as atomic swaps.

Let’s assume there are two counterparties (Alice and Bob) in an atomic swap, each wishing to exchange one digital asset for the other’s digital asset. Alice and Bob lock the correct number of tokens into smart contracts on their respective blockchains. Only once both parties have placed the correct number of tokens into their respective smart contracts can they be unlocked. Alice gains the digital asset that Bob originally locked, and vice versa.

While atomic swaps are one of the most decentralized options for facilitating cross-chain swaps, it is not a universal or scalable model. For example, atomic swaps typically require blockchains to use the same hash function, both parties to agree on the quantity and swap price, and to be able to wait an indeterminate amount of time to complete the swap.

Cross-chain liquidity

Cross-chain infrastructure, including cross-chain bridges and exchanges, plays a key role in securely unlocking cross-chain liquidity. As the number of blockchains in the Web3 industry grows, and new and old blockchains are increasingly used, liquidity is bound in these digital environments. Fragmented liquidity reduces market efficiency across all blockchains, weakens the utility of digital assets, and poses a barrier to developers who want to attract users on many blockchains.

Cross-chain bridges, decentralized exchanges, centralized exchanges, and other tools make various types of cross-chain liquidity pools possible - these connection points help different blockchains access or transfer liquidity from another blockchain. This is critical to creating a unified Web3.

Chainlink for cross-chain applications

In essence, the cross-chain problem that blockchain faces today can be attributed to the transmission and synchronization of data between blockchains. After all, tokens are just a specific type of data stored on a blockchain’s decentralized ledger.

The Cross-Chain Interoperability Protocol (CCIP) is an open standard for cross-chain interoperability that is under development. It aims to leverage the Chainlink Decentralized Oracle Network (DONs) to enable programmable token bridging and secure, arbitrary, and trust-minimized messaging between blockchains. The core goal of CCIP is to establish universal connectivity between blockchain networks, both public and private, to unlock isolated tokens and empower the creativity of cross-chain applications.

CCIP aims to become the cornerstone of Web3 infrastructure, an open standard that helps developers build various cross-chain applications

In the context of cross-chain exchanges, CCIP can make routing between liquidity more efficient by enabling secure and seamless data delivery between various blockchains, including liquidity conditions, token balances, and more indicators. In addition, programmable token bridges can enable any Web3 developer to build a cross-chain environment without directly managing the underlying bridge infrastructure. Cross-chain exchanges can build better user interfaces, exchange at lower costs, and provide a wider selection of assets due to the unparalleled connectivity brought by the use of open standards.

in conclusion

Cross-chain swaps eliminate the need for centralized intermediaries by enabling the direct exchange of value and information between blockchain networks. In short, they provide a more secure, transparent, and seamless way for users to trade assets between various blockchains.

The cross-chain interoperability protocol aims to connect various blockchains and the applications built on them

As Web3 continues to evolve and more applications and tokens are built on top of the growing blockchain ecosystem, cross-chain infrastructure like CCIP plays an increasingly important role in creating a unified user and developer experience.