Blockchains need to move toward standards for interoperable asset transfers

Cross-chain asset transfers have been around for many years. This concept was developed nearly as soon as multiple blockchains became available and has been steadily growing in popularity. The initial application focused on transfers between the chain’s tokens and native assets. Later, there were many decentralized exchanges. Although exchange of assets is useful, it is not the only way to move assets across blockchains. This is becoming more common.

There are currently 400,000 Bitcoins (BTC) and growing. These can be used for transactions that are not on the Bitcoin blockchain. Some Ether (ETH), has been transferred to other networks. Wrapped tokens are used to distinguish these assets from one another on the native network. Bridges are used to transfer native assets from older, more established blockchains to newer ones.

The processes are not uniform and tend to be one-way transfers to newer networks. This can lead to significant slippage or loss, and they are often not easy to use for end-users.

Current efforts to transfer pure value inter-blockchain

There are many other projects in this direction, besides the bridges created by the newer blockchains to facilitate the transfer of native assets from older chains. Some blockchains have inter-blockchain protocols, but they are more focused on alternate versions of the blockchains created by their users.

These solutions may be attractive, but they are unlikely to be the dominant solution. Most businesses will not set up their own banks or spin off their own blockchains to access quality financial services. It is unlikely that solutions that use one blockchain to serve as the custodian for all other blockchains in order to transfer value are successful.

Related: DeFi products need to build multichains.

Standardization is crucial for the advancement of blockchain technology

The establishment of protocols and standards among technology practitioners has often led to the advancement of the whole field. This has made it easier and more efficient for users and provided consistency across providers. Standards are very familiar for blockchains.

The whole ethos of a decentralized Blockchain network is the adoption a standard. This is an agreement between an independent group in a decentralized fashion to run exactly the exact same code or standard so that they can reach consensus on a common ledger. Some use cases have seen significant growth due to other standards in blockchains. ERC-20, and ERC-721 are two examples. These standards have facilitated significant growth in the technological evolution in the ways described below.

The ERC-20 standard. This standard was created on the Ethereum network to identify a token and contains the methods that tokens must expose in order to comply with the standard. This standard is now widely used beyond the Ethereum blockchain. This standard has many benefits, both obvious and not so obvious.

It is evident that tokens can be deployed quickly and easily without requiring any technical skills. This led to the initial coin offering boom that reached its peak in 2017. However, it is still being used today to create tokens with different utility levels. This standard has a few benefits, including the ease with which token exchanges can list tokens that conform to the standard and the ability for users to transfer the tokens to multiblockchain wallet apps that adhere to it.

The ERC-721 standard. This standard was created to define nonfungible tokens, or more simply unique digital items. This standard, similar to ERC-20 allows for uniform interpretation of unique asset tokens on applications and devices, regardless of their blockchain.

Since then, the standard has spawned growth of NFTs in 2021. This standard is used to tokenize digital art and is leading the rise of NFTs within the gaming industry. This use case is growing in popularity and seems to be attracting new gamers from other countries.

These two examples demonstrate the impact of standards being widely accepted in the blockchain industry on user adoption and growth. End-users would also benefit from standards for inter-blockchain value transfers.

Take, for example, the current state in which payment systems are implemented on blockchains. To make payments using native blockchain tokens to another party on a separate network, either the payer creates an address on the payer’s blockchain and accepts the tokens or the payer converts the native tokens into native tokens from an exchange. Many users resort to trial payments as this process is often not user-friendly and can be fraught with fear of losing funds. Users may also need to buffer transaction amounts in order to guarantee that the receiver receives the expected value in case of volatility, slippage or fees.

Related: The future of blockchain is a multichain approach

You can also denominate your transactions in fiat stablecoins. Many of the major blockchains already have stablecoins. But, the use of stablecoins across different blockchains is also subject to some of these same limitations and will benefit similarly from a uniform standard. Payment aggregators could also be established to facilitate asset transfers between blockchains. This would allow end-users to move assets and make payments across the network.

The potential elements of a cross-chain asset standard for transfer

An overview of existing bridge implementations can be helpful in determining what a cross-chain asset standard might look like. These bridges rely on the non-collision property of private-public keys hash methods to allow blockchain assets to hop between chains that use similar address generation algorithms. This means that if a user is able to access an address on a Blockchain, they will also be able unlock and access the address on another Blockchain that uses the same private/public key hashing algorithm. This method has been used to create bridges to transfer Ether from other networks that use similar address systems, such as Binance Smart Chain or Avalanche C–Chain. The blockchains are monitored by a decentralized oracle system. When value is moved from one address to a designated exit address or portal address (or smart contracts), the oracle transfers the asset to the address on the second chain. With the knowledge that the first owner will also have access to the address and asset on the second chain, the oracle then moves the asset to the address on the other chains. As you can see, this is how it works.

The foundational process can be extended to create a standard for token transfer, even if different blockchains use the same private/public key algorithm. The transaction components of a blockchain are composed of message-encrypted elements and the transaction input/output specification. This message can be converted into a protocol with a target address and target blockchain identifier. Similar to how an oracle scans a portal address or contract using homogenous address bridge, the same oracles would pick up, decrypt and transfer the asset using information on the destination address and destination chain.

A second aspect of the standard would use the unique nature blockchain transaction IDs to ensure all transfers are matched up and recorded by the oracle only once. The portal address could also be implemented in a keyless fashion so that only verified transactions can trigger transfers from and to it. This would ensure that the system is automatically reconciled. It also wouldn’t allow for any manual processes that could compromise the integrity of the portal or the implicit conservation of value. This framework highlights the fact that most chains already have the necessary features to establish a standard. A protocol could be used to define the next steps in this process.

New emerging economy

The blockchains and the assets that are created on them are growing and will likely be around for the long-term, despite the fact that there is still much to innovate and evolve technology. The emerging asset and payment ecosystem will likely include many blockchains, cryptocurrency tokens, digital assets, stablecoins and central bank digital currencies.

Some blockchain practitioners believe that their preferred chain will eventually be the only one. This has led to a reduction in the need for interoperable standards. This idea is too narrow and unlikely to become the norm. Experts in this area would be able to serve technology users and the technology’s users by not treating the success of any chain like a zero-sum proposition. Existing traditional financial institutions should not be ignored, particularly those that are able to adapt to the rapidly evolving technology. Blockchain applications have the potential to reach the underbanked and unbanked, allowing for the establishment of multiple chains in the emerging economic system.

A single platform or provider ecosystem has not been able to solve the major technological problems of humans. Traditional finance and payment systems, telecommunications platforms, auto manufacturing, including electric vehicle manufacturing, social media networks, and private space flight are not all viable options. The development of CBDCs and geopolitical considerations will likely result in an end state that includes a mixture of different platforms, providers and variants of the technology.

Blockchains are not yet used in any way that has been completely superior to any technology in an application. There are some promising areas: fast cross-border payments; decentralized finance; digital art and digital assets of high value; gaming systems to track in-game assets; rewards and fan tokens; transparency and accountability grants and charity dispensation systems; tracking of loan applications and agricultural subsidies; and, in some cases, payment systems.

Related: Blockchain interoperability may hinge on trustless bridges

Cross-blockchain asset transfer standards are being developed and adopted. This will make the technology more useful in many areas, including payment systems. It will also move the technology away form the current trend of growth that follows quadrennial Bitcoin-halving cycles and not due to mass adoption, real world economic or financial activity.

This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Ken Alabi holds a doctorate from Stony Brook University in engineering and a master’s degree in computer-aided Engineering from University of Strathclyde. He is an IT professional, programmer, and published researcher with numerous peer-reviewed publications in different fields of technology. Authors have also published articles on blockchains, the decentralization and interoperability blockchains.

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