Introduction The Decentralized Finance (DeFi) Revolution is taking over traditional finance (TradFi) and centralized exchanges (CEX), with billions in...
For Web3 developers, figuring out how to communicate with other blockchains has become a critical decision in the process of growing a protocol.
Back in January 2022, Vitalik published a Reddit post in January explaining his view that projects will evolve to embrace a multichain approach rather than pursuing cross-chain implementations.
My argument for why the future will be *multi-chain*, but it will not be *cross-chain*: there are fundamental limits to the security of bridges that hop across multiple “zones of sovereignty”. From https://t.co/3g1GUvuA3A: pic.twitter.com/tEYz8vb59b
— vitalik.eth (@VitalikButerin) January 7, 2022
While Vitalik makes a strong argument for embracing multichain implementation, cross-chain implementations have important advantages to consider. We believe that both are important to advancing the blockchain ecosystem and will discuss both in detail later in this article.
At a high level, a multichain approach may involve less technical risk. However, cross-chain approaches can be simpler to implement and actually incur less risk from the standpoint that certain cross-chain solutions are regulated and can be insured to an extent.
To better understand the issue, let’s talk about what it means to pursue a multichain versus cross-chain approach.
Multichain vs Cross-chain
The difference between multichain and cross-chain has to do with the way dApps (decentralized applications) and digital assets are bridged from one blockchain to another.
A cross-chain approach involves finding ways to represent, or wrap, assets from one blockchain onto another. When someone purchases Bitcoin on a centralized exchange like Coinbase or Binance, they are in fact purchasing a wrapped version of Bitcoin, that tracks Bitcoin’s price. The real Bitcoin still exists within the Bitcoin blockchain, and a cross-chain approach means representing it on other Blockchains as tokens. In order to do this, cross-chain bridges (such as Binance Bridge or Wormhole Token Bridge) are needed, resulting in centralization and security issues.
Taking a multichain approach means having a project exist on at least two blockchains at the same time. For example, Stably’s stablecoin USDS exists on 10+ blockchains, meaning people can use Stably as a multichain bridge between these blockchains. If someone has USDS within Stellar, they can quickly exchange that for its equivalent amount of USDS within Tezos or any other blockchains supported.
This approach reduces risk and makes sense for many of the reasons Vitalik mentions.
Networks connected by cross-chain solutions effectively link the security of the blockchains they connect via centralization, so a 51% attack on one chain holds the potential to create instability across all of the connected chains. As more blockchains are bridged, interdependency increases along with the risk that a black swan event on one network will affect all of the connected blockchains.
If there are 100 chains, then there will end up being dapps with many interdependencies between those chains, and 51% attacking even one chain would create a systemic contagion that threatens the economy on that entire ecosystem.
– Vitalik Buterin
With a multichain approach, the risk is compartmentalized to each blockchain.
As an example, the Solana blockchain has had a number of outages over the past few months. While an outage is different from a 51% attack, the fact that outages have occurred and may occur again mean that:
- The blockchain is centralized enough to be halted by a single individual or organization
- Assets bridged to and from Solana could be compromised
Similarly, any assets native to Solana that have been bridged to other networks could become worthless and tokens like ETH that’ve been wrapped for use on the network will no longer be able to be unwrapped and returned to the Ethereum blockchain.
Even if we stick to “safe” blockchains, problems with a dApp on one chain could affect assets across any network the asset has been bridged to. No matter what level we start on, bridging assets creates risk.
While these are valid arguments, Vitalik disregards these. This is likely as he quite literally believes that in the future, the multichain projects will be the ones that more likely succeed for the reasons mentioned.
Cross-chain solutions come with their own quirks but they’re far more straightforward than building out the infrastructure needed to support a protocol on every chain in the network (as is the case for multichain).
At this point in time, we have three ways to bridge tokens. You can use a(n):
- Unregistered custodian
- Regulated custodian
- Decentralized bridge
Custodians simply act as middlemen, accepting tokens sent from one blockchain and sending an equivalent value of tokens to an address on a different blockchain.
Anyone can set up a bridge and as an emerging technology, there’s certainly benefit to having a variety of different implementations being tested. Users need to be aware, however, that using bridges managed by unregistered custodians comes with important risks to consider, most notably the lack of recourse in the event that funds are lost.
Custodians qualified by the SEC have to obtain insurance, so users can expect to be covered or in the worst case, can seek legal recourse in the event of a hack, technical failure, or other black swan situation.
Bridges operated by regulated custodians have other benefits as well. Money managers must use custodial services that have been registered with the SEC, which means registered custodians can serve institutional clients like banks and trust companies.
At this point, you might be wondering: what about decentralized alternatives? Having a decentralized bridge could in fact be beneficial but technical obstacles currently stand in the way of an effective solution, and this technology is relatively untested as we stand.
Like blockchains, bridges rely on verifiers to make sure the system is operating correctly. As Arjun Bhuptani explains in his article, The Interoperability Trilemma, bridges can be verified in one of three ways:
- Natively-verified bridges use the verifiers of the various blockchains that they connect. Examples include Cosmos IBC and Near RainbowBridge.
- Externally-verified bridges rely on a 3rd party validator. Examples include Thorchain or Anyswap.
- Locally-verified bridges enable the parties involved in a transaction to verify the interaction. Examples include Connext and Hop.
The Interoperability Trilemma explains that each of the above options may only have two of the following three properties:
- Trustlessness: equivalent security to the underlying domain
- Extensibility: able to be supported on any domain.
- Generalizability: capable of handling arbitrary cross-domain data.
For blockchains that use similar primitives, building out cross-chain solutions might not be a difficult issue. Those that don’t, however, are like individuals who speak different languages: they need some kind of translator or system of hand signals to achieve communication.
As is the case with cross-chain solutions, it’s generally good to have a robust ecosystem of different bridges experimenting with different architectures to help weed out the problems and establish best practices for how bridges should be built and used in the future.
Weighing the Advantages
One important factor for builders considering whether to pursue cross-chain or multichain solutions is how implementing each approach factors into the overall strategy for scaling a blockchain ecosystem.
It’s easy to understand the benefits of a multichain approach: multichain inherently offers greater security but the money, time, and effort involved in this approach can’t be ignored.
A multichain approach may be inherently safer but building that sort of infrastructure comes with significantly higher up-front costs.
On the other hand, implementing a set of cross-chain solutions is generally a more straightforward proposition than building out a multichain ecosystem. And for users, regulated cross-chain solutions offer safety to users by insuring their funds in the event of a catastrophe.
Ultimately, cross-chain versus multichain approaches aren’t mutually exclusive. Cross-chain solutions can, are, and will likely continue to be used to facilitate the development of multichain ecosystems.
Rather than taking on such a large project all at once, projects can rely on bridges between popular networks as a temporary solution while a more effective long-term solution can be implemented.
Both approaches have their trade-offs and the inherently-superior security of a multichain approach may not be the factor that determines which approach will become more popular in the long run.
Unless a particular approach proves to be disastrous, it’s likely we’ll see projects embrace a range of strategies involving cross-chain and multichain approaches to scaling.
As the Thomas Edison quote goes “I didn’t fail 1,000 times. The light bulb was an invention with 1,000 steps.” The more we experiment with various approaches to cross and multichain solutions, the closer we get to a world with thriving blockchain ecosystems.
Please visit https://www.stably.io/ for more information about Stably’s borderless accounts, Stably USD (USDS), and Asset-Tokenization-as-a-Service. For easy to access a variety of different stablecoins, check out Stably Prime: https://prime.stably.io/.
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