How does blockchain interoperability bring Bitcoin into the DeFi field?

Blockchain interoperability can enable dialogue between different blockchains. This technology will soon become possible, and it will help introduce Bitcoin into the field of decentralized finance (DeFi).


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Ethereum co-founder Vitalik Buterin bluntly pointed out in a tweet last month that there is a lack of compatibility between Ethereum and Bitcoin. He wrote:

"Embarrassingly, we still can't easily make trustless interactions between these two largest crypto ecosystems."

Developers working on interoperability told Decrypt that Buterin's call for compatibility between blockchains has been answered. Cosmos' Inter-Blockchain Communication protocol, Komodo or Ren, a Singaporean company dedicated to bringing Bitcoin into the DeFi field of Ethereum, are good examples. It seems that Vitalik's wish is about to come true.

What is the compatibility between blockchains?

Simply put, cross-chain interaction is a technology that allows blockchains to communicate with each other. Currently, Bitcoin cannot be used in Ethereum smart contracts because they are part of two different blockchains. Just like running a Windows program on macOS, it simply won't work.

This limits the development of the encryption industry. Because blockchains cannot communicate with each other, Bitcoin developers have to use software specifically built for the Bitcoin blockchain; so is Ethereum, which is another major ecosystem in the blockchain field. These networks are huge, with billions of dollars worth of encrypted assets flowing between them every day, but they cannot communicate with each other, which has become a big problem limiting their development potential.

Protocols that promote compatibility between blockchains can solve this problem. They allow different blockchains to be interoperable; through these protocols, the Bitcoin blockchain can talk to another blockchain (such as Ethereum).

The most famous of these is the cross-chain communication protocol created by Jae Kwon in 2014, which powers the Cosmos ecosystem (interoperable Dapp set). There are also other projects, such as the interoperable blockchain network ecosystem Polkadot, and the Komodo project that allows users to exchange assets from different blockchains.

Another interoperability project is Ren, which works a little differently, but the principle is the same: let the blockchain achieve interaction in a way that does not require trust and decentralization. According to Crunchbase data, Ren has raised $ 34 million through financing. Loong Wang, co-founder and CTO of the project, told Decrypt:

"Ren focuses on acquiring an asset on one chain and handing it over to the network, and then you have the right to mint the asset's token on another chain.".

Why is blockchain interoperability important?

There are several very important players in the field of blockchain interoperability. But why is this technology important? Wang said that any decentralized financial agreement that “try to use a lot of liquidity or require a lot of liquidity to work” will benefit from this technology.

For example, loan agreements on Ethereum often use ETH as collateral. Wang said this means that once ETH's stock price plunges, everything will fall with it. Of course, cryptocurrencies are highly relevant, but as Ren matures, it will need to acquire other cross-chain assets. He further stated that due to Bitcoin's "huge market value", it would be very useful to use it as collateral.

Ren Chief Operating Officer Michael Burgess told Decrypt that the introduction of Bitcoin into DeFi will not only make cryptocurrency-based protocols more stable, but also expand the possibilities in this area. He said that one of the most common questions in the DeFi field is: 'If there is no third party acting as an intermediary, when can I start earning interest on my Bitcoin? 'Blockchain interoperability makes this possible. Wang added that it is not limited to Bitcoin, you can bring any asset to any blockchain. He said:

"I think the next step is to realize the ability to trade Bitcoin without any intermediary; that is, you don't need to obtain permission from a centralized entity, nor do you need to give up your custody of Bitcoin."

The Ren team showed an example at the ETH Denver conference: the system it developed allows users to send bitcoin to the MakerDAO system, and guarantees the MakerDAO cryptocurrency-supported stablecoin DAI, and then obtain DAI in return (currently MakerDAO does not Support Bitcoin).

To Kadan Stadelmann, Komodo ’s first city technical officer, a single blockchain architecture model is “inefficient and outdated”. He told Decrypt that his company's blockchain interoperability technology began with a vision of a "decentralized exchange that connects all blockchains."

This is achieved through fully automated atomic swap, which is a way to exchange cryptocurrencies between different blockchains. This technology is not unique to Komodo: the developer, RSK LAbs co-founder and chief scientist Sergio Demian Lerner was one of the first to fully describe the technology in 2012. Stadelmann stated:

"Komodo takes data from the Ethereum interface and compiles anything that the local Bitcoin protocol cannot understand, so that these two different blockchains can interact with each other."

End 51% attack

Stadelmann told Decrypt that Komodo also has a use that Ren didn't cover: the creators of the new blockchain can use Bitcoin's computing power to protect their networks. The blockchain may be controlled by a 51% attack. In this attack, anyone with more than 51% of the hashrate on the Proof of Work (PoW) chain can veto anyone else and manipulate the network as they like; they even You can send tokens to yourself for free.

New blockchains are particularly vulnerable to such attacks because they may not have enough miners yet. But Stadelmann said that through Komodo's special smart contract, Bitcoin's computing power can be used to protect these new blockchains and make them "technically immune to 51% attacks." Komodo lawsuit Twitter account once wrote:

"In the past year, 51% attacks have caused more than $ 23 million in losses in the blockchain field. Komodo's blockchain security service is the industry's only third-party security solution that reduces the risk of 51% attacks."

Stadelmann explained that Komodo's system regularly stores the block hash of the weaker blockchain on the Bitcoin blockchain. From then on, the weaker blockchain will use the stored information as a "checkpoint" to verify its own blockchain.

He said that this makes users of these blockchains very at ease. "Hackers or malicious actors must first crack the Bitcoin protocol and then the Komodo protocol before they can attack their blockchain." If people stop using the Bitcoin protocol, developers of the new blockchain can connect their networks To the current strongest blockchain.

What's next for blockchain interoperability?

Blockchain interoperability is a rapidly developing field, but there is currently no clear market winner. Both Ren and Komodo told Decrypt that they hope to become the standard for this technology.

Stadelmann did not hide his ambitions for Komodo; he wanted to see it "provide an industry standard in this area that can be used by other blockchain platforms and protocols." At the same time, Wang ’s vision for Ren is that Ren will complement professional ecosystems such as Cosmos.

The dust is far from settled, in fact, they have hardly been raised. Ren has not even launched; its testnet has been released in the second half of 2019, and its mainnet will be released in the near future. Other market entrants are still in the early stages of showing the possibility to the market. If they have no idea, Vitalik Buterin will let them know how to do it.

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