Cross‑Chain Stablecoins: Interoperability and the Bridge Wars

Introduction

Blockchain technology has made an impact across various sectors, including supply chain management, healthcare, real estate, government and public services, and financial services. Blockchain’s key elements are decentralization, cryptography, distributed ledger, and chained blocks. It has been shown that this technology can provide trust, transparency, and shareable information without resorting to intermediaries. Security is provided by the use of cryptography and the consensus mechanisms maintain the integrity of the blockchain and record’s immutability.

Blockchain is the enabling technology that implements the operations of cryptocurrencies. Stablecoin is a type of cryptocurrency designed to reduce price volatility. This stability is achieved by tethering the value of the stablecoin to a reserve of assets, often in the form of a fiat currency like the US dollar. Implementing a stablecoin involves various technical challenges related to the design and architecture, which include smart contract complexity and cross-chain interoperability. This work presents an architecture for the backend of stablecoin services that address these two challenges. In the architecture, the bridge component enables seamless cross chain interoperability, allowing the move of stablecoins from one blockchain to another without the need to be reverted to fiat currency.

Understanding Stablecoin

A stablecoin is a digital currency pegged to a ‘stable’ value, such as the US dollar or gold. In comparison to cryptocurrencies, stablecoins have a higher potential to address volatility issues. That is so because cryptocurrencies have relatively small market capitalization, which often experiences fluctuations and high volatility with daily buy and sell orders. Thus, stablecoins are the best form of digital currency to suit everything, from daily e-commerce transactions to crypto token exchanges on blockchains.

For a thorough understanding, we can assume stablecoins as a tokenized representation of real-world or fiat currencies. Put more simply, if 1 USDT (Tether) equals 1 USD, a stablecoin is expected to maintain this peg regardless of market fluctuations. Stablecoins are mainly of four types: Fiat-backed stablecoins, cryptocurrency backed, commodity backed and algorithmic stablecoins. To learn more about stablecoins, read our detailed insight.

What is cross-chain technology?

Cross-chain technology refers to an emerging technology that enhances interoperability between independent blockchains. Every blockchain is designed to perform specific actions to address the limitations of existing blockchains. For example, Bitcoin was introduced to replace traditional currency with digital cryptocurrency. At the same time, Ethereum came up with smart contract technology to empower the use case of blockchains across the fintech industry. Due to the lack of interoperability and the siloed nature of both Bitcoin and Ethereum, users cannot share information between these blockchains.

The good thing about blockchains is that they are unique but share identical basic infrastructures, which is where cross-chain technology comes in. With the rapid expansion of blockchain networks and the constant introduction of new blockchain projects, cross-chain interoperability becomes crucial. It allows blockchains to interact with each other even though they exist on their separate chains. With this technology in place, blockchain can share information, tokens, data, and, more importantly, stablecoins between diverse blockchain networks. This way, users can enjoy enhanced blockchain Interoperability with cross-chain stablecoin payments.

Technologies like cross-chain swap, cross-chain token exchanges, and the decentralized token bridge are perfect examples of how cross-chain-powered innovations have been bridging the gaps between blockchain and its real-world implementations. By enhancing blockchain interoperability, cross-chain preserves blockchain’s decentralized nature and unlocks various utilization opportunities across newer industries.

Cross-chain stablecoin payments

Cross-chain stablecoin payment is much like the cross-chain crypto exchange. Particularly in the context of stablecoins, cross-chain technology allows two inherently different blockchains to interact with each other for sharing stablecoins or making payments in stablecoins. For instance, a user A on Ethereum blockchain wants to send Ether to another user B on Binance Smart Chain. In return, A is entitled to receive Binance USD from B. Since BSC and Ethereum are two unique blockchains, they cannot allow blockchains to interact and exchange stablecoins. Cross-chain technology enters the game to solve this scalability issue. It establishes secure connections between these two blockchains and facilitates instant stablecoin exchange.

Cross-chain has enabled stablecoin payments to bring many benefits to the issuers. They can mint and buy back coins and redeem the outstanding stablecoins whenever needed. With the ability to quickly convert volatile assets into stablecoins, one can escape from the risks of crypto market fluctuations. Moreover, first and second-generation blockchains, Bitcoin and Ethereum, do not efficiently support everyday transactions due to their scarce computing resources and relatively high fees. As a result, users seek the freedom to choose the desired blockchain protocol that suits their day-to-day payment and settlement requirements. Their search ends at cross-chain stablecoin payment options, where payments can be done in any stablecoin without any complexity.

The role of stablecoins in cross-chain payments

A peer-to-peer decentralized payment system is one of blockchain technology’s most prevalent use cases. The idea was to eliminate third-party entities from the payment process and allow people worldwide to participate in a trustless distributed network. Also, note that blockchain initially appeared to power cryptocurrency transactions. However, the overgrowing popularity of alternative currencies such as stablecoins and the rapid rise in their circulation has encouraged many organizations (banks or financial institutions) to issue their stablecoins for block-based payment purposes.

Like crypto tokens, stablecoins have also been circulated on various blockchains that remain isolated. Before the advent of cross-chain technology, stablecoins transfer between blockchains was enabled by a centralized entity or middleman. Users first need to deposit their stablecoins to this middleman. This approach of giving custody of money to a middleman is against the ideology of blockchain, which is creating a permissionless and decentralized ecosystem.

The Blockchain Bridge

One of the first things you need to do before you start looking for the best blockchain bridges would be to find the definition of one. Investors are gradually showcasing more interest in the field of DeFi. Therefore, the uses of a blockchain bridge are gradually gaining momentum in the decentralized applications ecosystem.

Just like physical bridges, the blockchain bridge connects two separate blockchain networks or applications. A blockchain bridge can work in different ways and has also been referred to as a ‘cross-chain bridge.’ It can facilitate the uninterrupted transfer of assets and information between layer 1 and layer 2 networks as well as between different blockchain networks.

Every blockchain project features specific defining parameters unique to the project, which create problems with interoperability. A blockchain bridge serves as the proven answer to this problem as they can serve as trustless, trusted, bidirectional or unidirectional modes for transferring different transactions and data sets through blockchain bridges. The working of a blockchain bridge can involve exchange of decentralized identities, off-chain information and smart contract calls.

Stablecoin payments, crypto conversions and exchange of stablecoins made easy with Transfi, click to find out more!

Working of Cross-Chain DeFi

The secure transmission of data, tokens, and messages between on-chain environments enables the creation of cross-chain smart contracts—decentralized applications made using multiple separate smart contracts on different blockchains that communicate with each other to create a single unified application.

Cross-chain smart contract design is an emerging area of innovation with a variety of approaches. At a fundamental level, a cross-chain smart contract enables developers to segment their applications into separate modularized components that are deployed on different networks and perform different tasks, while staying in sync and supporting a unified use case. This modularity lets developers harness the strengths of various blockchains in a single application; for example, using a highly secure blockchain for its security while using a high-throughput blockchain for its low latency.

Given the current multi-chain landscape, where applications are individually deployed on separate blockchains, cross-chain smart contracts can be used to enable more seamless interoperability between deployments of the same smart contract code on multiple blockchain networks. This standardizes user experience across the multi-chain environment. Consequently, these contracts not only address the drawbacks of the present multi-chain design paradigm but also pave the way for entirely new smart contract use cases.

Conclusion

The emphasis of stablecoin has always been on creating less volatile and high liquidity-backed assets. That being said, this industry has to undergo many challenges to position itself in today’s competitive financial ecosystem. The stablecoin industry should collaborate with regulators and discover a more advanced framework that can address the challenges of cross-chain stablecoin payment. This industry has the potential to alter the way virtual payments are done. Stablecoins, with their basic cash-like features, make digital payments frictionless and instantaneous on various blockchains.

Frequently asked questions (FAQs)

What are stablecoins?

A stablecoin is a digital currency pegged to a ‘stable’ value, such as the US dollar or gold. In comparison to cryptocurrencies, stablecoins have a higher potential to address volatility issues.

What is cross-chain technology?

How does cross chain de-fi work?

What is a block chain bridge?

The blockchain bridge connects two separate blockchain networks or applications. A blockchain bridge can work in different ways and has also been referred to as a ‘cross-chain bridge.’ It can facilitate the uninterrupted transfer of assets and information between layer 1 and layer 2 networks as well as between different blockchain networks.

What is the role of stablecoins in cross chain payments?

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