Cryptocurrency trading is becoming more complicated day by day. Only a few years ago any centralized platform for trading was good enough for everyone. But now traders want to use decentralized exchanges, which is very reasonable considering the very long list of centralized exchange hacks that have occurred over the past five years. A decentralized exchange is a safer way to trade, not handing over your funds to a third party who may not be responsible enough to keep them safe. You keep your funds to yourself, and you may lose them only through your own volition, not by someone else’s incompetence.
With the increased demand, decentralized exchanges started improving themselves. When the first DEXs went live it was a mess, at best. Some of them even left their users with large $1.1 million losses due to the imperfection of their structure. Also, they allowed for trade only on one particular blockchain, mostly Ethereum, because it was the most popular and had more tokens than any other platform. It still has more tokens than any other platform, 1,163 to be precise, but the environment is already changing. It’s not enough to support one single network anymore, traders want to be able to trade any assets across multiple blockchains. That’s where the technology of cross-chain mechanisms can help fulfill that desire.
Source: dilbert.com
How does cross-chain interaction work
Cross-chain protocols, or so-called atomic swaps, allow you to exchange one cryptocurrency for another, even between two different blockchains, without the help from a third party. It’s basically a variation of smart contract technology and hash time locked contracts (HTLC).
When two parties who don’t trust each other want to exchange coins or tokens, they can create such a contract. This contract acts as a temporary escrow for the funds of both parties. When funds are sent to complete the exchange, both parties have to confirm the receival of funds within a limited timeframe. If one of the parties fails to do it, the transaction is cancelled. If both parties confirm the transaction, the swap happens. This completely removes counterparty risk of exchanging tokens across blockchains.
Source: blocktrak.com
Why is this great? We have talked about this previously - the current blockchain and cryptocurrency industry is extremely fragmented right now. Those who want to trade in a decentralized way may find themselves in a situation where they have to create multiple accounts on various exchanges and make 2-3 trades instead of one because they can’t trade between two cryptocurrencies directly. The cross-chain functionality on DEXs solves this problem. So, what DEXs support this technology?
The most advanced DEXs
Currently, many startups are now developing cross-chain swaps. Even Lightning Labs, the developers behind Bitcoin’s Lightning Network, are creating their own solution. No wonder some DEXs have already incorporated this feature.
The Komodo exchange was a pioneer of atomic swaps. One year after Tier Nolan proposed the algorithm of atomic swaps in 2014, their lead developer implemented it and allowed to actually swap cryptocurrencies between each other. They were also the first to conduct the swap between DOGE and Ethereum blockchains. DOGE is based on the Bitcoin code, so that means Bitcoin can be exchanged to Ethereum too. It’s hard to underestimate the importance of this test.
VDEX by Volentix. It features the Inter-Blockchain Communication (IBC) proofs, which are designed to simplify interaction with other blockchains. Those chains that can’t process IBC proofs can rely on trusted oracles and escrows. With an EOS-based smart contract, a trusted multi-signature wallet holding the asset in escrow can be used to sign the transaction on the originating chain. Thus the exchange is able to handle any cryptocurrencies and support atomic swaps between them.
Dex.top - It supports swaps between Ethereum, EOS, and NEO blockchains. All trades are matched initially on the ledger of the exchange itself to improve speed and then sent onchain for settlement. Sadly, they have a very limited variety of tokens for trading.
Switchneo - This exchange started as a DEX for the NEO ecosystem to allow trading NEO-based tokens, but it has grown beyond that. Now it supports Ethereum, EOS, and NEO trading, as well as limited BTC trading via the Wrapped Bitcoin token. It doesn’t provide any extensive ecosystem, but it may be very convenient for those traders who are interested in NEO or EOS tokens and want to find them all in one place.
Will it change the landscape of trading?
Cryptocurrency is still a developing industry. These tokens are traded in their own space, on their own platforms, with their own rules - or is it better to say without any rules? There are no established tools for trading, nor any standard for inter-blockchain communication. Luckily, blockchain technology attracts many brilliant developers and scientific minds, who are constantly coming up with new ideas and new ways to improve the user experience.
(Source: xkcd.com)
The cross-chain mechanism is not a fully-developed technology yet, however. In the future, it’s possible that all trades will be performed between the two owners of funds and not through a third-party platform. And the cross-chain function will be crucial in such interaction, because over time it’s likely that more and more blockchain platforms will emerge. But it shouldn’t be the problem of end users, it will be the problem of blockchain architects, and they are already active, developing, and experimenting on each of these platforms.
Disclosure: The author is not associated with any of the projects mentioned.