Although the cryptocurrency market seems to be slowing down and the value of most major currencies has shrunk by nearly half, people are still interested in digital assets and the adoption rate is still rising. This continued interest is mainly due to the following reasons. DeFi seems to be stronger than ever, because it provides a whole new way to make money. Second, although most of the cryptocurrencies have lost their value in the recent bull market, in the long run, they still surpass traditional forms of investment and are an excellent means of hedging wealth.
No wonder the total value of the entire cryptocurrency market is still as high as $1.3 trillion. One would think that due to the difference from a centralized conventional currency system, this accelerated adoption means a ubiquity among all thousands of coins and tokens.
Isolated decentralized system
Sadly, the existence of modern coins is isolated. They are designed to be decentralized and work independently, and either have their own independent blockchain ecosystem or separate from other larger ecosystems such as Ethereum and Binance Smart Chain.
This essentially means that if a token runs on a different ecosystem, then they cannot interact with another token. With the launch of more and more tokens, coupled with increased interest due to DeFi, this fight is more intense than ever. Take Binance Smart Chain as an example. Even a year ago, it did not exist on the market, but in recent months it has proven that it is a serious ecosystem, and many tokens are now using it. Ethereum, as the first platform that allows it to be used to launch different tokens, still maintains its dominant position.
So, what if a user has tokens on one blockchain and wants to run their tokens on a different system? This is where cross-chain exchanges can come in handy.
Sometimes called atomic swaps, cross-chain swaps are a complete decentralized mechanism that can exchange user tokens with other non-native tokens without custodial or intermediaries.
Cross-chain exchanges are performed through special smart contracts, which can handle two (or more) types of tokens. Although these swap contracts have existed for 4 years (the first known atomic swap was completed by Litecoin creator Charlie Lee in 2017, he successfully exchanged LTC with BTC.
Today, many platforms provide cross-chain exchange functions. An example is the decentralized platform MintySwap, which uses an aggregation protocol to leverage cross-chain exchanges between the two largest DeFi chains, but isolated from each other-Ethereum and BSC.
Convergence and cross-exchange functions promote the mature DeFi market, as users discover new markets that were previously inaccessible, and provide DeFi developers with a larger audience and growth.
There are many other platforms, such as Shapeshift and Wanhain, which claim to have cross-chain exchange capabilities, but these platforms deviate slightly from the real exchange. Shapeshift insists on requiring users to register, so it collects user data, which is a big no-no in a purely decentralized system, and Wanchain is actually creating an intermediate chain that acts as a bridge and does not directly exchange tokens.
In addition, recent cross-chain and cross-layer 2 projects have also received more attention from overseas: Connext Network, Hop Protocol, Celer Network, Orbiter Finance.
So how does cross-chain swap work?
As mentioned earlier, cross-chain exchanges are completed using smart contracts. A smart contract is a small application that can connect two different chains and perform automatic exchange of tokens when certain conditions are met.
Although this process is quite complicated on the back end, it is quite simple to execute. When two people agree to exchange their assets, they submit these tokens to the so-called Hash Time Locked Contract (HTLC). Then, each participant will exchange hash keys so that both parties can ensure that the other party has deposited the correct amount. If the deposit is made within the specified time, the transaction is executed. If not, the deposited amount will be refunded.
In this way, two people with completely different coins can exchange their assets without the need for a guarantor to act as a custodian or go to a centralized exchange and then trade the required assets.
Although cross-chain swaps are not a new thing, the recent interest in different tokens, especially due to the high profit margins of DeFi-oriented mining, has led to the demand for tokens from different chains.
Although centralized exchanges provide exchanges, the cumbersome registration, KYC, and subsequent payment related fees are quickly making it an obsolete option.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/what-is-a-cross-chain-exchange/
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