What are Cross-chain exchanges?

Blockchain exists with the goal of evolving and expanding the range of its applications around the globe. Blockchain technology has the potential to revolutionize finance, trading, and the capital market. However, its non-cumulative nature continues to hamper its widespread use. There are many different blockchain platforms that you can use, including first-generation ones like Bitcoin and third-generation ones like Avalanche. Each blockchain has its own separate chains. These chains are unable to come across or facilitate token trades that belong to different blockchain protocols.

Interoperability is a major problem for anyone who uses blockchain and wants to trade different tokens on various blockchains. Many Ethereum protocols projects are interoperable, including Uniswap (Dave), etc. These projects can interact to trade cryptocurrencies and swap assets. Cardano has also created a sidechain protocol to allow users to transfer values between blockchains that support Cardano. Blockchains do not allow users the freedom to trade tokens on different protocols, even with these facilities.

What limitation was the Siloed Decentralized System?

Even the most highly-demanded platforms like Ethereum or Bitcoin have their separate ecosystems. While they are both decentralized and independent, token exchanges require their own ecosystem. It means that you cannot exchange Ethereum native tokens on another protocol, such as Avalanche.

This was a serious problem, for both businesses and individuals using blockchain. With the growing decentralization trend as well as the introduction of advanced Blockchains, the limitation is no longer a problem. Avalanche was the first network to be launched in September 2020. As of today, there are over 225 projects on the platform. AVAX tokens, which are traded in large quantities, are also being traded.

How do cross-chain Swaps work?

Cross-chain trades use smart contract technology to enable token exchanges between two parties on different blockchains. These smart contract are powered by the technology known as Hash Time Lock Contracts or HTCLs. This locks the transactions with unique combinations to ensure that verification takes place on both ends. These security features come with the HTCL technology.

Hashlock

Hashlock technology permits smart contracts to lock the coin with a secret code (a combination of data). Only the swap initiator is allowed to access this secret combination. After verification of his deposit, he divulges the secret combination. After the revelation, the receiver is able to view the combination to unlock his deposit.

Timelock

The Timelock mechanism uses the time constraints to ensure the transaction is secured on the Blockchain network. It facilitates fast transaction completion. It stipulates that transactions must be completed within a certain time frame or the funds may be returned to the depositor.

Here's an example:

Jack deposits his ADA tokens in an HTCL address. The HTCL acts as an electronic safe. Jack must use the secret combination that Jack created to unlock it.

Lara will inspect the deposit when it reaches her. Jack shared the cryptographic hash that Jack had given her. You can use it to deposit your tokens (Ether), at the same HTCL account.

Jack receives her deposit and verifies the amount. Jack then divulges the secret combination that will allow him to access the deposit. Lara, upon seeing the combination, can also access it to open the account.

Once each one receives the tokens they are done with cross-chain swapping.

The following are the benefits to a CrossChain Swoop

Nature that is decentralized

The significance of decentralization is becoming more widely recognized. Cross-chain trades are a way to make people autonomous by creating a decentralized platform for multiblockchain exchange.

Enhanced security

Cross-chain swaps make use of HTCL smart agreements that provide users with increased security. They also guarantee a refund if there's a dispute or the first sender changes his mind. The technology does not allow for security concerns.

Low-cost, peer-to-peer transactions

Use of centralized trading platforms can lead to high switching costs. Not only do you need to find a reliable exchange and register, but also adhere to the terms and conditions. Cross-chain exchanges permit nodes to join a peer-to–peer blockchain network, and exchange tokens. It is faster and more cost-effective than traditional protocols because no one central entity has control over it.

High flexibility

Cross-chain exchanges enable high flexibility and allow the exchange of any token. Users don’t have to convert tokens into protocol-based tokens the same way they would in centralized swaps.

Conclusion

Cross-chain exchange is a futuristic model that allows for the decentralization and payment of tokens. It's an easy way for two participants to swap tokens on completely separate protocols without intermediaries. The cross-chain swap is possible because blockchain's core focus is on increasing interoperability over time. It encourages people toward decentralization, as opposed to centralized systems. Therefore, companies prefer a decentralized, blockchain-based system. This is possible with solutions that are developed on multiple protocols.

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