New version — Flash Trade on swaps.io (demo)
In the ever-growing and dynamic cryptocurrency universe, linking chains together remains a challenging puzzle, and cross-chain swaps have become a pivotal mechanism in developing solutions to overcome that. These swaps allow the smooth transfer of crypto assets between blockchain networks, establishing connections between chains and thus unlocking new possibilities for crypto users. This way, users are given increased flexibility in managing and utilizing their digital assets across various chains, empowered to access a broader range of decentralized services and ecosystems.
At the heart of these cross-chain transactions lies the concept of native coins, which are crypto assets original to each chain. In this post, let's explore the significance of native coins in enabling cross-chain swaps.
Native coins (also called crypto coins or simply coins) are crypto assets native to a particular blockchain. They are paramount to each blockchain's operation and often bear its name. Examples of native coins are such well-known cryptocurrencies as Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), and Solana (SOL). However, it should be noted that with time, the meaning of this term slightly changed, now also encompassing any tokens crafted on the same blockchain in some contexts.
There are multiple ways to carry out cross-chain swaps, but most current implementations make use of cross-chain bridges. Essentially, cross-chain bridges serve as a means of taking an asset issued on one blockchain and transferring it to another by creating a wrapped version of it, which obeys the rules of a new chain. The original coin or token gets locked in a smart contract or burned while its wrapped version appears on the destination blockchain.
After that, a user can exchange the received wrapped token for an asset they need on any decentralized exchange. Automating the second part of this process on the backend is possible through cross-chain swap protocols, which many popular bridges actively choose to do. It simplifies swapping substantially, only requiring users to specify the asset they would like to get at the end of the swap.
However, why must we lock one token and mint another? It is necessary because of the differences in blockchain operations, standards, and protocols, which make connecting them highly problematic. Consequently, such a lack of interoperability prevents crypto assets from working seamlessly across chains, regardless of origin. Since using cross-chain bridges is not ideal, other approaches, including peer-to-peer trading and atomic swaps, are being actively studied and developed by developers.
So, how exactly are native coins involved in cross-chain swaps? They facilitate this process, being the backbone of each blockchain. First, they help handle transaction payments or gas fees within their chains. Since they are the main assets on each blockchain, handling fees is one of the coins' primary purposes. They allow transactions to be executed, ensuring that cross-chain swaps are performed smoothly and painlessly.
Additionally, native coins are essential for executing smart contracts, digital contracts written into a blockchain code that executes automatically upon fulfilling some terms and conditions. Native coins trigger and carry out the smart contract's terms, ensuring the entire process's security and integrity.
Lastly, native coins are helpful in ensuring sufficient liquidity during swaps. They typically possess stable and consistent liquidity compared to other assets based on the same blockchain. This quality makes them ideal for providing more advantageous speeds and rates of cross-chain transactions. With all those uses, native coins are critical for linking blockchains together, facilitating the transfer of value across the blockchain galaxy.
Native coins and their use in cross-chain bridges can pose several complicated challenges to the teams supporting them. Arguably, one of the most critical challenges is linked to the fear of centralization, which is quite feasible in the case of many bridges since numerous cross-chain solutions require the involvement of centralized entities to manage the custody of native coins during wrapping. By introducing centralization risks, developers unwillingly increase the chances of compromising the security and control of users' assets. As user assets are stored in smart contracts, hackers often target those to either steal user funds or mint-wrapped versions, leading to significant losses in both cases.
In order to eradicate such risks, it is crucial to work towards creating much more secure and sophisticated cross-chain solutions that can provide users with greater autonomy and control over their assets. By doing so, we can minimize centralization risks and ensure a safer and more transparent cross-chain infrastructure.
The other two issues linked to native coins are interconnected. Those are frozen liquidity and fragmented liquidity, both negatively affecting the liquidity available for trading. Frozen liquidity on cross-chain bridges refers to the situation where the liquidity of a particular token becomes unavailable due to it being locked for minting a wrapped version. Fragmented liquidity, when talking about bridges, refers to the situation when the liquidity of one asset gets divided between several chains during wrapping. Both phenomena can cause a significant reduction in the amount of liquidity available for crypto traders, which can adversely affect the swapping experience as well as any token's market value.
Native coins play a crucial role in enabling cross-chain solutions through cross-chain bridges. They ensure a consistent liquidity supply and help facilitate the smooth functioning of their respective blockchains. This, in turn, allows projects to transfer cryptocurrency assets efficiently across diverse blockchain ecosystems. By addressing critical problems and promoting decentralization, the crypto community can enhance the existing cross-chain solutions and develop new and improved ones. For example, the Kinetex team has been working on creating a cross-chain solution that can redefine cross-chain trading for the whole crypto community, ushering in a new era of cross-chain. This solution, Flash Trade, will introduce a new cross-chain standard based on resolving and intents.
Kinetex Network: Website | Kinetex dApp
