What does multichain mean?

The term multichain refers to decentralized applications that have been deployed across multiple blockchains that share similar smart contract technology. Ethereum, Avalanche, Polygon, BNB Chain, are all compatible with the Ethereum Virtual Machine (EVM) which enables developers to launch multichain dapps.

While originally the majority of the development in the crypto space was based on the Ethereum mainnet, the focus has now shifted to either the layer 2 blockchains like Optimism and Arbitrum, sidechains like Polygon, or alternative layer 1 blockchains like Solana and Avalanche.

Because blockchain technology is constrained by the Scalability Trilemma which states blockchains can not scale without compromising security or decentralization, developers built alternative blockchains that accept different tradeoffs to achieve more scale, security, or decentralization. Developers are also choosing to develop applications on Layer 2 blockchains that use rollups and proofs to allow for vertical scalability while maintaining Ethereum’s security.

A multichain world is now a reality. Various dApps like

Multichain dapps add complexity for the users and fragments the ecosystem as liquidity is spread across various blockchains. One negative consequence of multichain applications is that users need to switch between the different blockchains from their wallet, which can be tedious and complicated for novice users. A few examples of multichain dapps are Curve Finance and Aave which exist on multiple chains, but whose instances are isolated from each other. 

Multichain apps also add complexity for developers because they have to decide on which ecosystem to build, learn the nuances of new developer ecosystems, and take extra security measures to prevent exploits, of which many have focused on multichain applications and bridges because of their complexity.

In a pure multichain world every blockchain ecosystem is isolated from each other. For example, Ethereum cannot communicate with Polygon, Avalanche cannot communicate with the Fantom blockchain and so on.

What does cross-chain mean?

Cross-chain describes the communication between blockchains, and is the natural evolution of multichain. In cross-chain architectures, blockchains are not isolated silos, but are interconnected.

Cross-chain becomes possible thanks to cross-chain bridges and interoperability protocols like Ren Protocol, Multichain, and Connext, who have pioneered the concept of xCalls - the ability to call smart contracts across chains in a secure way.

How do cross-chain protocols work?

Cross-chain protocols can work in two different ways: (i) lock and mint and (ii) liquidity networks.

1. Lock and Mint

When you want to move a token from Chain A to Chain B, the tokens do not actually leave the originating blockchain (Chain A), but instead they are locked in a smart contract on the originating chain, and a representation, or “wrapped” version of the tokens are minted on the receiving chain (Chain B).  

Because wrapped tokens on Chain B are locked collateral on Chain A, a process managed by the cross-chain bridge, the original tokens are subject to the risk of the bridge. For example, if the collateral locked in a bridge’s smart contract is stolen as the result of a hack, the wrapped tokens will become worthless.

There are several architectures that allow the passing of information, or a “generalized” message, from one blockchain to another: (i) more trusted setups, (ii) trust-minimized setups.

In general, if a bridge requires an external third party, such as a set of validators, an oracle, or a multisig to work, this makes the bridge more trusted (relies on 3rd parties) and therefore less secure (e.g. open to more attack vectors).

The word “trusted” in this scenario means the user needs to place more trust in a 3rd party, and because a third party can potentially steal the funds locked in the smart contract, it is less secure than an architecture that minimizes the trust requirements from third parties (trust minimized setups).

2. Liquidity Networks

Cross-chain protocols that use liquidity networks rely on pools of liquidity that already exist both on the sending and receiving chains, so there is no minting of wrapped assets. Instead, users deposit liquidity into the pool on the originating chain, and then receive assets from the pool on the receiving chain. 

While cross-chain bridges that use liquidity networks are more secure, they are more limited in their functionalities and scale since liquidity is needed on both blockchains.

Cross-chain vs. Multichain: Similarities and Differences

Multichain and cross-chain both assume the existence and activities on various blockchains, but where they differ is in their ability to actively communicate with each other.

In a multichain scenario, there is no communication between chains, bridges, and interoperability protocols. This is because blockchains can maintain their security assumptions, provided by the different validators, only by themselves, and cannot monitor the security of another blockchain that was not built for their specific purpose.

The benefits of a cross-chain infrastructure is the ability to make all the applications, liquidity, and data composable with each other, removing barriers between the siloed blockchains. 

Vitalik Buterin, has previously expressed doubts on the safety of cross-chain communication, but since then new cross-chain communication mechanisms have been discovered that significantly increase the security of bridges, such as Optimistic Bridges.

Because a layer 2 blockchain like Optimism can only securely interact with Ethereum (or the L1 where it’s built upon), communication between Layer 2s also requires cross-chain protocols. For example, if a user wanted to move tokens from Optimism to Arbitrum, they would have to go to Ethereum first, wait 7 days, and then to the final rollup.

Secure interoperability protocols like Connext instead allow developers to shorten this time and create a fast and cheap experience for the user.

Popular Use Cases

Cross-chain communication is popular in a few major use cases including bridges, wallets, and dapps.

1. Bridge Examples

Bridges are some of the applications that can be built on top of interoperability protocols. The Connext Bridge, for example, is the most secure and one of the cheapest bridges to allow users to move tokens across multiple chains. 

Other examples include Axelar and Wormhole, although they are more trusted solutions as they rely on a set of validators, a third party that needs to be trusted, to complete transactions, as opposed to Connext, which is a trust-minimized solution.

2. Wallet Examples

Various crypto wallets have introduced integrated features to move tokens across multiple blockchains using interoperability protocols under the hood. Some are focused on trustless connections like Ethereum and Starkware (the Argent wallet), other or moving across totally separated chains like Ethereum and Solana - for example the Clover wallet.

3. Dapp Examples

Other dapps that have successfully started to implement a cross-chain strategy include Sushi, Superfluid, FujiDAO, and NFTHashi. 

a. Sushi

Sushi is a cross-chain decentralized exchange that allows users to swap any fungible asset to any other fungible asset. For example, you can send asset A from Ethereum and receive an asset B on Polygon.‍

b. Superfluid

Superfluid is a platform that allows to create money streams, or a steady flow of tokens that continuously changes every second, across blockchains. For example a DAO could start a stream of USDC from a secure chain like Ethereum, and a user could decide to receive it on a cheaper chain like Polygon.

c. FujiDAO

FujiDAO is a cross-chain loan aggregation protocol that identifies the best rates across any chain and allocates users’ funds, whether users are lenders or borrowers, where it economically makes the most sense.

d. NFTHashi

NFTHashi is a trust minimized NFT bridge that allows users to move NFTs across connected chains. NFTHashi is currently available on Ethereum testnets.

The Future of Cross-Chain Applications

Today, some users want and need fast transactions and low cost to operate on a blockchain, while others prioritize security: that’s why there is a need to have different chains and domains.

A multichain scenario is always more secure than a cross-chain one because blockchains were built to be secure when isolated. Still, users and protocols need to move data and value across domains, so cross-chain solutions are needed.

There already have been multiple hacks on cross-chain protocols, so it’s important to learn which ones are more secure and which are less secure. In the future, users won’t need to know on which chains they are: they will only want to interact with their favorite dapp, which will operate on one or multiple chains via interop protocols and abstract the multichain complexities for the user.