Cross Chain Basics

Cross Chain Technology

Cross chain technology was created as a decentralized solution so that blockchains can communicate with one another without the help from other intermediaries, in most cases a centralized party e.g. an exchange or a custodial wallet. Blockchains operate in silos, making it difficult for blockchains to interact and communicate with one another. Cross-chain technology was designed to fix that problem. This technology avoids reliance on a centralized entity, i.e. avoids third party risk, gives users full custody of their crypto, with the goal of facilitating a faster processing time at a lower transaction cost, making it easier for people to transact across different blockchain networks. Such ability is described as interoperability in the blockchain context. Interoperability is the ability to share information across blockchain networks.

Cross Chain Lending & Borrowing

Lending and borrowing is a core element of any financial system. Cryptocurrency is no different. Cross-chain lending and borrowing gives users the ability to lend tokens on one blockchain while borrowing tokens from a different blockchain.
Lending and borrowing transactions play a particularly important role in a cross chain world because you cannot move the native existence of a token from one blockchain to another. The only way to move it is by creating a mirrored version of the token on the other chain, and such solution creates a problem: by utilizing a bridge solutions to facilitate the transaction - each bridge solution will create their own pegged version of the same token and if there are two dozens of bridge solutions around, there would be two dozens of versions of the same token existing on the new chain, and there are several hundreds of different tokens existing on Ethereum alone.
What’s a better way to move across chains? The answer is to always hold onto the native tokens on each of the blockchains, so you can either sell and switch tokens to get exposure from one blockchain to another, or if you don’t want to sell you can collateralize your native assets on one blockchain to borrow the native assets on another blockchain to be able to start interacting with the ecosystem over there, hence cross chain lending and borrowing.
Users hold different tokens native to different blockchains. Currently they can’t lend and borrow across blockchains if eg. the lending rates are high on one blockchain vs another or they want to use their existing holdings on one blockchain to borrow assets on another blockchain.
Users who want to lend their tokens to a specific money market and start gaining interest on their tokens they have supplied based on the current lending APY. These lent tokens are sent to a smart contract and become available for other users to borrow.
The user who is borrowing, must provide collateral tokens to receive a loan. All loans are over-collateralized, meaning the user will have to lock up more tokens than the value of the loan received, which provides insurance to the lender when the market is volatile. Collateralized loans are much more secure for the lender, this allows the borrower to get leveraged positions, get exposure across chains while still keeping the token positions of their choice.
Unlike traditional borrowing platforms, there is no credit check, and there is no bank acting as a middleman in between, it’s universal access to all around the world, giving access to lending and borrowing to individuals to achieve financial inclusion on a global scale
Last modified 2mo ago