How multichain token systems can improve liquidity

How multichain token systems can improve liquidity

Digital assets are usually limited to their native blockchain network, and existing methods of transferring tokens from one blockchain network to another are highly vulnerable to hacking or involve the use of a trusted third party.

However, multi-chain tokens allow users to transfer their assets directly to another blockchain without giving up custody of their tokens.

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Experts in the blockchain space believe that cross-chain tokens can positively impact the industry by enabling greater user participation across multiple networks.

Marius Ciortan, director of product development at Bitpanda and Pantos, a European crypto exchange, told Cointelegraph, “Multichain tokens can establish a more fluid and connected environment in the context of decentralized finance.”

Ciortan continued, “Multichain tokens, for example, can help develop more efficient decentralized exchanges by allowing users to trade assets across multiple blockchain networks. This can help improve liquidity and reduce fragmentation in the DeFi ecosystem.”

Multichain tokens can also help interconnect blockchain networks, helping developers deploy their applications on multiple blockchains. Hoon Kim, chief technology officer at Astar Foundation, a tier-1 smart contract platform, agreed, telling Cointelegraph: “More interoperability between assets and liquidity means more interdependence between ecosystems. This can expand the network to allow more innovation and increase the risk of failure when an asset loses its value.”

“However, if an asset wants to increase demand, we can see a future where more and more projects will aim to inject their assets into multiple networks and increase utility,” Kim said.

Challenges with interoperability

Facilitating communication and interoperability between different blockchain networks is heavily dependent on interoperability protocols. However, interoperability protocols in the blockchain domain present several challenges that require resolution to ensure seamless operation of the blockchain ecosystem.

The absence of standardization poses a significant obstacle to interoperability protocols. There are many different exchange protocols, and each one has a different design and framework. This means that the environment is full of different networks that do not work together.

Since there is not much unity, it is difficult for developers to create apps that can run on different blockchain networks and still work. Because of this, people working in software development have to learn to use different exchange standards, which can take a lot of time.

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Scalability is another obstacle to interoperability protocols. Most interoperability protocols are specifically designed to handle a limited number of transactions, potentially impeding data flow in networks experiencing high traffic levels.

As a result, the problem of scalability can lead to slow transaction processing, elevated fees and overcrowding of the network.

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To tackle this challenge, it is important to devise interoperability protocols capable of handling large amounts of transactions and expanding proportionally with the growing use of blockchain technology.

Security is another notable obstacle to interoperability protocols. The interconnection of blockchain networks is associated with an increased likelihood of security breaches and hacks. The absence of security considerations during the design of an interoperability protocol can lead to exploitable vulnerabilities that malicious entities can take advantage of.

Developers have emphasized the importance of designing interoperability protocols with resilient security features capable of protecting against potential attacks and maintaining the authenticity of the blockchain ecosystem.

Ciortan said: “One of the biggest challenges we have seen across all interoperability projects in recent years is ensuring the security of the system. Validating events across multiple chains is a difficult task and requires a lot of work and research to develop a system that is robust enough to achieve this goal reliably and that stands the test of time.”

The challenge of managing the complexity of interoperability protocols is a critical issue that requires attention. The intricacy of interoperability protocols necessitates a deep understanding of cryptography, networks, and distributed systems.

To circumvent these issues, the blockchain community must work together to develop standards and best practices for interoperability protocols.

Kim also believes that security is one of the biggest challenges when it comes to interoperability in the blockchain area. Kim said:

“Most bridge protocols are managed through a centralized server that enables a burn-and-mint function where the account is managed via a multi-sig. But recently we’ve seen a lot of ‘layer 0’ protocols with node validators and virtual machines to bridge a blockchain with another.”

Centralized bridge protocols can be vulnerable to hacking, data breaches or other cyber attacks. If the central link or other components of the bridge infrastructure are compromised, it can result in the loss of assets, data leaks or other security breaches that can have serious consequences for users.

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Since multi-chain token systems work by users exchanging their tokens directly, without any intermediaries or bridges, this can help solve some of the challenges of traditional interoperability protocols.

Operating principles of a multi-chain token system

The Pantos group has created a new benchmark called the Pantos Digital Asset Standard (PANDAS). The standard is the main facilitator of tokens operating across multiple blockchain networks. Based on years of study, the Pantos team has developed a framework that allows tokens to interact smoothly with various blockchains.

Because Pantos is more of an infrastructure layer than a bridge, the PANDAS standard enables developers to distribute their existing tokens and newly created tokens on multiple blockchains without doing any maintenance work. This indicates that their tokens are on multiple chains and can be moved freely from one chain to another.

PANDAS does this via smart contracts, which are agreements that are executed when specific circumstances are met. In this scenario, the transfer across chains is made possible due to smart contracts and a network of nodes.

For example, if someone has an Ethereum-based token and wants to trade it on a BNB Chain DEX, they don’t need to rely on a bridge to move a wrapped token to another chain since they can use the Pantos technology to transfer their token to a new chain.

How does the multi-chain verification process work?

Pantos has developed several validation procedures over a considerable period of time. The ultimate validation method has not yet been released to the general public; however, it will constitute an improved iteration of the oracle-derived methodology.

The approach facilitates improved scalability and reduced gas charges while maintaining system security standards. Oracles are primarily used as instruments of inquiry. For example, the oracle on one blockchain can be queried by any Pantos client to confirm a transaction on another blockchain.

The Oracle verification process is based on a combination of threshold signature schemes and distributed key generation (DKG) protocols developed by Stanford University computer scientists Dan Boneh, Ben Lynn, and Hovav Shacham. These cryptographic techniques facilitate the authentication of signatories’ legitimacy by users. The Boneh-Lynn-Shacham threshold signature allows users to verify that a signer is authentic, and the DKG enables multiple parties to contribute to the computation of a shared public and private key set.

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The process is carried out with a dual focus on financial and logistical efficiency, achieved through consolidating multiple signatures into a single signature. Additionally, the act of verifying a single signature can serve as proof that the required minimum number of signatories support the signed correspondence.

Pantos produces a decentralized private key, where the oracle nodes have distinct private key shares, despite not owning the distributed private key. A public key can essentially be considered analogous to a decentralized private key. Using the private key shares held by the oracle nodes, the network can effectively consolidate their discoveries and generate an encoded message that can then be decrypted using the public key.

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If the oracle nodes undergo modification, all components, including the private key shares, the distributed private key, and the public key, may undergo modification. Usually, the production of new keys requires the supervision of a trusted person in a position of authority. In contrast, Pantos uses DKG protocols to dispense with the requirement of a trusted authority.

Multichain token systems have the potential to revolutionize the blockchain industry and make DeFi more fluid and connected. By allowing users to transfer assets directly between blockchains without relying on intermediaries or bridges, multi-chain token systems provide an additional and efficient method for users to engage across multiple blockchain networks.

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