Native Coins and Their Use in Cross-chain Swaps
Dubai, UAE, 27th January 2024, Cross-chain swaps enable the transfer of digital assets between blockchain networks, promoting interoperability and unlocking new possibilities for users. Native coins, unique to each chain, are at the core of cross-chain transactions, facilitating seamless crypto asset transfers. Let’s explore their role in more detail.
Existing Mechanisms
There are various methods to conduct cross-chain swaps, but currently, most of them rely on bridges. These bridges work by creating a wrapped version of a token that originated on one blockchain to exist on another, following the second chain’s rules. Once a user receives the wrapped token, they can exchange it for the asset they initially wanted on any DEX. Many cross-chain protocols automate the second part of the process, freeing users from having to find the right DEX and handle the consequent swaps manually. Thus, users simply need to indicate the asset they want to swap and the asset they desire to obtain while initiating the swap.
However, why must we wrap tokens at all? This is where a lack of interoperability becomes especially evident, signifying challenges that users and developers currently have to face when swapping between different blockchain networks. The difference in the protocols and standards each chain uses makes it hard to achieve a seamless connection. Therefore, wrapping tokens remains one of the most widely available solutions.
The Use of Native Coins
Native coins play a crucial role in swapping via cross-chain bridges, facilitating this process. First, they typically possess sufficient and consistent liquidity (which is not always the case with other assets based on the same chain), so trading using them makes the process easier and quicker.
Secondly, since they are the primary assets of each blockchain, facilitating fee payments within a network, including gas fees, is one of their most important uses. These payments enable transactions to be conducted and contracts executed, ensuring that cross-chain swaps are processed and completed smoothly. Therefore, native coins are essential for ensuring the connection between blockchains, simplifying the transfer of value across the blockchain universe.
Associated Issues & Possible Solutions
When it comes to cross-chain bridges, using native coins can pose a number of difficulties and challenges for the teams working on them. One of the most significant issues is centralization, which can compromise the security of funds. Many bridges require centralized entities to manage the custody of native coins during the wrapping process by creating pools. These pools are vulnerable to various hacker attacks, as evidenced by the not-so-long history of cryptocurrencies.
The other issues associated with native coins – frozen liquidity and fragmented liquidity – are interconnected and negatively impact the liquidity available to users. The frozen liquidity phenomenon indicates the liquidity of a specific token becomes unavailable due to it being locked in a smart contract during wrapping. Similarly, fragmented liquidity occurs when the liquidity of an asset gets divided between several chains during wrapping. These two liquidity issues can greatly reduce the obtainable liquidity, thereby affecting users’ swapping experience.
To eliminate these risks, developing more secure and sophisticated cross-chain solutions is vital to give users greater autonomy and control over their assets. This will help minimize centralization and liquidity risks and create a safer, more transparent cross-chain infrastructure.
Conclusion
Cross-chain bridges rely on native coins to ensure seamless transfer of crypto assets across different blockchain ecosystems, and native coins play an essential role in this process. However, the crypto community should remember issues connected to cross-chain bridges and work towards creating more efficient solutions. For instance, the Kinetex team is preparing to revolutionize cross-chain trading by introducing an innovative resolving standard in the upcoming Flash Trade. This solution will allow Kinetex to eliminate the reliance on cross-chain bridges and third-party validators, thus ensuring more secure cross-chain transactions.
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