Inter Blockchain Communication.
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TLDR below. This is not financial advice.
If you are active in the Cosmos Network, one of the first terms you will come across is IBC (Inter Blockchain Communication) and IBC is a very important feature of Cosmos Network. So what exactly is IBC and why is it important to the Cosmos Network?
3 Approaches To Improve Blockchain Scalability
With Ethereum as the standard, there are currently three main ways blockchain infrastructure seeks to improve the scalability & scale of smart contracts.
The first way is through the use of Rollup technology, which allows the wrapping of transactions taking place in L1 on the sidechain into a single aggregated block and recorded on the original L1 Blockchain. This allows off-chain transaction data to be available on layer 1 whenever needed to validate a state transition. This is the Layer 2 extension technology that Ethereum is using.
Check this video as Lisa explains what Rollup technology is.
You can imagine it like creating a school bus for transactions on Ethereum. Although they are not arbitrarily scalable, they are a good short & medium term way to relieve congestion pressure. Imagine a school bus sending 50 kids instead of 50 cars on the road!
The second path is to build a brand new Layer 1 blockchain to achieve higher throughput and scalability using other technologies.
For example, in the case of Solana & Internet Computer to achieve higher throughput, they require each node to be extremely powerful. (Side note: this is the reason why Solana went offline for a while in Sept.)
This means that transaction processing is no longer performed by the vast majority of ordinary users because to do so they will need to invest a large amount of money in computer hardware, which is suitable. with individuals or organisations that are technically savvy and have ample financial resources. This is of course a trade-off as it affects the decentralisation of the blockchain.
In our analogy, that means bigger buses to transport people.
The third path is to combine heterogeneous blockchains through “interaction protocols”. They are like building a system of highways across the country, connecting a series of provinces in a Country making travel easy and fast. Prominent projects in the third group can be mentioned as Cosmos, Polkadot, Avalanche.
What Is Cosmos Network & Inter Blockchain Communication (IBC)?
Cosmos Network consists of different independent blockchains built on top of the framework that Cosmos provides. Its goal is an ecosystem that focuses on the scalability and usability of a separate blockchain using “interoperability protocols”.
Cosmos’ core products include:
Tendermint core: It is the core consensus mechanism used in separate blockchains in the Cosmos Network.
Cosmos SDK: It is a toolkit to help developers who want to create their own blockchain for their application on Cosmos Network.
Inter Blockchain Communication (IBC): Is Cosmos’ cross-chain communication protocol, helping Cosmos Network realise the “Internet of Blockchain” vision.
You can see Inter Blockchain Communication (IBC) as highway systems that help connect private blockchains in the Cosmos Network that I likened above.
At a higher level, IBC is a cross-chain communication protocol that allows separate blockchains in the Cosmos Network to transfer tokens and arbitrary data between each other.
These chains connect and communicate via a two-way peg, the same mechanism used to move tokens from Ethereum to sidechains.
When a user submits a valid cross-chain transaction to an IBC endpoint, the origin chain frees the sent tokens while the destination chains receive the corresponding amount of wrapped tokens. Users can send these wrapped tokens back to the original chain to receive their “real” tokens back.
The difference between IBC and specialised Bridges implemented by individual chains in the Cosmos Network is that IBC allows deployment on the entire Cosmos network, as long as those chains integrate IBC and are permissionless.
Value & Potential Of IBC With Cosmos Ecosystem
The permissionless transfer of assets through the Cosmos Hub enables seamless economic cooperation between separate chains and projects on the Cosmos Network.
Currently, Cosmos Network is home to over $130B worth of cryptocurrency across 40 apps and services including Binance Smart Chain, Terra, Crypto.org, Thorchain, Secret network, etc. Today’s leading L1 eco-development like Terra. Details here.
Example: After Terra connects to IBC, $UST can be transferred back and forth 18 chains (connected IBC) in Cosmos Network and users can use them in different DeFi applications.
In the absence of IBC, if Terra wanted to do the same, they would have to build 18 separate bridges, each connecting to a corresponding chain. This is complicated and time consuming to implement.
Besides, IBC also contributes to accumulating value for $ATOM (Cosmos Hub’s native token) through Gravity DEX, a hybrid DEX combining AMM and Orderbook.
While Gravity will not mandate specific tokens to provide liquidity, it is highly likely that $ATOM will become one of the widely used tokens in Gravity’s liquidity pools, as is the case with $ETH and AMMs. on Ethereum.
Gravity could become the main liquidity hub of the Cosmos Hub & Cosmos Network, allowing $ATOM liquidity providers to earn a fraction of the swapping fee. More than that, Gravity will lead to an increase in on-chain activity, resulting in more transaction fees being generated.
In addition, the upcoming Interchain Staking feature will allow Cosmos Zones to share the security source from the Cosmos Hub validator. Shared security is not a new concept, this is the core design of Polkadot.
But Cosmos’ approach is different because it intends to use an opt-in model, that is, Zones can opt-in or not. Participating Cosmos Zones can benefit from Cosmos Hub’s interactive features while remaining independent. At a high level, it will allow $ATOM holders to delegate their $ATOM to secure multiple Cosmos Zones. In return, they receive guaranteed Cosmos Zone transaction fees and network inflation rewards.
In addition, IBC also laid the foundation for multi-chain contracts. The implication lies in allowing the transmission of data and messages between contracts, with a logical split across blockchains.
So you learned what an IBC is and how important it is to the Cosmos ecosystem. This feature makes the cryptocurrencies built on Cosmos easier to interact with and more efficient to use capital. This protocol creates the infrastructure for tokens to communicate across various blockchain tech stack.