Jun 30
Why the Inter-Blockchain Communication protocol (IBC) should expand cross-ecosystem
With guest writers from Composable Finance
The cross-ecosystem future of DeFi
Interoperability has been a significant focus within the Decentralized Finance (DeFi) sector. Cross-chain movement of liquidity plays a vital point in yield-maximization, serving end-users with greater growth of TVL than would be possible in any singular ecosystem. Despite this, blockchain ecosystems remain siloed, and patchwork interoperability methods have been exploited, leading to the theft of billions in DeFi protocols.
Connecting blockchains and protocols optimized for a specific value proposition is possible with the Inter-Blockchain Communication Protocol (IBC) — a universal, general-purpose, trustless communication standard. IBC allows developers to realize values from multiple ecosystems concurrently without the formation of silos and zero-sum competition between them. However, particular challenges are hindering the expansion of IBC outside of the Cosmos Ecosystem. With support from the Interchain Foundation, Composable Finance is expanding the reach of IBC to new ecosystems such as Kusama and NEAR, with more to come in the future.
The IBC in its Current State
The Inter-Blockchain Communication Protocol, IBC, is a general-purpose, universal interoperability protocol that enables data to be passed between heterogeneous ledgers. The protocol consists of a transport layer and an application layer with relayers moving data between ledgers. The transport layer, also referred to as TAO (transport, authentication, ordering), provides the infrastructure to allow distinct blockchains to interoperate without a trusted third party. Trust minimization is achieved through the use of light clients, periodically updated by the relayer, cryptographically verifying the consensus state of the counterparty chain; this results in cross-chain communication with security assumptions in line with the underlying security of each blockchain.
The application layer is concerned with unpacking and interpreting the data delivered by the relayer from the sending chain. The first IBC use case was for cross-chain token transfer, but a plethora of other use cases exist including transporting oracle data, controlling an account on another blockchain, or querying another blockchain without needing to run your own full node. Custom IBC applications can be made for any use case requiring general message passing.
IBC is the underlying cross-chain communication protocol adopted by blockchains in the Cosmos Ecosystem. There are currently 45 IBC connected blockchains — blockchains built with the core Cosmos stack — Tendermint, the Cosmos SDK and IBC. The Cosmos Hub was the original Cosmos blockchain, launched in March 2019. IBC went live in April 2021 with a connection between the Cosmos Hub and the decentralized exchange, Osmosis.
In the 14 months since its launch, IBC adoption has grown to facilitate over 3 million cross-chain transactions, accounting for over $708 million in value, in the past 30 days alone. In the future, the Hub plans to use IBC as the underlying technology for cross-chain validation, where blockchains can benefit from the Hub’s validator set and underlying security to produce blocks for their own chain, separating out the role of consensus and governance.
Notwithstanding, IBC is still in its relative infancy. Currently, IBC works ‘out of the box’ with Tendermint-based chains which have instant finality. A solo machine client implementation enables devices with a single updatable public key to interface with IBC, as implemented by crypto.com to issue DOT within the Cosmos Ecosystem without a Polkadot compatible light client. This approach enables chains or devices which cannot use a Tendermint light client to benefit from the communication semantics and abstractions specified by IBC, without the need for development of a new light client algorithm which is a non-trivial undertaking.
Why the IBC should go cross-ecosystem: empower new and expanded dApps
By expanding the IBC to ecosystems beyond Cosmos, IBC is one step closer to its core goal, interoperability as a primitive. This benefits all stakeholders involved with:
- New and more accessible earnings opportunities.
- Efficient cross-chain transfers.
- Seamless movement of liquidity; previously disconnected ecosystems led to fragmented liquidity.
- Token transfers via IBC, removing the need for traditional bridges.
- Broader user base and a more sustainable DeFi environment, encouraging more developers to build on IBC-enabled chains.
IBC’s implementation across existing ecosystems will create newer opportunities for DeFi’s stakeholders: users, applications, developers, and chains, whether currently connected to the IBC or not.
Users
The main benefactor of cross-ecosystem IBC adoption will be DeFi users who will benefit from greater security and yield opportunities. IBC provides a trustless alternative to current bridging solutions, which means user funds are never in the hands of a third party during the bridging, eliminating counterparty risks associated with traditional bridging infrastructure. Conventional bridges are attractive exploit targets due to a high concentration of liquidity and relatively insecure safety assumptions, such as multi-signature signing. Moving funds trustlessly between ecosystems connected via IBC also gives users new and more accessible earning opportunities, enabling cross-chain yield maximization with minimized gas and bridge fees.
Unlike existing bridging infrastructure, IBC is an interoperability standard with a similar design to the TCP/IP specification that enables computers to communicate. Likewise, IBC can be leveraged by sovereign blockchains to enable cross-chain arbitrary data transfers, defining a communication standard for interoperability that is impossible to build with traditional bridges. Beyond trustless token transfer, arbitrary data transfer facilitated by IBC opens the door to greater utility than what is supported by today’s bridges.
Developers, dApps, and Chains
Developers, decentralized applications (dApps), and chains are the other benefactors of increased IBC adoption, regardless of whether they are currently connected or not. Without IBC adoption, Layer 1 blockchains continue to suffer limitations imposed by the current lack of interoperability standards. Multiple chains constantly compete for a share of TVL through yield in a zero-sum manner, which is unsustainable. IBC allows these chains to benefit from each other’s value propositions without the need for mutually destructive competition. Benefits include:
- Increased interoperability, enabling unparalleled cross-chain liquidity movement. Chains gain access to greater TVL than what was previously available to them.
- This modular functionality allows for the most valuable services to thrive based on merit, without the liquidity limitations imposed by native ecosystems.
- In a space where blockchains are purpose-built, the interoperability of the IBC enables developers to benefit from all of them seamlessly, leaving siloed ecosystems and zero-sum competition in the past.
For chains already connected to the IBC, the strongest case for IBC expansion is realizing the value of different blockchains. Composable’s cross-chain virtual machine (XCVM) allows developers to seamlessly leverage the value of all IBC-enabled blockchains by using IBC as its transport layer and Composable’s Routing Layer for economic path discovery. For example, a developer building a cross-chain dApp on the XCVM could interact with a lending protocol on one chain and withdraw their loan on another chain through a single smart contract.
Below is a brief overview of Composable’s novel solution to cross-chain interoperability that expands IBC’s reach to become the standard for cross-ecosystem communication.
How Composable Finance provides the infrastructure to expand IBC cross-ecosystem
The XCVM
The XCVM is Composable’s novel solution that tackles the interoperability dilemma by facilitating the creation of modular, cross-chain applications. This means that developers can build applications that span multiple ecosystems by deploying a single contract. In a DeFi space shifting increasingly toward purpose-built blockchains, the ability to leverage multiple chains through a single, smart contract is an incredible advantage. Composable’s XCVM is able to achieve this through the use of the CosmWasm framework and IBC.
The CosmWasm framework was designed to be interoperable and leverages IBC to facilitate communication between multiple chains. Utilizing the CosmWasm framework and IBC as its transport layer, the XCVM allows the creation of native cross-chain applications. The reach of these XCVM applications is unparalleled: extending from Polkadot’s Substrate to Cosmos to potentially any blockchain with light client or solo machine support, however, light client implementations provide greater security guarantees.
Centauri
With the support of the Interchain Foundation, Composable has built the first-ever Substrate-IBC bridge, Centauri. Composable’s work on Centauri can be broken down into 4 core components:
- Contributions to Parity’s Bridge Efficiency Enabling Finality Yielder (BEEFY) — which can create finality proofs for Centauri on Picasso, a critical component to trustless bridging architecture.
- The development of a BEEFY light client implementation for Cosmos-IBC, allows Cosmos chains to follow the finality of the Kusama relay chain. This allows any Cosmos chain to prove finality for any parachain connected to the Kusama relay chain to allow seamless communication between the Kusama and Cosmos ecosystems.
- Additionally, Composable has worked with Jack Zampolin and the Strangelove Ventures team on their IBC-Go relayer to help extend their relayer’s reach to support DotSama parachains in addition to Cosmos blockchains.
- Finally, there is the Centauri pallet itself which will allow the creation of IBC packets on Kusama via Picasso.
After the initial proof of concept with the Osmosis DEX team, any parachain will be able to leverage Centauri’s infrastructure — extending the IBC’s reach to the entire DotSama ecosystem.
NEAR
Centauri is an example of Composable’s work to extend the reach of the IBC to Polkadot and Kusama. However, this Substrate-IBC bridge is really only the beginning. As mentioned previously, IBC can be implemented on any blockchain that supports light clients. Composable’s continued commitment to connecting these chains to the IBC is further demonstrated by bringing IBC to NEAR.
But building a light client is not a trivial task. Composable’s NEAR proposal addresses 3 roadblocks that currently exist within the NEAR ecosystem, preventing the implementation of a light client:
- A mechanism is required to perform the required signatures in a time and gas-efficient manner.
- Currently, the NEAR relayer is able to feed the IBC pallet on Polkadot the data requested but is missing valid proofs, a required component for cross-chain communication.
- A batching mechanism is required to conform with IBC’s standards.
Upon passing, this proposal will bring these required components to the NEAR ecosystem, extending IBC’s reach and allowing for trustless communication between the NEAR, DotSama, and Cosmos ecosystems.
Other ecosystems
Composable plans to continue connecting new chains to IBC by building light clients, and the required infrastructure to support them. Ecosystems such as Zksync and Starkware are examples of 2 mature ecosystems that could greatly benefit from IBC and already have the required infrastructure needed to support a light client.
In the future, you can expect Composable Finance and the Interchain Foundation to keep building within such ecosystems, ultimately working towards a future where all light client-enabled blockchains are interconnected through IBC.
Conclusion
IBC introduces a new era of enhanced interoperability to DeFi builders and users. However, at the moment, IBC is still in its infancy. Many potentially compatible, light client-enabled blockchains have not yet enabled IBC support. Composable Finance and the Interchain Foundation are working hard to connect these chains to the IBC.
The connection of new chains to the IBC will ultimately lead to a Web3 where DeFi applications spanning entire ecosystems are the norm, not just a distant dream. This is made possible by the XCVM, which adopts the CosmWasm framework and IBC as a transport layer to allow for the orchestration of modular cross-chain applications through a single smart contract.
Come along to Composable’s inaugural event, Unchained, to witness the unveiling of the Composable XCVM and discuss the future of cross-chain interoperability with DeFi’s greatest minds from the Polkadot, Cosmos, and EVM ecosystems.
Unchained will be held on July 1 in Berlin, with speakers from Interchain GmbH including Susannah Evans, IBC Product Lead; Marko Baricevic, Cosmos SDK Lead; and Billy Renekamp, Cosmos Hub Lead.
This article was authored by the team at Composable Finance and Susannah Evans, IBC Product Lead at Interchain GmbH.
