What the heck is a cross-chain swap?

Imagine being able to swap any asset across any blockchain in a matter of minutes, or even seconds.

It’s a lofty goal, but lately, it’s starting to look more achievable.

Thanks to the introduction of new technology over the past few years, and the emergence of experimental blockchain networks, cross-chain swaps are growing in number and in use. If they take off, the evolution of the cross-chain swap could usher in a world in which it's common to use multiple blockchains at once.

Cross-chain swaps drive to the core of a multi-blockchain world. If you can swap between any token on any blockchain, then it provides the ultimate freedom for accessing any protocol — no matter what chain it’s on or what tokens it requires. Down the line, it could even lead to more complicated setups, like smart contracts that use multiple tokens on several different blockchains.

That’s still a big if, though. Cross-chain swaps are technically complicated to pull off, and the platforms that have emerged to facilitate them are still slow and clunky to use. Some of them have also proven to be vulnerable to hackers. 

Is the upside of the cross-chain swap worth the risk? What’s clear at this point is that crypto traders are hungry for reliable ways to move value across chains.

What is a cross-chain swap?

A cross-chain swap is a trade that sends value from one blockchain to another, swapping the native coin from the first chain for the native coin of the second. 

For example, say I have some ether (ETH) on the Ethereum blockchain. A cross-chain swap could turn it into some avalanche (AVAX) on the Avalanche blockchain.

This is not to be confused with bridging, a process for sending the same cryptocurrency from one blockchain to another. That process typically involves locking up the token on one chain and releasing a wrapped version on another chain.

The advantage of using a native cross-chain swap over a bridge (in combination with a DEX) is that it deals with the blockchain’s native asset rather than a wrapped version of it. This can reduce some risk since many wrapped tokens have centralized elements.

Plus, it could be a bit quicker, since it involves fewer processes, namely not needing to use decentralized exchanges. It’s all done in one go.

How do cross-chain swaps work?

There are two main ways that cross-chain swaps work.

First, there are protocols built with the express purpose of swapping native tokens across blockchains. The most well-known example is Thorchain, a decentralized liquidity network. It works by swapping coins for its own token (RUNE) on the first blockchain and then swapping the same amount of RUNE for the desired token on the second blockchain.

The only other comparable project is Chainflip, which is built on Substrate and is part of the Polkadot ecosystem. It takes a slightly different approach, focusing more on price execution. Due to the way Chainflip is built, it can’t handle certain proof-of-work blockchains like Bitcoin.

Thorchain and Chainflip are specifically designed for swapping native assets among blockchains, and they don’t depend upon other protocols.

The second approach to cross-chain swaps involves two different types of protocols working together. This setup relies on a combination of a bridge and a decentralized exchange (DEX): the bridge swaps the tokens to the other blockchain, where they are exchanged for the desired token via a DEX. The effect is a cross-chain swap, it’s just broken down into two functions.

The one thing to bear in mind here is that the assets involved are wrapped assets. That means, for example, you’re not swapping native bitcoin on the Bitcoin blockchain but a tokenized version of it on the Ethereum blockchain. So while Thorchain and Chainflip swap native assets, these types of cross-chain swaps tend to use wrapped assets.

One platform that works this way is xy.finance, which uses bridging protocols like Anyswap, NuCypher and O3 in combination with DEXs on the relevant blockchains. The protocol also checks the costs associated with using the various platforms to find the cheapest path.

Here’s an example that shows the path taken for a swap using this approach. The Atom tokens on Binance Smart Chain are exchanged for USDC via the Babyswap DEX. This stablecoin is then bridged from Binance Smart Chain to Ethereum using AnySwap. Then, the USDC is exchanged for the desired Compound tokens, via the Defiswap DEX.

Executing a cross-chain swap is fairly simple to do and isn’t much harder than making a normal trade on a decentralized exchange. You select the cryptocurrency you want to sell and the blockchain that it’s on, then you select the cryptocurrency you would like to trade for and which blockchain you would like that on.

The protocol will show you how much the fee will be. Then you click swap, approve the transactions and then have to wait until it’s confirmed (which will depend on the speed of the blockchains you are using).

Why is this such a technically difficult task?

Blockchains have evolved in different ways, using multiple coding languages. They rely on a variety of consensus mechanisms and operate at different speeds. As a result, trying to make blockchains compatible is an exceptionally hard challenge.

“It’s very difficult because Thorchain has to tolerate five-second block times at the same time as ten-minute block times from Bitcoin. It has to tolerate Bitcoin’s probabilistically final confirmation as opposed to a [Byzantine-fault tolerance] network where it’s instantly final confirmation. It has to tolerate all of this,” says a core developer at Thorchain who chooses to stay anonymous.

On the Bitcoin network, transactions become more likely to be confirmed over time and are usually seen as confirmed after they’ve been included in seven blocks. For a cross-chain swap to work, this has to be paired with systems like Cosmos Hub, which confirm transactions with complete finality after just a few seconds.

Plus, there are more nuanced difficulties that are based on subtle differences between how the chains work. For example, each chain has its own way to estimate and pay transaction fees (Ethereum transaction fees are now even more complicated than they were before). Then there are the problems unique to specific blockchains, like uncle blocks — a common occurrence in Ethereum — in which a block is temporarily included in the chain but is then ousted by alternative blocks in a longer chain.

“You have to be a subject matter expert into each chain,” says the Thorchain developer.

What could go wrong?

With custom connections between all these different blockchains, there is a lot of potential for things breaking. In fact, it’s such a challenging task that very few teams are working on native cross-chain swaps the way Thorchain does them. That’s probably also because it wasn’t really possible until blockchains were recently introduced to a technology known as threshold signatures. 

Thorchain has had its fair share of technical failures. Between June and July this year, it was hacked for $140,000, then $5 million, then $8 million. The hacks caused so much damage that the network was taken offline for months in order to patch it up and get it back on its feet. 

The Thorchain developer says the issue was related to handling Ethereum-based tokens, specifically ERC-20s. Due to an integration error, it was possible to trick the Thorchain network into believing that money had been received when it hadn’t.

On October 29, Thorchain came back online having gone through two audits. The team has also introduced a bug bounty program to help prevent or mitigate further attacks.

Cross-chain swap protocols that trade assets using bridges and DEXs, on the other hand, are not a typical target for hackers— but the underlying bridge or DEX might be. A bridge called Poly Network was exploited for $611 million in August and another called pNetwork lost $12 million in September. Some DEXs have been hacked as well, such as Dodo for $3.8 million and NowSwap for $1 million. 

This means there is considerable risk for both methods.

How much potential could they unlock?

Technical risks aside, the growing popularity of transactions that send token value from one blockchain to another has contributed to significant growth in the value of layer-one blockchain platforms like Avalanche, Cardano and Solana.

Thus far, a lot of this value has arrived through bridges. The bridge between Ethereum and Avalanche, for instance, now contains $5.2 billion while the one between Ethereum and Fantom holds $2.3 billion. This shows a clear demand for services that enable value to flow between blockchain platforms.

But cross-chain swaps themselves are also getting more popular. Thorchain continues to grow rapidly even though it is still experimental and relatively unstable. Since April, the amount of value locked in the network has grown from $2.3 million to $230 million and it has more than 10,000 users. And that’s even as the protocol has been deliberately limiting its growth.

What all this suggests is that if a cross-chain protocol can provide a safe gateway that links a number of major blockchains and has enough liquidity — whether on its own network or by using pre-existing pools of liquidity — then it could fast become a major railway system that connects blockchain cities.