A look at how Cosmos is enabling swaps between blockchains

Cosmos is moving full-steam ahead with its radical plan to enable swaps between blockchains. 

The plan, in development for two years, finally kicked off earlier this year with the launch of the Inter‑Blockchain Communication Protocol (IBC) — a technological standard for enabling crypto assets to be swapped between blockchains. A blockchain that supports this standard can connect to any other blockchains that do as well.

The Cosmos ecosystem is made up of around 50 blockchains, all built using the Cosmos software. One such blockchain is Cosmos Hub (ATOM), supported by a company called Tendermint. Others include Terra (LUNA) — the 13th biggest blockchain by market cap — ThorChain (RUNE) and Osmosis (OSMO).

There are also a few firms developing the technologies underlying the ecosystem, including Informal Systems, which has been rolling out IBC gradually. Lately, the adoption of the protocol has started to pick up steam. So far, 22 blockchains have activated IBC, with several more on the way.

As more chains have integrated IBC, one result has been a big increase in cross-chain swaps. Since its launch at the end of March, it took just six months to see more than a million swaps across these blockchains in a single month, namely September. Then, in October, there were 1.5 million swaps.

“IBC adoption has exceeded my expectations, grown faster than any of us at Tendermint/Cosmos core companies have expected,” says Tendermint CEO Peng Zhong at Cosmoverse, a community-run conference in Lisbon, Portugal.

So how does IBC work? And what are the biggest challenges standing in the way of the Cosmos dream for interconnected blockchains? 

What is IBC and how does it work?

IBC is a standard of communication between blockchains. It’s mostly used by blockchains built using Cosmos software but can be adopted by any blockchain that uses a similar consensus algorithm.

IBC’s developers hope that it will become the accepted standard for enabling cross-chain swaps between compatible blockchains. They aren’t alone in that ambition. Competing blockchain interoperability standards include Polkadot’s Cross-Consensus Message Format (XCMP) and Celo’s Optics.

Within the Ethereum ecosystem (including Ethereum-compatible chains like Avalanche and Binance Smart Chain as well as layer two solutions) there are also a number of inter-blockchain “bridges,” but they are all custom built. 

IBC works similarly to these bridges. It locks up assets on one chain and issues a wrapped version of the same asset on the desired chain. When done in reverse, the original assets are unlocked. 

Network participants called relayers are key to making this all work. They are responsible for transferring the information that executing cross-chain swaps requires. Anyone can run a relayer and since they do a fixed job, they can easily be replaced.

Because IBC is a consistent standard, any blockchain that has enabled it can connect with any other blockchain that has done so. This creates a network of interconnected blockchains that can each communicate with each other and swap assets.

Technically, there are two ways these networks can communicate. They can either create direct links between networks or they can use “hubs.” Relying only on direct links might be problematic at a large scale because there would be so many connections between all of the chains. 

Hubs, on the other hand, act as an intermediary to which multiple blockchains can connect. So a chain would just need to connect to one hub to get access to all of the blockchains that are connected to that hub — therefore saving on the number of connections needed.

Cosmos’s growing pains

With IBC seeing strong adoption in the Cosmos ecosystem, it’s now starting to face its first big challenge in the wild: scaling.

According to Tendermint CEO Peng Zhong, IBC cross-chain transactions are free right now, meaning that relayers transfer the information to make the cross-chain swaps happen but don’t get paid for doing so. Since processing this information requires running hardware and processing power, it can be quite expensive. 

Zhong says the relayers are mostly run by Tendermint, the R&D-focused Interchain Foundation and the decentralized exchange Osmosis. He estimates the costs to be tens of thousands of dollars per month, which is unsustainable — especially if the network continues to grow quickly.

The technology behind the relayers is being built by Informal Systems, the core developer of Cosmos. According to Adi Seredinschi, research engineer at Informal Systems, one option to fix this is to introduce fees for making cross-chain swaps. While he’s skeptical that it’s a long-term solution, because he thinks it offers the wrong incentives, he acknowledges that there’s no permanent solution yet.

Another big issue is the lack of engineers.

Zhong estimates that the traffic flowing through cross-chain swaps could increase by 10 times over the next three to four months. “That’s going to be a big problem, we don’t have enough people right now to handle this infrastructure,” he says, adding that they’re investing in more engineers and dev-ops people.

Looking to the future

There are a few things on the roadmap for expanding the Cosmos ecosystem and providing more functionality across chains.

One of them is the ability to do more than just swap assets across blockchains — for example, creating applications that involve multiple chains. Since blockchains in the Cosmos ecosystem tend to perform different functions (such as the Osmosis chain being used for DeFi tools), assets need to be continuously sent between them in order to use a wider variety of applications.

Instead, you could have applications that bring all of these actions across multiple blockchains into single, complex transactions. 

“Osmosis is a DEX. You could have a lending protocol on another chain. It would be cool to have a one-click button automatically do a leverage loop for you across these chains,” says Osmosis co-founder Sunny Aggrawal. 

Ultimately, though, the long-term future for Cosmos depends on the adoption of IBC among chains outside of the Cosmos ecosystem. Zhong is unsurprisingly optimistic that other chains will start to adopt it. He points out that if multiple other popular non-Cosmos blockchains adopt it (such as Celo, Near, Binance Smart Chain) then they will be connected to each other too — not just to Cosmos chains. 

A few blockchains are certainly interested in doing so. According to Solana Labs CEO Anatoly Yakovenko, Solana is looking at adding IBC although with no specific timeframe. Computer scientist Emin Gün Sirer said that Avalanche is open to the idea while GitHub records show Harmony is working on adding it.

Zhong says that Celo is also working on adopting IBC. He’s even optimistic that rival blockchain platform Polkadot, which is also focused on cross-chain communication, will adopt it.

“There will be a way to communicate between Polkadot chains and Cosmos chains, it will just be a matter of time. There’s an effort to get it to support IBC. It’s moving forward. I had a talk with [Sommelier co-founder] Jack Zampolin earlier today about the promise on that. I think it’s going to happen,” he says.