How can blockchains break out of their silos?

This, dear reader, is the question that brought about the development of IBC (Inter-Blockchain Communication).

IBC was designed by the Cosmos team to solve the problem of blockchain interoperability.

By the end of this post, you should have a full understanding of IBC and its different applications.

Post Summary

• The Blockchain Silos
• What Is IBC (Inter-Blockchain Communication)?
• How Does IBC Work And How Does It Benefit Traders?
• IBC Vs Cross-Chain Bridges
• Conclusion

The Blockchain Silos

Interoperability was one of the earliest challenges that faced blockchains.

You can imagine a world where you have two bank accounts (A and B) and each has a different native currency.

The problem, however, is that they are not interoperable.

There is no way to send currencies directly from bank account A to bank account B unless you go through the rigorous process of exchanging currencies.

Of course, this sad tale reflects the condition of blockchains in their early days.

Thankfully, IBC has emerged as one of the solutions for breaking down blockchain silos.

Continue to the next section for more details.

What Is IBC (Inter- Blockchain Communication)?

IBC is a blockchain interoperability standard developed by the Cosmos team in 2021.

It is a protocol that allows multiple blockchains and applications to transfer tokens and data to one another.

IBC consists of two separate layers:

•  Transport Authentication Ordering (TAO): This layer takes care of interoperability between multiple chains.
• Application Layer: On the other side, this layer facilitates the interactions between multiple blockchain apps.

These layers also ensure data authenticity, keeping the interconnected chains safe and secure.

Ideally, IBC was built with the vision of making the Cosmos network the “internet of blockchains.”

Thus, it is possible for all applications built on Cosmos to interact seamlessly with one another.

Also, other independent blockchains built using the Cosmos SDK can leverage IBC for interoperability. Osmosis, Juno, KAVA, Crypto.org, Evmos, and Injective are a few of these blockchains. Find others here.

Continue to the next section!

How Does IBC Work, and How Does It Benefit Traders?

How Does IBC Work?

Blockchains that are IBC-enabled allow coin holders to send and receive coins to other blockchains that are also IBC-enabled.

Assume you hold a coin on “blockchain A” and you want to transfer it to “blockchain B” using IBC.

Here is what happens when you make the transaction:

• Firstly, when you send the coin, it is locked away in an escrow account on the blockchain, and a validator comes and verifies it.
• Secondly, the coin gets reissued as a representation on “blockchain B,” and you can freely use it to make transactions.

So, that’s how IBC works. It’s simple, right?

How Does It Benefit Traders?

IBC offers a range of advantages to crypto traders and investors.

For starters, here are two anecdotes:

Assume you have up to $200 worth of tokens in “blockchain A.” However, you owe a friend $200 worth of tokens in “blockchain B.”

With IBC, you can easily transfer your $200 token from “blockchain A” to “blockchain B” and send it to your friend. Here is how you can do this with the “IBC Transfer” feature on Keplr wallet.

Again, assume that “blockchain A” offers 8% APY for staking its blockchain token. On the other hand, “blockchain B” offers a 13% APY.

In such a scenario, IBC helps you switch your tokens from “blockchain A” and stake them on “Blockchain B” for higher returns.

Other applications of IBC include:

• Cross-chain trading
• Arbitrage opportunities
• Access to new markets, etc.

Continue to the next section to learn why IBC is different from cross-chain bridges.

IBC Vs Cross-Chain Bridges

Cross-chain bridges are also interoperability protocols for blockchain.

Although they share some similarities with IBC, there are important differences between the two that are worth exploring:

• Level of Interoperability

As previously explained, IBC is natively built into the Cosmos SDK.

It allows all blockchains built with the Cosmos SDK to communicate with each other by enabling IBC.

In contrast, crypto cross-chain bridges are protocols built separately to facilitate communication between specific blockchains.

They are more limited in their interoperability and may not support so many blockchains.

• Security

IBC layers ensure that data and assets transferred between blockchains are safe and secure.

It achieves this by using cryptography with features such as packet ordering and replay protection to help prevent fraud and other malicious activities.

Cross-chain bridges, on the other hand, may not offer the same level of security as IBC.

The reason is that they often require users to place their trust in third-party entities, which can introduce some sort of vulnerability.

Research shows that 65% of DeFi hacks in 2022 were cross-chain bridge hacks.

Conclusion

IBC is breaking down roadblocks to blockchain communication.

Today, just like how you can now easily transfer money between bank accounts, you can now transfer data and assets between blockchains using IBC.

Do you have further questions about IBC?

Drop them in the comments box below.