Founded in 2014, Chainlink is an oracle provider connecting smart contracts to external data, using node operators to verify all data. These node operators must stake their LINK, Chainlink’s native token, to do so, earning rewards for correct information.
Addressing the Challenge of Blockchain Interoperability:
The primary goal of cross-chain technologies is to facilitate the exchange of information across different blockchains. Prominently, cross-chain bridges have emerged as a significant cross-chain technology, enabling the migration of cryptocurrencies, NFTs, and other data between blockchains.
Cross-chain bridges do offer a way to move tokens between blockchains, but they fail to fully resolve the interoperability challenge. Moreover, they pose security and user experience concerns. Reportedly, over $2 billion has been lost due to cross-chain bridge vulnerabilities in the first three quarters of 2022. These bridging technologies are intricate and often susceptible to exploitation.
Apart from security concerns, cross-chain bridges are still in their infancy and primarily cater to asset bridging. However, this falls short of achieving true "communication" between blockchains, which entails utilising the capabilities of other chains beyond just information exchange.
Currently, Chainlink's oracle protocol is employed to provide price feeds on DeFi platforms across various smart contract blockchains. Hundreds of DeFi platforms, with a cumulative value locked exceeding $20 billion, rely on Chainlink's Oracle network for security. The Chainlink Cross-Chain Interoperability Protocol (CCIP) takes this secure consensus mechanism and employs it to establish genuine communication between blockchains.
CCIP was released on the 17th of July 2023. Its communication goes beyond mere asset exchange; it engenders actual communication between blockchains. This means that blockchains can leverage each other's capabilities, encompassing security infrastructure, scalability measures, and transaction processing capabilities.
The security model underpinning price oracles, designed to resist flash-loan attacks and other threats, forms the backbone of CCIP's protocol.
Sergey Nazarov, Chainlink's co-founder, likened CCIP's ambition to become the "TCP/IP of finance" to the fundamental architecture that underlies the internet. The network has initiated collaborations with major players in traditional finance, including Swift, BNY Mellon, Australia and New Zealand Banking Group (ANZ), BNP Paribas, Citi, Clearstream, Euroclear, Lloyds Banking Group, SIX Digital Exchange (SDX), and The Depository Trust and Clearing Corporation (DTCC).
This collaboration extends to both messages and token transfers across public and private chains.
Fueled by Chainlink's widely recognized oracle networks, CCIP incorporates extra security layers through the Risk Management Network and limitations on transfer rates.
A distinctive Active Risk Management (ARM) network has the purpose of identifying any potentially malicious cross-chain activities. When such activity is detected, ARM automatically halts services and safeguards user funds, akin to how banks shield customers from fraudulent transactions, as elucidated by Nazarov.
CCIP’s security is based on its Active Risk Management (ARM) Network. Within it are different ARM nodes that regularly monitor the Merkle roots of messages from the initial chain. Each node will have to either ‘bless’ or ‘curse’ the root. If the amount of ‘blessings’ reaches a certain threshold then the root can be executed. If the amount of ‘curses’ reaches a certain threshold, then the CCIP system is deemed ‘cursed’. CCIP will be paused on that chain until the contract owner can assess the safety of the situation.
Figure 1: CCIP Risk Management Network, Source: Chainlink
Improved token flexibility by swiftly transferring tokens across chains, achieving this faster than creating a bespoke solution.
A transaction cost is determined on the source chain via a gas-locked fee payment mechanism, ensuring execution certainty despite spikes in gas fees and network congestion on the destination chain.
Eliminates the need for custom coding for chain-specific integrations by developers. Users can interact with any blockchain using a single interface.
CCIP's evolution will persist to include new blockchains, enriched functionalities, and additional layers of security, ensuring its relevance and effectiveness over time.
Avalanche, Ethereum, Optimism, and Polygon (MATIC).
How does it work? CCIP’s Core Functionality:
Nazarov explained, "One oracle network acts as the conduit for transmitting messages and value. The other network oversees and assesses whether the transactions passing through the first network pose any risks or not."
For developers interested in constructing cross-chain solutions, the avenue to do so lies in building on top of CCIP via Arbitrary Messaging. Essentially, this involves a smart contract on Chain X employing Chainlink's messaging router to dispatch messages to Chainlink's decentralised oracle networks (DONs). These DONs then securely and confidentially communicate with the messaging router of the target chain, which validates the data and forwards it to the smart contract on Chain Y.
Figure 2: CCIP Messaging, Source: Chainlink
When a message is sent, the Messaging Router on the source chain utilises Chainlink's DON to relay messages to the destination chain. The message is then validated by the Messaging Router on the destination chain, translated if necessary, and delivered to the destination chain's smart contract. The source chain confirms the executed transaction.
Developers working on decentralised applications can utilise Chainlink's CCIP to integrate features from different blockchains into a single smart contract. The concept revolves around constructing a smart contract that essentially acts as multiple contracts on diverse chains, interacting cohesively. This approach empowers developers to create applications that harness the speed of one blockchain while benefiting from the security of another and the scalability of additional chains.
Applications employing CCIP will foster unity between blockchains, facilitating seamless interaction through a single smart contract code. Developers can cherry-pick features from various blockchains, leveraging Ethereum's security, Polygon's speed and scalability, and decentralized oracle networks to provide data services.
Leading DeFi Integrations
The Synth Teleporter leverages Chainlink's CCIP to perform secure and precise token burning and minting across chains, ensuring both reliability and safety. This unique burn-and-mint model enhances capital efficiency, eliminating the necessity for liquidity pools. As a result, Synth Teleporters allow Synthetix liquidity to flow to regions with high demand, sidestepping limitations posed by traditional token bridges.
Chainlink’s CCIP is certainly not the first cross-chain bridge on the market. Its competitors include LayerZero, Multichain (recently compromised), and Celer Network’s Bridge.
CCIP fees include both gas and a premium;
Fees for CCIP can be paid with a variety of assets. However, if one wishes to use an asset alternative to LINK, there will be a surcharge of 10%. Moreover, these assets will be auto-converted into LINK at a later stage, but are done so manually at the moment by replacing them with LINK in the CCIP contracts. LINK is then paid to service providers, such as node operators.
While the surcharge may encourage users to purchase and use LINK instead, users who do not already own LINK may find the prospective LINK gas fee high enough at times that they opt to pay with an alternative asset.
It should be noted that even though the assets will be auto-converted into LINK, this may not significantly impact the price of LINK in the short term as Chainlink plans to release 7% of non-circulating supply into the market over the coming quarters. This was primarily led to support users & node operators from dramatically elevated LINK volatility & prices as new changes to the staking mechanics are set to introduce an 80% increase in its pool cap that will account for 8% of circulating supply.
Moreover, if the price of LINK were to increase, and thereby increase gas costs, CCIP users would be expected to drive an increase in buy-side pressure. However, should it continue to increase, it can be expected that ARM node operators receiving LINK incentives will bring about supply pressure as they realise their service fees into other assets.
Figure 3: Chainlink Stats, Source: Greythorn Research Team, Data: CoinGecko
Figure 4: LINK Tokenomics (Initial), Source: Greythorn Research Team, Data: CoinGecko
Partnered with decentralised applications Synthetix and Aave. Synthetix will use the bridge to allow users to transfer liquidity between chains. For Aave, it will provide a cheaper and more streamlined alternative to its current cross-chain governance, which uses several chain-native bridges.
Chainlink's interoperability solution leverages Swift's widely utilised messaging infrastructure, a system embraced by more than 11,000 global banks to facilitate international payments and settlements. In 2021 alone, this network effectively settled an impressive $1.8 quadrillion in transactions.
"Similar to how pivotal standards like TCP/IP transformed the fragmented early internet into the unified global internet we all use today, CCIP aims to unite the fragmented public blockchain landscape and the burgeoning bank chain ecosystem into a cohesive Internet of Contracts."
Figure 5: How Chainlink uses Swift to connect TradFi & Web3, Source: Chainlink
While Chainlink's Anti-Fraud network aims to detect and prevent malicious transactions, the challenge lies in continuously evolving and staying ahead of new attack vectors. The effectiveness of this network in identifying and mitigating emerging threats will influence CCIP's overall security.
In summary, Chainlink's Cross-Chain Interoperability Protocol (CCIP) addresses blockchain interoperability challenges by enabling true communication between blockchains. Released in July 2023, CCIP goes beyond asset exchange, allowing blockchains to leverage each other's capabilities, including security and scalability. CCIP's security model, supported by Chainlink's oracle networks, ensures reliability. It competes with other cross-chain bridges and integrates with DeFi platforms like Synthetix and Aave.
While offering bullish fundamentals such as broad use cases and strong partnerships, CCIP faces challenges in maintaining security and achieving interoperability between diverse blockchains.
Success depends on overcoming these challenges, adapting to changes, and fulfilling its promise of creating a unified Internet of Contracts.
Important notice and disclaimer
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