Cross-Chain Wallet | Knowing Basics, Working & Advantages For Investors

For every crypto trader willing to trade multiple cryptocurrencies, understanding the use and significance of cross-chain wallets is essential. They are more convenient and useful options as compared to traditional crypto wallets. With a greater level of interoperability, cross-chain swaps, and compatibility with various platforms, these wallets are easing the way traders buy, sell and secure crypto coins. 

If you are new to this technology, let’s understand here in a discussion why these wallets should be a part of your crypto trading. 

What are Cross-Chain Wallet

As the name suggests, Cross-chain wallets are the ones that support crypto transactions among different types of blockchains. You can transfer, store and manage your multiple digital coins in these wallets. They are considered more convenient and useful than the older wallets due to their interoperability.

How Cross-Chain Wallets Work

Blockchain Bridges

These bridges serve as connectors between different blockchain networks which enables the transfer of data and assets. This function includes locking assets on the source blockchain and minting equivalent tokens on the destination blockchain. As soon as the assets are moved back, the tokens on the destination blockchain are burned, and the original assets are released on the source blockchain.

Different Bridges:

Trusted Bridges: They rely on a centralized authority to manage the asset transfer process.

Trustless Bridges: these bridges utilize the smart contracts to automate the transfer process without relying on intermediaries.

Atomic Swaps

Atomic swaps are smart contracts that play a major role in the direct exchange of one cryptocurrency for another. This process occurs between users on different blockchains without the need for intermediaries. The process is called “atomic” because it ensures that the swap either completes fully or not at all, which eliminates the risk of one party defaulting.

Hash Time-Locked Contracts (HTLCs): It’s a specific type of smart contract used in atomic swaps. HTLCs use cryptographic hash functions and time locks to ensure that each swap completes securely and timely.

Interoperability Protocols

Interoperability protocols are frameworks that facilitate communication and transactions between different blockchain networks. Protocols such as Polkadot, Cosmos, and Wanchain are designed to enable cross-chain interactions by providing a common platform for different blockchains to connect and share information.

Cosmos utilizes the Inter-Blockchain Communication (IBC) protocol to enable interoperability between independent blockchains, while Polkadot employs a unique multi-chain framework that allows for the transfer of any type of data or asset across blockchains in its network.

Working Mechanism of Cross-Chain Wallets

To understand the working mechanism of cross-chain wallets, it is essential to examine the step-by-step process involved in cross-chain transactions:

Initiation of Transaction:

The user initiates a transaction from their cross-chain wallet by specifying the amount and the destination blockchain.

Asset Locking:

The crypto wallet interacts with a blockchain bridge to lock the specified amount of assets on the source blockchain. This process typically involves sending the assets to a smart contract that holds them securely.

Minting of Equivalent Tokens:

Once the assets are locked, the bridge mints an equivalent amount of tokens on the destination blockchain. These tokens represent the locked assets and can be used as if they were native to the destination blockchain.

Completion of Transaction:

The minted tokens are transferred to the recipient’s address on the destination blockchain. The recipient can now use these tokens within the new blockchain ecosystem.

Redemption:

If the user wishes to transfer the assets back to the source blockchain, they initiate a redemption process. The equivalent tokens on the destination blockchain are burned, and the original assets are released from the smart contract on the source blockchain.

Security Measures

Given the complexities involved in cross-chain transactions, security is paramount. Cross-chain cryptocurrency wallets implement several security measures to protect users’ assets:

Multi-Signature Authentication: Requires multiple signatures to authorize a transaction, adding an extra layer of security.

Hardware Wallet Integration: Allows users to store their private keys in hardware wallets, which are less susceptible to hacking.

Encryption: Every safest crypto wallet utilizes advanced encryption techniques to protect users’ data and assets during transactions.

Smart Contract Audits: Regular audits of smart contracts by third-party security firms to identify and fix vulnerabilities.

Wrapping Up

For beginners, these terms might be new and complex to understand but going through this detailed information must have enlightened you regarding how cross-chain wallets function. If you are interested in trading more than one type of cryptos, these are the perfect solution to ensure a smooth trading experience.