DeFi is Becoming Increasingly Cross-Chain

Interchain Accounts have the power to elevate the Cosmos ecosystem to a whole new level, ramping up interoperability between IBC-enabled chains and bringing composability to Interchain transactions.

And they are here!

In this article, we’ll take a look at the latest iteration of the Inter-Blockchain Communication protocol (IBC), and what this new feature means to you.

DeFi is Moving Increasingly Cross-Chain

With the explosion of DeFi from its initial experiments to the burgeoning sector it is today, never before has the need for interoperability been so clearly underscored.

An alternative financial system reimagined from the ground up without gatekeeping intermediaries quickly became dominated by whale traders.

Gas fees on Ethereum soared through the roof reaching over $200 per average transaction, and the hundreds of DeFi dApps built on-chain struggled for throughput and scalability.

Faced with such roadblocks, DeFi began to spread its wings, seeing a plethora of solutions from alternative layer 1s to layer 2 scaling solutions and side chains.

Yet all this innovation to offer cheaper, faster, improved usability comes with significant tradeoffs in terms of decentralization and security. An equitable financial system cannot be held together with duct tape, VC capital, or conglomerates controlling a handful of nodes.

As the cornerstone of the original Cosmos whitepaper, IBC has been designed around the enduring vision of a multi-chain future.

Held to the highest development standards as a sustainable solution with interoperability as a first principle, the initial version of IBC allows independent Cosmos chains to connect and transact while retaining their autonomy.

In the 10 months since its launch, 38 chains have already joined the #IBCGang, conducting more than 9.3 million IBC transactions in a 30-day period. Now, the next iteration of IBC, Interchain Accounts, is ready to take Cosmos interoperability to the next level.

Interchain Accounts Let Blockchains Control Accounts on Other Chains

Developed by Interchain GmbH, Chainapsis, Informal Systems, and Confio, with Interchain Accounts, IBC-enabled blockchains can do a lot more than connect and transfer tokens.

Entire blockchains can control accounts on separate chains. So, rather than users simply transferring tokens and following them across different chains, Interchain Accounts provide access to all IBC-enabled Cosmos chains straight from one Cosmos Hub account.

Why is this such a big deal? Well, it means that Cosmos ecosystem blockchains can access the application features of another chain and carry out any action native to that chain.

So, for example, Sommelier chain could execute transactions on Osmosis (such as stake, vote, swap tokens, etc.) and vice versa. This creates a dramatically improved user experience and brings much-needed composability to the Cosmos ecosystem.

Interchain Accounts Bring Composability to Cosmos

Ethereum DeFi has sprung up so quickly, securing billions of dollars of total value locked (TVL) across its many protocols thanks to native composability. In a composable system, various different components can be removed, reshuffled, or reintegrated, rather like Lego blocks that can be easily added or taken away.

Every single piece of Lego can be optimized, allowing for ultra-fast iteration, innovation, and communication between protocols.

This means that highly complex financial instruments can be traded permissionlessly over different smart contracts, with each smart contract handling a part of an overall business process.

In Cosmos, with the exception of CosmWasm smart contracts, applications don’t have immediate access to each other because each application is essentially a blockchain itself. Even so, thanks to IBC, Cosmos has already become the number 2 blockchain ecosystem by TVL behind Ethereum.

Interchain Accounts provide the composability and interoperability of smart contracts across different blockchains. This will create a DeFi explosion for application-specific blockchains in the Cosmos ecosystem. With composability in IBC, innovation in distinct applications can be deployed easily, without significant upgrades.

Better still, unlike in Ethereum or similar ecosystems where applications have to relinquish their sovereignty and are subject to the constraints and governance of the layer 1 they are built on, using IBC as the protocol, blockchains remain entirely sovereign, while achieving interoperability. In other words, the composability that Interchain Accounts introduce doesn’t take away the benefits of application-specific blockchains.

IBC Product Lead at Interchain Gmbh, Charly Fei, explained, “Enabling composability in IBC allows innovation in distinct applications to be deployed without needing to upgrade the entire Interchain, providing a more scalable innovation model that preserves compatibility…

Interchain Accounts will enable all the best bits of composable application and system design critical to the explosive growth in DeFi natively across the interchain.

Growing the Cosmos Ecosystem

The Cosmos Hub, Sommelier, and Osmosis will be among the first to implement the Interchain Accounts module onto their chains, taking it forward and pioneering the next phase of Cosmos interoperability.

Cosmos Hub in particular has the Interchain Accounts module upgrade scheduled to be implemented as part of the Theta Upgrade by Q1 2022, pending governance approval.

Of course, all applications and protocols that succeed with IBC will draw more users to Cosmos, benefit the entire ecosystem, and make DeFi a more engaging and rewarding experience for all, taking Cosmos closer to mass adoption. For more information about Interchain Accounts, see the detailed report on the Interchain Foundation blog here.