If you have been around the Cosmos Ecosystem for a while, you have probably heard the term Inter-Blockchain Communication or IBC but have you ever researched what it is, why it is important, and why it is the key factor for the Cosmos Ecosystem? If you haven’t, no worries, we will go over all of these today and if you have, maybe use this as a refresher.

What is IBC?

Before we go any further, what exactly is IBC? IBC is an open-source protocol that allows blockchains to communicate with each other by exchanging data, tokens, and messages. In simple terms, it allows 2 different blockchains to communicate with each other without the use of a bridge. This can get pretty technical so here is a link if you want to dive into the details. 

For all the visual learners, below you can see an image of how both blockchains communicate with each other.

While you might be thinking, “This sounds good but it only works in the Cosmos ecosystem, correct?” 

Wrong. The best part of this technology is that it is available for any blockchain to implement. This means it is possible to exchange ATOM with ETH or OSMO with SOL. In fact, there are already projects working on this, with Picasso Network being one of the most well known who are working on bringing IBC to Solana and Ethereum.

“IBC provides chains with a common protocol and framework for implementing standardized inter-blockchain communication. For chains built with the Cosmos SDK, this comes out of the box, but the IBC protocol is not limited to chains built with the Interchain Stack.” Cosmos Academy

Why is IBC Important?

This technology is important because it brings more security to this entire cryptocurrency ecosystem, specifically when it comes to communicating with other blockchains. While cryptocurrencies come with a lot of risk, one of the most unknown/unseen risks are the risks users take when using bridges to exchange cryptocurrencies between blockchains, Wrapped ETH (WETH) and Wrapped BTC (WBTC) are one of the most common ones. Not only do you have all the risks that cryptocurrencies come with, for example, scams, volatility, regulatory risk, manipulation, etc…, you now have added to that a much larger list of risks by using bridges. Some of these risks are security risks, centralization risk, smart contract risks, interoperability risks, counterparty risks, liquidity risks, operational risks, loss of funds risks. 

So we’re all on the same page, a bridge, literally what it sounds like, is a pathway that makes it easier for people to use their cryptocurrencies across different blockchain networks that aren’t natively able to communicate with each other, this is known as interoperability. Natively, the Ethereum and Bitcoin blockchains can’t communicate with each other, only with a smart contract and a bridge, are users able to take their Bitcoin and “wrap” their tokens using this bridge into something compatible with the Ethereum blockchain, the end result being a brand new token called WBTC. There are hundreds or more of these examples of wrapping tokens, this is just one of the most popular ones.

While I won’t be going into all of the aforementioned risks, there are a couple that I wanted to touch on, smart contract risks and counterparty risks. 

Smart Contract Risk 

Before I can explain what it is, I must first explain what a smart contract is. A smart contract is a self-executing contract with the terms of the agreement between parties written directly into code. It automatically enforces and executes the terms of the contract when the predefined conditions are met, it does this without the need for intermediaries. 

If that definition was too technical, here is a simpler way to think about it is with this example. Let's say you and your friend want to save money together and decide to open a special bank account just for this purpose. You both agree that every time one of you puts in $10, your friend will also put in $10. So, you tell the bank about this agreement, and they set up the account to work that way. Now, whenever you or your friend deposit money into the account, the other’s bank automatically matches the amount in the joint bank account.

While there are many good things with smart contracts, there are also many downsides. One of the problems is that these smart contracts can get quite complicated and most users don’t know how to verify code before using one. 

Another problem is that smart contracts may contain bugs or vulnerabilities that can be exploited, resulting in financial losses or unexpected behavior. A few well known examples of smart contract attacks are the Balancer hack and more recently the Poly Network hack hacking over $600 million worth of cryptocurrencies. I don’t intend to scare you but just inform you of the clear risks in using this technology. 

Counterparty Risk

Counterparty risk is basically the risk that the person or company you're doing business with might not keep their end of the bargain. For instance, if you lend money to a friend and they can't pay you back, that's a type of counterparty risk. In the world of cryptocurrencies, it means trusting someone else to handle your digital money, and there's a chance they might not give it back or do what they promised.

In the context of bridges, they usually need third parties, like custodians or more decentralized groups called DAOs, to help with transactions between different blockchains. But relying on these other parties comes with risks. They might not follow through on their promises, run out of money, or even act dishonestly. Trusting them means taking a chance that they might not do what you expect them to do, this risk goes inherently against one of the core of cryptocurrency beliefs, “Not your keys, not your coins.” Andreas Antonopolous

If that went over your head, a real world example would be you buying a collector’s item from someone far away. You can’t pick it up yourself so you hire a shipping company to ship it to you. But if the shipping company doesn't do its job properly, like if it loses the toy or breaks it, you might not get what you paid for. That's what is meant by counterparty risk - there's a chance the company you're trusting might mess up and you'll be left without your item or in a damaged condition.

Why is IBC the key factor for the Cosmos Ecosystem?

Throughout this article I have listed what bridges, smart contracts, and some risks while providing both hypothetical and real world examples of how dangerous bridges can be. Now I will be shifting to showing you how IBC technology is the solution to this problem.

The Cosmos Ecosystem is different from most if not all other blockchains because it isn’t one Layer One blockchain, but many different blockchains all interconnected using IBC technology. In fact one of the best visualizations of this comes from mintscan.io where it shows all of the connections each Layer One has to each other and how much value has been moved between them using this IBC technology. IBC allows users to natively trade their tokens on other blockchains without having to use any bridge or trust any third party, all transfers are done natively. 

Let's say that you have ATOM and you want to trade it for AKT on the Osmosis blockchain, you send your ATOM tokens over. But here's the thing: when they arrive on the Osmosis blockchain, they're still the same ATOM tokens. They haven't been changed into a different form or wrapped in any way. The same goes for the AKT tokens you're trading for—they remain the same AKT tokens just on a different blockchain.

This goes a long way in the future of cryptocurrencies as this now allows for applications to use this technology to safely provide users with easy to use UI while taking this complex technology and putting it in the back out of sight of users. One of the best implementations of this is with websites like ibc.fun and wallets like Leap. Both of them use IBC in the back end while providing a clean to use and easy to understand front end that is simpler for the average person to use. 

We want to onboard the next billion people but first we need to grow the trust at the base layer. IBC is that trust.

If you skipped this entire article or only need to understand one thing, it would be this quote from the Cosmos Network’s page: “Trust the chains, not a bridge. With IBC, trust the chains you already use instead of a vulnerable third party. Easy, direct implementation with IBC is secure even in Byzantine environments where relayers can be faulty or malicious.”

Disclaimer

This article was written by Christopher Perrotta. The accuracy of this content is in the responsibility of the writer.