Understanding the Inter-Blockchain Communication Protocol

Over the last few years, much of the debate within the cryptocurrency and block community has centered around the idea of scalability and interoperability. Will the future be one where a single chain like Ethereum, whose sharding approach creates a top-down approach? Or will the future be one where many chains work in tandem? This is the vision the Cosmos ecosystem was founded on, a vision of an “internet of blockchains.”

In order to achieve this vision, we must look to the Cosmos and the many chains that make up this diverse ecosystem of independent and interoperable chains. To make this vision a reality, the Inter‐Blockchain Communication protocol (IBC) was created.

What is the Inter-Blockchain Communication Protocol

The Inter-Blockchain Communication protocol, or IBC, was launched in May 2021 and is the driving force behind Cosmos’ interoperability. Making it possible to create an Internet of Blockchains that are both sovereign but can maintain communication, interact, and exchange assets without sacrificing their sovereignty. IBC enables blockchains to connect easily and directly securely. Since its successful mainnet launch in 2021, IBC has connected 53 different blockchains.

IBC enabled Cosmos Chains

In its simplest form, IBC is designed to revolutionize the way blockchains interact. By allowing independently distributed ledgers and different types of blockchain networks to trustlessly transmit messages, data packets, and other information securely—and with minimal effort on behalf of developers or users—the IBC protocol has created a new standard for interconnectivity between disparate chains.

How does IBC work?

The Inter-Blockchain Communication (IBC) protocol works by establishing a standard for communication between different blockchain systems. This standard defines the rules and protocols that must be followed in order to exchange data and value between the different blockchains.

IBC consists of two layers:

  1. The application layer
  2. The IBC transport, authentication, and ordering layer (TAO)
Application Layer

The layer in which applications and services are built on top of the IBC protocol and responsible for handling the communication and interoperability between different blockchain systems.

The application layer of IBC is the layer at which users and developers interact with the IBC protocol. It is responsible for handling the user interface and the user experience of the IBC protocol.

The TAO Layer

The TAO layer is responsible for ensuring that transactions are valid, which means that it checks the transactions to ensure that they meet all of the necessary requirements (e.g., that they are signed by the correct parties, that they contain the correct data, etc.)

The Two layers of IBC

In other words, for communication between different blockchains, IBC uses “relays” or “pegs” that act as intermediaries between the different blockchains. These relays or pegs are responsible for validating and forwarding transactions and data between the different blockchain systems.

For example, let’s say a transaction is initiated on Osmosis; it is first verified to ensure that it is valid. If it is valid, the transaction is forwarded to the appropriate relay or peg, which then broadcasts the transaction to the target blockchain. The target blockchain verifies the transaction, and if it is valid, it is added to the blockchain, and the process is complete. This means blockchains do not need to communicate directly with each other; rather, they can send data via dedicated channels.

Ensuring the security of IBC includes several measures to prevent fraud and tampering, such as cryptographic signatures and proof-of-work mechanisms. All data sent over IBC is authenticated to ensure that the receiving ledger can trust and verify each packet it receives. These measures help to ensure that only valid transactions can be broadcast between the different blockchain systems and that the integrity of the data being exchanged is maintained.

The Key Benefits

Created for the purpose of facilitating the exchange of data and value between different blockchain systems. It is designed to enable interoperability between different blockchains, allowing them to communicate and exchange information with one another.

There are several benefits to using the IBC protocol:

  1. Interoperability: The most obvious benefit of IBC is that it allows different blockchain systems to interoperate with one another, enabling the exchange of data and value between them. One of the main benefits of Osmosis is that it allows for the creation of “cross-chain hubs,” which are networks of interconnected blockchains that can communicate and exchange data seamlessly, creating a smooth user experience.

  2. Increased security: The use of cryptographic protocols such as hash locks and time-locks. These protocols allow for the transfer of value to be securely locked until certain conditions are met, such as the receipt of a valid cryptographic proof or the passage of a certain amount of time. IBC also relies on decentralized consensus mechanisms, such as proof-of-stake, which ensure the integrity of the transfer of value between blockchain networks. This allows for transfers to be securely validated by multiple independent parties rather than relying on a single centralized authority.

  3. Improved scalability: IBC can also improve the scalability of individual blockchains, as it allows them to offload some of their workload onto other, more specialized blockchains. For example, if one blockchain is experiencing high levels of traffic and is struggling to process all of the transactions that are being submitted to it, it could use IBC to transfer some of those transactions to another blockchain that has more capacity or is better optimized for handling a particular type of workload. This could help to alleviate some of the scalability issues that individual blockchains might face while still allowing them to remain secure and decentralized.

  4. Enhanced privacy: IBC can also enhance privacy, as it allows for the creation of private, off-chain channels for communication and data exchange between different blockchains. As such, IBC does not impose any requirements on the internal operation of ledgers and their consensus algorithms. This allows it to remain flexible and agnostic.

Osmosis and IBC

Since the implementation of IBC, no ecosystem has leveraged the scalability and interoperability that Osmosis has been able to. The Inter-Blockchain Communication (IBC) has provided Osmosis:

  • A standard foundation for communication by establishing a set of rules and protocols that must be followed in order to exchange data and value between different blockchain systems; this has been key as Osmosis serves to host the largest source of liquidity and within IBC-enabled ecosystems.

  • This standardization makes it easier for Osmosis to integrate with different blockchain systems so long as they, too, have enabled IBC, as it only has to support a single, standardized protocol rather than a variety of different protocols. This is a central thesis to the “Tall App” thesis, rather than going the route of having Layer Two chains in the case of Ethereum, which can end up fragmenting liquidity. Osmosis is able to connect with any IBC-enabled chain.

This standardization has enabled IBC to scale rapidly; all a chain on Cosmos has to do is enable IBC to enjoy access to the liquidity Osmosis has to offer. An example of how the interoperability IBC has afforded Osmosis is Superfluid Staking. Using the Osmosis interface, a liquidity provider can deposit any two participating networks’ supported tokens into an Osmosis liquidity pool and can then stake a percentage of their liquidity shares to validators of their choice. Doing so In the staked assets will not only earn its share of fees from the liquidity pool’s swap fees but will also earn rewards for securing the chain.

The Inter-Blockchain Communication Protocol has revolutionized the Cosmos Ecosystem. It enables interoperability between chains, creating an unprecedented level of collaboration in blockchain technology. Ultimately, the idea of an Internet of Blockchains is rapidly becoming a reality, in the same manner that Containerisation expedited world trade and the growth of global commerce due to the level of standardization it introduced, IBC is doing the same for the Cosmos.