If you’ve read the official documentation on how Chainlink CCIP works and are still confused don’t worry. It’s normal. The official documentation is full of a lot of jargon and assumes you have a good grounding in all things crypto. In this guide, I will explain how the chainlink cross-chain interoperability protocol works in simple language. I will show you how it enables token transfers, the different layers to the protocol, and how all the different components work together.
What does Chainlink CCIP do?
The CCIP allows different blockchain networks to talk to each other. They can send both messages and digital assets. Just like how TCP/IP allows computers to talk to each other using the same messaging and communication standard, CCIP is an open standard that enables cross-chain communication.
Let’s look at an example with token transfers.
Say I want to move ETH from the Ethereum blockchain to Solana. As Solana and Ethereum are completely separate networks you can’t move one asset to the other. Remember we are talking about digital ledgers here
Ethereum looks like this:
and Solana looks like this:
There is no way to place ETH on the Solana ledger.
The two chains are incompatible with each other.
However, both chains support minting new tokens.
Ethereum has the ERC-20 protocol and Solana has the SPL protocol.
If I wanted to I could create a token called elementalcrypto on Ethereum and another called LMNTL on Solana.
You can mint whatever token you want.
That’s how we’ve ended up with weird-sounding tokens such as Shiba Inu and ApeCoin.
Another thing that both of these chains have in common is that they support smart contracts.
Smart contracts allow developers to program conditions on top of blockchains.
For instance, you could write an application that pays out 100 LMNTL tokens every time you send it an ETH coin. Think of it like an if… then… functionality in your code.
Your instructions could say, “If someone sends me ETH then mint and send them 100 LMNTL tokens.”
So now I can do an interesting hack. While I can’t send ETH to Solana I could lock it up on Ethereum and mint a new token on Solana called WETH which stands for wrapped ETH.
If each WETH on Solana corresponds to an ETH locked up Ethereum it’s kinda like having moved the ETH to Solana.
In practice, I have not moved any ETH but I know that the new token I created on Solana is redeemable for 1 ETH on Ethereum any time I want to.
Who guarantees that it is redeemable and the system will work?
CCIP is a protocol that allows me to send tokens from the origin chain to the destination chain in a cryptographically secure manner.
IS CCIP safer than other bridges?
Bridges have been the most vulnerable component of DeFi protocols for a while now and keep getting hacked left right and center due to weak security guarantees.
However, bridges tend to offer application-specific services whereas CCIP offers broader cross-chain infrastructure.
CCIP claims to be superior because it uses what’s called a risk management network.
The risk management network is comprised of a decentralized network of oracles that continuously monitor the CCIP for malicious activity.
You can think of it like a decentralized system of checks and balances where Node Operators will alert anyone using CCIP and freeze operations in case of suspicious activity.
These networks use Chainlink’s off-chain reporting to come to a consensus outside of the blockchain on cross-chain interactions. This results in lower costs while maintaining accountability.
CCIP will allow blockchains to interoperate with each other, allow smart contracts from different blockchains to send each other commands, and enable the movement of tokens between chainsSergey Nazarov during the launch of CCIP
There are four conceptual layers you need to be aware of to fully grasp how CCIP works.
1. Application layer
The first layer is the easiest to understand. It is the myriads of apps that can use CCIP to interact with different chains. This is where wallets, exchanges, yield aggregators, market makers, and other decentralized applications can hook up to the protocol and offer their users cross-chain interactions
2. Cross-Chain Services
This is the layer that enables token transfers. Anyone who wants to transfer tokens across blockchains can use Chainlink’s Programmable Token Bridge. You can think of it as a plug-in solution that is ready to use.
Alternatively, you can use any other third-party code that has been built to use the CCIP protocol.
3. Interoperability layer
Next, you have the protocol itself. This is the standard upon which anyone can build smart contracts to send data across chains.
4. Consensus and network infrastructure
This technology allows transactions and data to be cross-verified in a decentralized manner off-chain.
How does Chainlink’s CCIP work in practice?
When you interact with CCIP your first point of contact will be with the router contract.
This is a smart contract that initiates the cross-chain interaction. The router contract speaks to another contract called the on-ramp contract that sits on the specific chain you want to talk to. For example, if you want to send ETH from Ethereum to Solana your on-ramp contract would connect to Ethereum. The onramp then instructs your tokens or coins to be sent to a token pool where they are locked or burned.
What does it mean to burn a token?
When you burn a token you send it to a smart contract from which it can never leave. And because no one can ever use it it’s like it has no use and has vanished just like how burning a dollar bill causes it to vanish.
Different tokens are managed in different ways.
- Native tokens such as ETH, SOL, DOT, etc can only be created on their own chain. So if you want to send ETH you need to lock it on Ethereum and mint WETH on the blockchain you are sending it to.
- Some tokens such as USDC and USDT are available across chains. In this case, you would burn the token on one chain and mint it on another.
Once the tokens are locked or burned on the source chain an off-ramp contract mints the tokens on the destination chain.
What does Chainlink do?
Chainlink is a decentralized oracle network that allows smart contracts to connect to real-world data such as prices, weather conditions, reserves status, and more.
The majority of DeFi applications out there today rely on the Chainlink network to obtain off-chain data.
Chainlink also offers off-chain computation so that you can crunch the numbers before bringing them to a blockchain.
Chainlink’s cross-chain interoperability protocol is a core initiative of Chainlink Labs to power the next generation of cross-chain applications. See What Is Chainlink Crypto if you want to get to grips with it.
- How to Mine Chainlink (Link): Everything You Need to Know
- Chainlink staking
- How to get Chainlink
- Where Chainlink Gets Its Data: Guide to How Feeds Work
In this post, I will walk you through how chainlink is used. I will show you which apps and companies are using Chainlink and the extent of its usage. Read more.