TenX, a crypto startup, has through its R&D lab attempted to transfer ERC20 tokens to Bitcoin by using its Cross-blockchain protocol via the Lightning Network (LN).
The information was made known by a blog owned by R&D called CoBlox on Dec 12, making reference to the Dec 7 demo.
According to the blog post, the challenge was to replace ERC20 tokens with Satoshi, which are the smallest transactable unit of Bitcoin through the use of LN protocol’s second layer scalability. The ERC20 tokens operate on the platform of Ethereum, but because of the use of smart contracts to make ownership transfer of ERC20 tokens possible, the tokens are not entirely native to the Ethereum platform.
The Lightning Network Solution
The issue of Bitcoin’s scalability has found a solution with the second-layer solution from Lightning Network, which creates off-chain payment channels for most of the transactions performed by users through the use of Hashed Timelock Contracts (HTLCs) and the blockchain is only used to take record of the net results.
The former Ethereum HTLC by CoBlox was less complicated because native assets were involved. CoBlox has described the approach they will use to obtain a solution for a situation involving ERC20, noting that the developers decided to “split the HTLC setup into two transactions” which are “contract deployment” and “ERC20 transfer call,” but that the two steps couldn’t be combined by them.
According to the post:
“The ERC20 transfer function uses msg.sender for authentication. However, calling transfer from a contract deployment sets msg.sender to the address of the yet to be deployed contract which obviously has no tokens!”
The post went ahead to comment that making use of “the Lightning Network for an atomic swap also has its quirks,” because for the solution to work, invoices will need to be created by individuals and subsequently paid without basically “knowing about the underlying HTLCs.” However;
“An atomic swap cannot always be expressed through this model of invoices and payments. In LND, which is what we used for our PoC, receiving a payment requires an invoice which requires knowledge of the secret. As a result, we were only able to do ERC20 to Lightning and not the other way around. The invoice used in the swap can be found below.”
The Search for a Solution Continues
CoBlox still says that it is “looking at ways” to find a solution to the issue of limited directionality and because of that, have withheld it’s proof-of-concept (PoC) results for ERC20 tokens and this is in relation to its COMIT network which will feature an open source release.
A study conducted this summer by Diar, a weekly crypto outlet, showed that with respect to routing payments, the effectiveness of the Lightning Network is reduced particularly when larger amounts are involved. The development team of Lightning Network rejected the report and said it was “poorly-researched and written.”