Currently, the worlds of traditional finance and public blockchain networks are disconnected. Trillions of dollars in wealth remain locked inside of traditional financial institutions - unable to access innovative financial opportunities (i.e. digital assets) that exist inside of the public blockchain network ecosystem, or better known as Web3. These opportunities include tokenized financial instruments, fractionalized ownership of illiquid assets, and many new forms of value being unlocked through the innovative capabilities of tokenization and digital assets. If a strong digital interconnection between financial institutions and public blockchain networks were to be established, financial assets and capital would be able to flow seamlessly between the two ecosystems of traditional finance and Web3.

At present, traditional financial institutions like Goldman Sachs and JP Morgan, who manage trillions in assets, conduct their business operations on technology systems that were developed 40-50 years ago. In contrast to this, public blockchain networks like Ethereum, which powers billions of dollars of financial transactions in Web3, utilizes newer forms of technologies to enable secure exchanges of value, such as cryptography and smarts contracts. While both systems work for their individual ecosystems, their difference in technologies effectively limits their ability to communicate and exchange value.

If an interoperability technology existed that could connect these two ecosystems, participants from the traditional finance world (e.g. asset managers, hedge funds, banks, etc.) and participants from the Web3 world (e.g. DeFi investors, Web3 users, etc.) could move their assets in and out of both ecosystems and capitalize on a larger set of financial opportunities. It would effectively drive new interactions of value exchange between financial institutions and Web3, and lead to a more prosperous and interconnected global financial ecosystem, where both financial institutions and Web3 users could thrive off new investment frontiers.

Chainlink Labs, the company behind the leading decentralized oracle network provider, has been busy rolling out a powerful interoperability technology called the Cross-Chain Interoperability Protocol (CCIP). CCIP is a low-level protocol that effectively enables cross-chain communication between public and private blockchain networks, facilitating seamless value exchange between traditional financial institutions and Web3.

The cross-chain standardization mechanism of CCIP enables legacy technology systems and public blockchain networks to interact and exchange value without needing to change their existing communication and technology infrastructure. In public blockchain networks, CCIP enables interactions across various decentralized applications on multiple public blockchains without the hassle of manually bridging assets from one chain to another. In private blockchain networks, CCIP facilitates secure communication between legacy banking systems and both public blockchains and private blockchains.

Let's look at an example from the perspective of a traditional financial institution and a Web3 user:

Global Bank

Bank X aims to purchase a tokenized real estate fund listed on an Ethereum-based decentralized exchange. By leveraging CCIP, Bank X can use its existing infrastructure and communication protocols to define and execute the necessary interactions to purchase the token on Ethereum. CCIP translates the bank's messages into Ethereum-compatible actions, enabling seamless transactions without requiring changes to the bank’s current systems.

Web3 User

A Web3 user is aiming to maximize their investment yield by using several DeFi protocols across Ethereum, Solana, and Binance Smart Chain. Traditionally, this user would need to create and manage multiple wallets and manually bridge their assets across each chain before interacting with each DeFi protocol. With CCIP, the Web3 user can condense these steps into a single transaction without having to manually bridge chains.

CCIP is already gaining significant traction in both the worlds of traditional finance and Web3.

ANZ Bank: In September 2023, ANZ Bank collaborated with Chainlink Labs to integrate CCIP for cross-chain settlement of tokenized assets and stablecoins. The experiments demonstrated successful Delivery versus Payment (DvP) transactions using ANZ’s web app.

SWIFT: In August 2023, SWIFT integrated CCIP to test interoperability between their messaging standards and blockchain networks. The experiments showed that SWIFT's connectivity, combined with CCIP, can facilitate seamless interactions between traditional financial systems and both public and private blockchains.

Transporter & Swap: Transporter, a DeFi protocol specializing in cross-chain liquidity provisioning, utilizes Chainlink's CCIP to facilitate secure cross-chain transactions and promote interconnected DeFi ecosystems. XSwap, the first cross-chain swaps protocol powered by CCIP, enables secure and efficient cross-chain asset swaps across major blockchain networks, enhancing liquidity and reducing transaction costs.

Integration with L1 & L2 Blockchains: CCIP has successfully integrated with several prominent Layer 1 and Layer 2 public blockchain networks, including Ethereum, Polygon, Arbitrum, Optimism, Avalanche, Base, BNB Chain, Celo, and Gnosis Chain. Additionally, several leading DeFi protocols, such as Synthetix and Aave, are adopting CCIP to enhance their cross-chain interoperability.

Overall, the interconnection of traditional finance and public blockchain networks through CCIP technology marks the beginning of a significant convergence between traditional finance and Web3. This integration will usher in a new global financial system facilitated by digital assets and blockchain interoperability. As major banks expand their operations into digital asset offerings and younger generations invest their wealth into digital assets, a stronger flow of capital and value will be developed between the traditional finance world and Web3. As a result, the landscape of the global financial system will be transformed into a new system defined by frictionless exchange of value, strong flow of capital, and new economic possibilities.