Since the introduction blockchain technology has come a very long way and has changed the game for digital transactions, finance, and decentralized applications. However, interoperability, or what allows different blockchain networks to communicate with and interact with other networks remains a significant limitation in the blockchain space. The future of decentralized systems lies in blockchain interoperability — to make it possible to use blockchain to serve a greater set of applications, services, and industries.
In this blog post, we will explore blockchain interoperability, why it matters, and how it is being achieved. We will also share the challenges and solutions, the key players working on interoperability solutions, and how they will play a part in shaping the future of the blockchain ecosystem.
What is Blockchain Interoperability?
Interoperability within blockchain is about how one network can freely exchange information and assets with other networks. Separate blockchains are as siloed as separate ecosystems with their own rules, consensus mechanisms, and data structures. Therefore, it is often hard, if not impossible, to move data, tokens, or whatever other asset can be exchanged for value between different blockchains without third-party intermediaries.
Interoperability addresses this problem by creating a system that allows blockchain networks to speak to one another and work together. Its goal is to bring the world of blockchains together seamlessly, interconnected, and with a frictionless experience for users and developers who can interact with multiple blockchains in different contexts.
The importance of interoperability can be better understood through the lens of a few critical use cases:
1. Cross-Chain Asset Transfers: Without centralized exchanges or custodians, users should be able to move assets between one blockchain (such as Bitcoin) and another (such as Ethereum).
2. Decentralized Finance (DeFi) Integration: However, DeFi protocols on Ethereum may want to talk with other DeFi ecosystems like Binance Smart Chain or Solana, but we need to do it in a decentralized and trustless way.
3. Data Sharing and Cross-Chain Smart Contracts: On some level, applications can be built on one blockchain, and use or access data stored on another. When writing a decentralized application (DApp) based on Ethereum, you could leverage Chainlink’s decentralized oracle network to aggregate different blockchains.
4. Governance and Consensus Mechanism Interoperability: To make decentralized governance mechanisms work effectively, participation across disparate blockchain networks is required.
Interoperability has been a huge bottleneck for the adoption of blockchain. The current state of business as usual with isolated and incompatible blockchains is wasteful and creates fragmentation. Those barriers are being perceived as ways to overcome them through Interoperability to create a more cohesive system.
Why is Blockchain Interoperability Important?
1. Expansion of the Blockchain Ecosystem: Many networks in the blockchain space find their place in various niches and purposes. Yet these networks are typically run isolated from one another.
These silos break down, and networks can work together and extend the reach of blockchain technology by being interoperable.
As more industries embrace the use of blockchain for also use cases other than cryptocurrency, such as supply chain management, healthcare, finance, and identity verification, this is particularly important.
2. Reducing Fragmentation: Decentralized applications (dApps) are hindered through Blockchain fragmentation from scaling and being useful by design.
For example, developers must develop equivalent solutions for each blockchain, or else use central bridges and third-party services.
Fragmentation can be reduced by making apply interoperable across multiple blockchains, making the experience and adoption in a better way.
3. Access to Liquidity: Digital assets liquidity is a key driving factor behind the progress of the blockchain ecosystem. There, however, liquidity is usually restricted to a single blockchain.
Interoperability empowers cross-chain interaction allowing liquidity pools to flow more freely and creating new pools of assets between chains.
This is especially useful for decentralized finance (DeFi) platforms that must gather liquidity on different blockchain networks.
4. Improved Security: Most of the new chains haven’t matured as much as the blockchain networks like Bitcoin and Ethereum. New or smaller chains draw security and trustworthiness from old or large chains, increasing the overall security of the blockchain ecosystem.
5. Optimizing Network Efficiency: Each blockchain offers strengths such as faster transaction speed, lower fees, and more sophisticated smart contract support. The Interoperability feature enables users to use the best features from different networks, thus yielding higher efficiencies and performances of the overall networks.
How is Blockchain Interoperability Achieved?
Several technical solutions, frameworks, and protocols, are necessary to achieve blockchain interoperability. There are three primary approaches to achieving interoperability:
1. Cross-Chain Bridges: Cross-chain bridges are one of the most popular ways of achieving the desired interoperability. A cross-chain bridge is a protocol that allows the transfer of assets and data from one or more blockchain networks to other blockchain networks.
Most of these bridges operate with trustless transactions between chains, with smart contracts or atomic swaps being used.
A cross-chain bridge is such a classic example, the Wrapped Bitcoin (WBTC) in Ethereum being the best example – it is a Bitcoin token that allows BTC to be wrapped on Ethereum which is an ERC20 token that you can use to become part of the DeFi ecosystem in Ethereum.
But in much the same way, the RenVM protocol lets you mint wrapped versions of assets from other chains like Bitcoin or Zcash and use them on Ethereum.
Bridges are great for transferring the tokens from one chain to another but they suffer from some security vulnerabilities and are reliant on the centralization of an actor to lock and unlock the tokens.
2. Sidechains: Sidechains are decentralized blockchains that interact with the main blockchain to transfer assets among them. While sidechains use different mechanisms of consensus and features than their parent chain, they are both linked to the parent chain for security and interoperability reasons.
One example is Liquid Network, a sidechain of Bitcoin that brings lower fees and faster transactions without compromising on the Bitcoin security model.
Said to be the way to scale blockchains and facilitate cross-chain interactions by being a bridging layer between different blockchains. Yet, sidechains require secure solutions for trust maintenance and asset transfer without centralization.
3. Interoperability Protocols: A number of these interoperability protocols are developing to connect disparate blockchains more centrally and effectively. The objective here is to lay out protocols for a universal layer of cross-chain communication, which does not require the use of bridges or sidechains. Some of the leading interoperability protocols include:
o Polkadot: It is a multi-chain platform, that allows blockchains to interconnect with each other in one single network. It is a relay chain coordinating the communication of different parachains (different blockchains) with it. With this, Polkadot is bringing ease of use between blockchains, while still at the same time allowing for the sovereignty of each block chain.
o Cosmos: There’s Cosmos, which is an interoperability protocol allowing blockchains to interoperate with each other through Inter Blockchain Communication (IBC) protocol. Cosmos makes it possible to create “zones”, [their version of a private blockchain], with some capability to interact with other zones via IBC, so that zone users can pass data or assets across chains to their counterparts.
o Chainlink: Most well known for its Decentralized Oracle Services, Chainlink also plays a major role in enabling smart contract interoperability across multiple blockchains. The Cross-Chain Interoperability Protocol (CCIP) of Chainlink enables smart contracts on different blockchains to be able to communicate with and share data between one another.
o Wanchain: The Wanchain platform provides a method of transferring assets across blockchains. The trustless transfer of assets on Wanchain is achieved through the use of a combination of secure multi-party computation (SMPC) and threshold cryptography.
Challenges to Blockchain Interoperability
While there has been significant progress in the development of interoperability solutions, several challenges still need to be addressed:
1. Security Risks: Security vulnerabilities plague cross-chain interoperability protocols and bridges. In particular, bridges have been successfully hacked and exploited repeatedly, and more. An attack on a bridge’s security can bring the funds or even the data of multiple blockchains into corruption.
2. Standardization: No blockchain interoperability standard is universal. There are multiple ways of consensus, token standards, and formats of data across different blockchains, which makes it difficult to create standardized protocols across all networks. Fragmentation and inefficiency are a product of this lack of standardization.
3. Scalability: As blockchain networks deal with more transactions, be that cross-chain, they need to scale. While interoperability solutions such as bridges can introduce bottlenecks that reduce their scalability. To support large-scale transactions we need to design interoperability protocols that are secure and decentralized.
4. Complexity: Introducing integrity makes the blockchain ecosystem more complicated. To achieve the well though of cross-chain transactions, can not be carried out by one party or the other, it needs some parties who coordinate the things to work together, for example, developers users, and validators. Because such complexity increases the time and cost for the development of decentralized applications that support multiple blockchains, they may not be appropriate in the case when a simplified enhancement approach is key.
The Future of Blockchain Interoperability
With the maturation of blockchain technology, the property of interoperability will become a crucial part of the construction of decentralized ecosystems. A single truly interconnected blockchain network will open up all sorts of innovation avenues for DeFi, supply chain tracking, digital identity, and more.
Several key trends will shape the future of blockchain interoperability:
1. Growth of Multi-Chain Ecosystems: Polkadot and the Cosmos project are paving the way for a future with a single ecosystem that will accommodate multiple blockchains. With the growth of these ecosystems, blockchain networks will become more interconnective and interoperable.
2. Cross-Chain Decentralized Finance (DeFi): The interoperability of blockchain creates a positive de-fi application, and liquidity can flow freely between various networks. That could result in the birth of more efficient DeFi markets in a more sizable format.
3. Enterprise Adoption: Interoperable solutions that communicate with existing are what enterprises exploring blockchain for supply chain management, financial services, and other use cases will demand.