What is Interoperability?
Blockchain interoperability refers to the ability of different blockchain networks to communicate, share data, and build on each other’s features and use cases. This ability to share or see information across different blockchains allows for seamless communication and data transfer between different blockchain networks, enabling the exchange of data and assets without the need for intermediaries.
Why do we need Interoperability?
Interoperability is necessary for the adoption, scale, and innovation opportunities within blockchain solutions and Web3. Various blockchains have different functions and solve different problems. For instance, the Bitcoin blockchain was created to offer a decentralized method of storing and transferring value, and the Ethereum network aims to provide a platform for building decentralized platforms like dApps. But without interoperability, it is almost impossible to adopt blockchain technology, because each individual project would be too siloed. Interoperability solutions allow blockchain to read and write data to other blockchains. This facilitates cross-chain solutions that can operate on different blockchains and utilize the different functionalities from each blockchain.
But regardless of technology choice, there are different kinds of interoperability and different types of connectivity, which come with different tradeoffs.
- The ability to integrate – In other words to expose an API, receive a message or similar, such that it is possible to perform reads and writes across systems. This refers to integration interoperability. All blockchains support this, so at this level they are all ‘interoperable’.
- ‘Crafted’ atomic transaction interoperability – The ability to perform atomic transactions across chains for a specific scenario through the crafting of a bespoke solution. An example is a token transfer service that allows a token to be burned on one chain and minted on another.
- ‘Generalized’ atomic transaction interoperability – The ability to have a generalized approach to performing atomic transactions across two or more systems, without the need to craft a solution for each scenario. This is what we are aspiring to and has the most value. From a technical perspective, it means that only business logic needs to be codified, and that transactional atomicity “just works”, regardless of business logic complexity or the number of parties involved. From a business perspective it removes risk (such as settlement, counterparty and liquidity risk). Equally importantly though, it means that new systems with new applications can be “plugged in” to an ecosystem and simply used, without significant development effort.
Overcoming the Challenges
Fortunately, there are multiple approaches to overcoming the challenges of blockchain interoperability. Some of the current cross-chain technologies include sidechains, oracles, and bridges:
- Sidechains are independent blockchains that run parallel to the main chain, allowing assets and data to be transferred between the two through cross-chain communication protocols. They offer a way to extend the functionality of a main chain while maintaining a degree of independence.
- Oracles act as bridges between blockchains and external systems, bringing off-chain data onto the blockchain. Advanced oracles also facilitate cross-chain communication, enabling blockchains to share information and assets with each other.
- Bridges directly connect two different blockchains, allowing for the seamless transfer of assets and data. These are essential for enabling direct cross-chain transactions between distinct blockchain networks.
The Future of Interoperability
The promise of these interoperability solutions lies not just in linking disparate blockchain networks but in fundamentally changing how they interact. By enabling networks to focus on their infrastructure offerings rather than competing for market share, blockchains can compete on the merits of their technology and the value they deliver. This shift from competition to collaboration is crucial for bridging the gap between decentralized finance (DeFi) and traditional finance (TradFi), enhancing the liquidity and accessibility of digital assets and preparing Web3 for mass adoption by the general public.
While still in its nascent stages, several promising examples demonstrate the power of interoperability in action:
- Cosmos IBC (Inter-Blockchain Communication): Cosmos, a blockchain network focused on scalability and interoperability, has developed the Inter-Blockchain Communication (IBC) protocol. This protocol acts as a standardized language, allowing different blockchains built on the Cosmos ecosystem to communicate and exchange data securely. This enables applications built on one Cosmos chain to leverage the functionalities of another, fostering a connected and interoperable ecosystem.
- Polkadot: Polkadot, another prominent player in the interoperability space, utilizes relay chains and parachains. The relay chain acts as a central hub, coordinating communication between independent parachains, each specializing in specific functionalities. This allows developers to build specialized blockchains for various purposes while ensuring seamless communication with other parachains within the Polkadot ecosystem.
Conclusion
The future of blockchain interoperability is expected to evolve with the continuous development of cross-chain technologies. As more entities become aware of this rising technology and its capabilities, the interconnection of these unique blockchains is becoming necessary. The increase in the number of new blockchain networks is also a result of the recognition that there is no one perfect solution that will be able to meet all of the needs associated with blockchain technology all at once. Therefore, interoperability is seen as the key to blockchain technology’s mass adoption, enabling blockchain networks and protocols to communicate with each other, making it easier for everyday users to engage with blockchain technology.