Blockchain technology continues to make strides in disrupting major industries like finance, real estate, healthcare, etc. This has led to the creation of multiple blockchains to meet the unique needs of different industries.
This proliferation of new blockchains has necessitated the need for interoperability between them to take advantage of the unique characteristics of each blockchain. Blockchain interoperability allows blockchains to communicate with each other and share information, data, and assets.
Here’s how blockchain interoperability works, its benefits, and why blockchain technology is important for global adoption.
What is blockchain interoperability?
Blockchain interoperability refers to various ways that allow different blockchains to communicate with the aim of sharing data and digital assets while effectively integrating transactions.
Blockchain interoperability is an important part of decentralization. It ensures secure, efficient and transparent exchange of information between blockchains. This allows a blockchain to share its activities with another blockchain using predefined protocols.
How does blockchain interoperability work?
The foundation of blockchain interoperability is cross-chain messaging protocols. This allows blockchains to read and/or write data from one blockchain to another blockchain.
These cross-chain messaging protocols enable the creation of cross-chain decentralized applications (DApps). These DApps can work across multiple smart contracts running on different blockchains.
There are currently four main ways in which blockchain interoperability is achieved:
1. Side Chains
Most of the legacy blockchains like Ethereum, Solana, and Avalanche are Layer 1 blockchains that provide basic level blockchain services. Sidechains are Layer 2 protocols built to be compatible with a Layer 1 blockchain.
The sidechain has its own set of features, which include a consensus algorithm, security framework, and native token. However, they can also act as avenues for blockchain interoperability. The main chain and side chain are connected via a cross-chain messaging protocol, with each chain keeping a log of the assets. Blockchain projects like Cosmos and Polkadot are examples of chains built with built-in cross-chain infrastructure to support interoperability.
2. Oracle
Oracles are purpose-built protocols that offer incredible benefits for interoperability. They are able to connect real-world data to any blockchain via smart contracts.
Chainlink is an example of a blockchain oracle that plays a key role in providing off-chain data for smart contracts, allowing data to be shared across different blockchains. This helps with interoperability by ensuring that the different blockchains all refer to a central source.
3. Bridges
Bridges allow cryptocurrency users to seamlessly transfer tokens and digital assets between blockchains. It does this by allowing a digital asset to be locked in the chain of origin while an identical asset is “imprinted” in the chain of receipt. An example is how wrapped tokens work. Users can use Ethereum on the BNB chain as Wrapped Ethereum (wETH). This is critical for decentralized finance, as it allows users to engage across multiple blockchains without having to purchase the blockchain’s native token.
4. Trades
Swaps offer users the opportunity to exchange tokens from different blockchain networks. These cross-chain token swaps are conducted using swap protocols and/or automated market makers (AMMs) that control pools of liquidity on each blockchain to facilitate the swap.
Importance of blockchain interoperability
The main use case of blockchain interoperability is facilitating the seamless interaction of data and digital assets across different blockchains. When two interacting parties use the same blockchain like Ethereum, the exchange of data and value is straightforward. However, achieving the same thing across different blockchains is quite a Herculean task.
Interoperability removes the barriers between blockchains. This is an important component for global crypto adoption as it allows users to leverage different features across multiple blockchains. The interoperability removes the barrier to entry for companies looking to engage with multiple protocols across multiple blockchains.
Interoperability significantly increases productivity when developing new decentralized applications (DApps). Smart contracts can work across multiple chains, and oracles can feed real-world data into different blockchains. Combined with the transparency of blockchains, it will lead to a surge in global blockchain usage and adoption.
Pros and cons of blockchain interoperability
Blockchain interoperability brings many benefits. Some of them are:
- Connectivity between blockchains: Interoperability ensures seamless communication between systems, processes and data on different blockchains.
- Cross-chain collaboration: The use case of interoperability goes beyond just connecting blockchains. Blockchain protocols and smart contracts also benefit from interoperability. Interoperable protocols and smart contracts provide blockchain developers with a solid foundation for creating cross-chain DApps.
- Improved decentralization: Blockchain is based on the core principle of decentralization and interoperability amplifies this to great effect. Linking multiple blockchains improves the blockchain guarantee of decentralization of systems and industries. For example, instead of having just one blockchain processing millions of transactions for decentralized applications, multiple smart contracts can be linked together across multiple blockchains to provide this service and reduce network congestion that typically results in high gas charges.
While interoperability definitely has a number of benefits, there are still some areas that need work:
- Vulnerable to exploits: Interoperability exposes blockchains to hacks during cross-chain activity. A 2022 study by crypto analytics firm Chainalysis shows that over $1.9 billion was stolen in cross-chain hacks. Security on cross-chain bridges and swaps needs to be tightened to prevent further exploits.
- complex process: Interoperability is still evolving and involves many complex processes that require specialized skills. This has the potential to slow scope and adoption.
Platforms that offer blockchain interoperability
1. Wormhole
Wormhole is a decentralized interoperability protocol with support for multiple blockchains including Ethereum, Solana, BNB Chain, etc. Wormhole also provides an ecosystem and platform for developers to leverage standalone modular swap-ins to create unique interoperable DApps.
2nd document (RSK)
Rootstock (RSK) facilitates interoperability through its RIF gateways and the RSK-ETH bridge. RIF gateways are a set of protocols that provide fast and secure connections between blockchains. The RSK-ETH Bridge is a cross-chain bridge for exchanging tokens from Ethereum to RSK and vice versa. RSK is tied to Bitcoin, so it essentially facilitates the exchange of tokens between Ethereum and Bitcoin.
3. BTC relay
BTC Relay provides a platform for developers who need interoperability between Ethereum and Bitcoin. Developers can create DApps that allow users to pay for Ethereum DApps in Bitcoin.
4. T3rn
T3rn provides a platform for easy and seamless integration between blockchains. T3rn makes decentralized multichain financing possible and highly secure. Users can transact across blockchains through multi-chain smart contracts to ensure funds never get stuck or lost.
Interoperability will quickly drive blockchain adoption
Blockchain interoperability offers a wealth of opportunities for companies looking to use blockchain to advance technology. The ability to seamlessly move data and digital assets across blockchains provides users with a one-size-fits-all solution. Developers also benefit from cross-platform development capabilities with smart contracts and protocols. This will encourage cross-industry scaling as user adoption and application development continue to increase.
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