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Every year, we see new blockchain networks being developed to tackle specific niches within certain industries, each blockchain having specialized functions based on its purpose. For example, layer-2 scaling solutions like Polygon are built to have ultra-low transaction fees and fast settlement times.
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, as more organizations become aware of this rising technology and its capabilities, the interconnection of these unique blockchains is becoming necessary.
What is interoperability?
Blockchain interoperability refers to a wide variety of methods that enable many blockchains to communicate, share digital assets and data and work together more effectively. This makes it possible for one blockchain network to share its economic activity with another. For example, interoperability allows transmitting data and assets across different blockchain networks via decentralized cross-chain bridges.
Interoperability is not something that most blockchains have because each blockchain is built with different standards and code bases. Since most blockchains are naturally incompatible, all transactions must be done within a single blockchain, no matter how many features the blockchain might have.
Marcel Harmann, founder and CEO of THORWallet DEX — a noncustodial decentralized finance (DeFi) wallet — told Cointelegraph: “Interoperability can be understood as freedom in data exchange. Currently, base layer protocols cannot communicate with each other effectively. Layer-1 protocols like Ethereum or Cosmos have smart contracts built into their fabric, only permitting secure data exchange within their own ecosystems. Digital asset transfers that leave the network pose a question: How can a blockchain trust the state validity of another blockchain?”
Harmann continued, “Consensus mechanisms on each blockchain decide the canonical history of all the transactions that were validated. This produces extremely large files that must be processed with each block and can only be viewed in the specific language native to the blockchain. Interoperability between two or more blockchains refers to one or both chains being able to understand and process the history of the other chain, thus enabling, for example, the exchange of assets between different layer-1 networks.”
Even though it seems obvious that public blockchain projects should be designed with interoperability in mind from the start, this is not always the case. However, organizations are increasingly calling for interoperability because of the benefits of sharing information and working together.
Why is interoperability important?
To realize the full potential of decentralization, it is beneficial for
people participating in several blockchains to be linked through a single protocol. This reduces friction for the user since they can access different decentralized applications (DApps) without having to change networks.
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Due to blockchains operating independently from each other, it’s difficult for users to take advantage of the benefits presented by each network. To do so, they need to hold tokens supported by each blockchain to engage with the protocols within their network.
Interoperability can fix this problem by enabling users to use one token across multiple blockchains. In addition, by enabling blockchains to communicate with each other, a user can access protocols on multiple blockchains with greater ease. Because of this, there is a better chance that the industry’s value will continue to grow.
Fabrice Cheng, co-founder and CEO at Quadrata — a Web3 passport network — told Cointelegraph:
“Interoperability is crucial because it’s one of the key benefits to blockchain technology. Decentralized open-source technology allows the creation of products that are interoperable across chains, enabling more users, businesses and institutions to stay interconnected.”
Cheng continued, “People who use blockchain technology want to make sure people are screened, KYC-verified and have good credit behavior. DeFi users can access trading options or have access to real-time price feeds. Interoperability is an efficient way to remove intermediaries for users and allows businesses to focus on their core values.”
When it comes to decentralized finance, giving traders more ways to use their assets can bring additional growth and opportunities to the sector. For instance, multichain yield farming enables investors to generate multiple returns as passive income on many blockchains for owning a single asset.
The investor would only need to hold Bitcoin (BTC) or a stablecoin like USD Coin (USDC) and then spread it across multiple protocols on different blockchains via bridges. Interoperability will also improve liquidity across multiple blockchain networks since it will be easier for users to move their funds across different chains.
Interoperability does not only refer to connectivity between blockchains. Protocols and smart contracts are also interoperable. For example, t3rn, a smart contract hosting platform, enables smart contracts to operate on multiple blockchains. This works by the smart contract being hosted on the smart contract platform and being deployed and executed across different blockchain networks. Interoperable smart contracts make it easier for developers to create cross-chain applications and for users to run cross-chain transfers.
Interoperable smart contracts will make it easier for users to access multiple decentralized applications since they won’t have to change networks. For example, suppose a user uses a DApp on Ethereum and wants to access a lending protocol on Polkadot. If the Polkdadot-based DApp has an interoperable smart contract, they access it on Ethereum.
Oracles are another protocol that can benefit from interoperability. Oracles are entities that connect real-world data to the blockchain via smart contracts. Decentralized oracle platforms like QED can connect oracles to multiple blockchain networks, making it possible for real-world data to be shared across blockchains. In addition, oracles can take data from an API or sensor and submit it to a smart contract to activate once certain conditions have been met.
For example, a supply chain has multiple organizations that use different blockchain networks. Once a component in the supply chain reaches its destination, the oracle can submit data to the smart contract confirming its delivery. Once delivery is confirmed via an oracle, the smart contract releases a payment. Since the oracle is linked to multiple blockchains, each supplier can use the network of their choice.
Interoperability is also important for the exchange of digital assets between blockchain networks. One of the most common ways this is done is by the use of cross-chain bridges. In simple terms, cross-chain bridges allow users to transfer tokens from one blockchain to another.
Wrapped tokens, for example, allow users to use Bitcoin (BTC) on the Ethereum network as Wrapped Bitcoin (wBTC). This is important in the DeFi industry since users can engage with DeFi without buying a platform’s native token, which may be more volatile than stablecoins or blue chip coins like BTC or Ether (ETH).
Being able to easily move assets between blockchain networks is a major benefit of interoperability. Anthony Georgiades, co-founder of the Pastel Network — a nonfungible token (NFT) and Web3 infrastructure and security project — told Cointelegraph:
“Interoperability is of vital importance to the blockchain industry due to the diversity of data and assets found within the crypto ecosystem. Decentralized cross-chain bridges are necessary to facilitate transfers between different kinds of tokens or assets.”
The key to the success of blockchain technology will be the level of interaction and integration between the many blockchain networks. Because of this, interoperability between blockchains is crucial since it reduces the barrier to entry for users who want to engage with protocols across multiple networks.
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Interoperability across blockchains will enhance productivity throughout the whole crypto sector. Users can quickly move data and assets across blockchains, increasing flexibility for everyone involved. Instead of being tied to a single blockchain, smart contracts can function on multiple networks and oracles will submit real-world data across different platforms. When combined with the advantages of public decentralized blockchains, interoperability should provide the basis for widespread blockchain adoption and utilization.
Georgiades continued, “Therefore, interoperability allows users to transmit cryptocurrency from one blockchain to another and enables users to post tokens or NFTs as collateral for other assets. An interoperable Web3 world is a vision we are tirelessly working towards. A multichain ecosystem facilitated by seamless cross-chain bridges will get us there and bring that vision to fruition.”
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