Blockchains need an interoperable standard to evolve, crypto leaders say

Blockchain technology needs a common communication standard that can be easily integrated by every network for a complete transition from Web2 to Web3 to occur, industry commentators say.

Many expect that there will be more blockchains and such an ecosystem requires communication protocols similar to the Transmission Control Protocol/Internet Protocol (TCP/IP) used on the internet.

Ryan Lovell, Director of Capital Markets at crypto price oracle solutions firm Chainlink Labs told Cointelegraph that blockchains without interoperability are like computers without the internet – isolated machines that cannot transfer data and value across networks.

“To realize a fully interoperable blockchain ecosystem at scale, there must be an open communication standard analogous to TCP/IP, which currently serves as the Internet’s defacto connection protocol.”

Lovell believed that a similar standard for blockchain networks would “pave the way for a seamless, internet-like experience” for their platform and applications.

This is particularly important given that the recent bull market saw a number of new layer 1 blockchains make their mark. However, almost all of them operate in isolation from each other.

Lovell emphasized that blockchain interoperability is “crucial” for financial institutions looking to tokenize real-world assets (RWA) because it will ensure that liquidity is not “suffocated” by existing only in a “siloed ecosystem.”

Brent Xu, founder and CEO of Umee — a lending platform backed by Cosmos’ Inter-blockchain Communication Protocol (IBC) — told Cointelegraph that before RWAs are brought on-chain, proper risk management systems must be put in place to facilitate this interoperability.

Xu explained that financial institutions must tick Know Your Client (KYC) credentials to ensure the authenticity of the RWAs before they are tokenized on-chain, and then ensure that it can be identified by an on-chain proof-of-reserve audit .

To avoid a chain disaster, he emphasized that the risk of cutting corners is simply not worth it:

“Think about the ’08 mortgage crisis. Enormous economic value was lost due to a broken inheritance system. Imagine if this value was ported into the blockchain ecosystem, we would see a huge loss of value due to the contagion.”

Cross-chain bridges, independent layer 2 sidechains, and oracles are three of the most widely used blockchain interoperability solutions to date. The first two operate exclusively on-chain, while the latter feeds off-chain data onto the chain.

Related: Why interoperability is key to blockchain technology’s mass adoption

There have been problems with some of these solutions, but especially cross chain bridges.

An October report highlighted that half of all decentralized finance (DeFi) exploits took place on a bridge of chains, the most notable example being the $600 million Ronin bridge hack in March 2022.

Xu noted that many of these hacks have come from multi-signature security setups or proof-of-authority consensus mechanisms, which are considered centralized and much more vulnerable to attack.

He added that many of these interoperability solutions favored “speed of development” over security early on, which backfired.

The key, Xu said, is to incorporate interoperability into the platform, as that will result in a more secure end-to-end transaction than using third-party bridges:

“Bridges are particularly vulnerable because they provide two ends where hackers can potentially infiltrate any vulnerabilities.”

Among the most widely used blockchain interoperability protocols are Chainlink’s Cross-Chain Interoperability Protocol (CCIP), IBC – which leverages the Cosmos ecosystem – Quant Networks Overledger and Polkadot.

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