Blockchain technology continues to take steps forward in disrupting major industries such as finance, real estate, healthcare, etc. This has led to the creation of several blockchains to meet the unique needs of various industries.
This increase in new blockchains has necessitated the need for interoperability between them, to take advantage of the unique features of each blockchain. Blockchain interoperability allows blockchains to communicate with each other and share information, data and assets.
Here’s a look at 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 enable different blockchains to communicate with the aim of sharing data and digital assets while integrating transactions efficiently.
Blockchain interoperability is an important component of decentralization. It ensures secure, efficient and transparent information sharing between blockchains. This enables one 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 enables blockchains to read and/or write data from one blockchain to another blockchain.
These cross-chain messaging protocols enable the creation of decentralized cross-chain applications (DApps). These DApps can work across multiple smart contracts that execute on different blockchains.
There are four important ways in which blockchain interoperability is achieved:
1. Side chains
Most of the older blockchains such as Ethereum, Solana and Avalanche are Layer-1 blockchains that provide basic level blockchain services. Sidechains are Layer-2 protocols that are built to be compatible with a Layer-1 blockchain.
The sidechain has its own 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 the side chain are connected via a cross-chain messaging protocol, where each chain keeps a log of assets. Blockchain projects such as Cosmos and Polkadot are examples of chains built with integrated cross-chain infrastructure to support interoperability.
2. Oracles
Oracles are specially designed protocols that provide incredible benefits for interoperability. They are able to connect real data to any blockchain through smart contracts.
Chainlink is an example of a blockchain oracle that plays a key role in providing off-chain data to smart contracts, enabling data to be shared across different blockchains. This contributes to interoperability by ensuring that the different blockchains all refer to a centralized source.
3. Bridges
Bridges enable cryptocurrency users to seamlessly transfer tokens and digital assets between blockchains. This is done by making it possible to lock a digital asset on the originating chain while an identical asset is “stamped” on the receiving chain. An example is how wrapped tokens work. Users can spend Ethereum on the BNB chain as Wrapped Ethereum (wETH). This is crucial for decentralized finance as users can engage across multiple blockchains without having to purchase the blockchain’s native token.
4. Exchanges
Swaps allow users to exchange tokens from different blockchain networks. These cross-chain token exchanges are done using exchange protocols and/or automated market makers (AMMs) that control liquidity pools on each blockchain to facilitate the exchange.
The importance of blockchain interoperability
The most important application area for blockchain interoperability is to facilitate seamless interaction between data and digital assets across different blockchains. When two interacting parties use the same blockchain, such as Ethereum, data and value exchange is straightforward. But achieving the same thing across different blockchains is quite a herculean task.
Interoperability removes the barriers across blockchains. This is an important component for global crypto adoption, as users can take advantage of different features across multiple blockchains. Interoperability eliminates the barrier to entry for entities wishing to engage with multiple protocols across multiple blockchains.
Interoperability significantly increases productivity in the development of new decentralized applications (DApps). Smart contracts can work across multiple chains, and oracles can feed real data into different blockchains. Combining this with the transparent nature of blockchains will see the rise of global use and adoption of blockchains.
Advantages and disadvantages of blockchain interoperability
Blockchain interoperability brings many benefits. Some of them include:
- Connection between blockchains: Interoperability ensures seamless communication between systems, processes and data on different blockchains.
- Collaboration across chains: The use of interoperability extends beyond simply connecting blockchains. Blockchain protocols and smart contracts also benefit from interoperability. Interoperable protocols and smart contracts provide blockchain developers with a solid starting platform for creating cross-chain DApps.
- Improved decentralization: Blockchain is built on the core principle of decentralization and interoperability strengthens this with great effect. Linking multiple blockchains together promotes blockchain’s guarantee of decentralization of systems and industries. For example, instead of having just one blockchain processing millions of transactions for decentralized applications, there could be multiple smart contracts linked across multiple blockchains to provide this service and reduce network congestion that typically leads to high gas fees.
While interoperability definitely has a number of benefits, there are still a few areas that need to be worked on:
- Vulnerable to exploitation: Interoperability exposes blockchains to hacks during cross-chain activities. A 2022 study by crypto analysis firm Chainalysis shows that over $1.9 billion was stolen in cross-chain hacking. The security of cross-linked bridges and exchange agreements must be strengthened to avoid further exploitation.
- Complex process: Interoperability is still evolving and it involves many complex processes that require specialized skill sets. This has the potential to reduce scale 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 exchanges to build unique interoperable DApps.
2. Basic strain (RSK)
Rootstock (RSK) facilitates interoperability through its RIF gateways and the RSK-ETH bridge. RIF gates are a series of protocols that provide fast and secure connections between blockchains. The RSK-ETH bridge is a cross-chain bridge to exchange tokens from Ethereum to RSK and vice versa. RSK is tied to Bitcoin, so it essentially facilitates token exchange between Ethereum and Bitcoin.
3. BTC relay
BTC Relay provides a platform for developers who require interoperability between Ethereum and Bitcoin. Developers can build DApps that allow users to pay with Bitcoin for Ethereum DApps.
4. T3rn
T3rn offers a platform for easy and seamless integration between blockchains. T3rn makes multi-chain decentralized funding possible and highly secure. Users are able to transact across blockchains through multi-chain smart contracts that ensure funds are never stuck or lost.
Interoperability will rapidly promote blockchain adoption
Blockchain interoperability offers a plethora of opportunities for entities looking to use blockchain for technological advancement. The ability to seamlessly move data and digital assets across blockchains gives users a one-size-fits-all solution. Developers also benefit from cross-platform development capabilities using smart contracts and protocols. This will encourage scaling across industries as user adoption and application development continue to increase.
