Why interoperability is key to blockchain technology’s mass adoption

Interoperability enables blockchain networks and protocols to communicate with each other, making it easier for everyday users to engage with blockchain technology.

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 single perfect solution that will be able to meet all the needs related to blockchain technology at once. Therefore, as more organizations become aware of this rising technology and its capabilities, the interconnection of these unique blockchains becomes necessary.

What is interoperability?

Blockchain interoperability refers to a wide range of methods that enable many blockchains to communicate, share digital assets and data, and collaborate more effectively. This enables one blockchain network to share its financial activity with another. For example, interoperability allows data and assets to be transferred across different blockchain networks via decentralized cross-chain bridges.

Interoperability is not something most blockchains have because each blockchain is built with different standards and codebases. Since most blockchains are inherently incompatible, all transactions must be done within a single blockchain, no matter how many functions the blockchain may have.

Marcel Harmann, founder and CEO of THORWallet DEX – a non-custodial decentralized finance (DeFi) wallet – told Cointelegraph: “Interoperability can be understood as freedom in data exchange. Currently, base layer protocols cannot communicate effectively with each other. Layer-1 protocols like Ethereum or Cosmos have smart contracts built into their fabric, which only allow secure data exchange within their own ecosystems. Digital asset transfers leaving the network beg the question: How can one blockchain trust the state validity of another blockchain?”

Harmann continued, “Consensus mechanisms on each blockchain determine the canonical history of all transactions that were validated. This produces extremely large files that must be processed with each block and can only be displayed 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, thereby enabling, for example, the exchange of assets between different layer-1 networks.”

While 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 collaborating.

Why is interoperability important?

To realize the full potential of decentralization, it is beneficial to

people participating in multiple blockchains to be connected through a single protocol. This reduces friction for the user as they can access different decentralized applications (DApps) without having to switch networks.

Due to blockchains operating independently of each other, it is difficult for users to take advantage of the benefits presented by each network. To do so, they must have tokens supported by each blockchain to engage with the protocols of their network.

Interoperability can solve this problem by allowing users to use one token across multiple blockchains. Additionally, by enabling blockchains to communicate with each other, a user can more easily access protocols on multiple blockchains. Because of this, there is a greater chance that the industry’s value will continue to grow.

Fabrice Cheng, co-founder and CEO of Quadrata – a Web3 passport network – told Cointelegraph:

Interoperability is essential because it is one of the most important benefits of blockchain technology. Decentralized open source technology makes it possible to create products that are interoperable across chains, enabling multiple users, businesses and institutions to be interconnected.

Cheng continued, “People who use blockchain technology want to ensure that 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 effective way to remove middlemen for users and allows businesses to focus on their core values.”

In the case of decentralized finance, giving traders more ways to use their assets could provide further growth and opportunities for the sector. For example, multichain yield farming allows investors to generate multiple yields as passive income on many blockchains for owning a single asset.

The investor only needs to hold Bitcoin (BTC) or a stable coin 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 as it will be easier for users to move their money 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 host platform, enables smart contracts to operate on multiple blockchains. This works by having the smart contract hosted on the smart contract platform and being distributed 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 do not need to switch networks. For example, suppose a user is running a DApp on Ethereum and wants to access a lending protocol on Polkadot. If the Polkdadot-based DApp has an interoperable smart contract, they can access it on Ethereum.

Oracles is 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, enabling real-world data to be shared across blockchains. In addition, oracles can take data from an API or sensor and send it to a smart contract to be activated when certain conditions are met.

For example, a supply chain has multiple organizations using different blockchain networks. When a component in the supply chain reaches its destination, the oracle can submit data to the smart contract confirming the delivery. Once the delivery is confirmed via an oracle, the smart contract releases a payment. Since the oracle is linked to multiple blockchains, each provider can use the network they want.

Interoperability is also important for the exchange of digital assets between blockchain networks. One of the most common ways this is done is through the use of cross chain bridges. Simply put, cross-chain bridges allow users to transfer tokens from one blockchain to another.

Wrapped tokens, for example, allow users to spend 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 can 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 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 in the crypto ecosystem. Decentralized cross-chain bridges are necessary to facilitate transfers between different types of tokens or assets.

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 essential as it lowers the barrier to entry for users who want to engage with protocols across multiple networks.

Interoperability across blockchains will increase productivity throughout the 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 operate on multiple networks, and oracles will submit real-world data across different platforms. Combined with the benefits of public decentralized blockchains, interoperability should provide the foundation for widespread blockchain adoption and use.

Georgiades continued, “Therefore, interoperability allows users to transfer 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 multi-chain ecosystem facilitated by seamless cross-chain bridges will get us there and bring this vision to reality.”