Every year, we see new blockchain networks being developed to address specific niches within certain industries, each blockchain has 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 the result of the recognition that there is no perfect solution that can meet all the needs associated with blockchain technology at once. Therefore, As more organizations become aware of this emerging technology and its capabilities, the interconnection of these unique blockchains becomes necessary.
What is interoperability?
Blockchain interoperability refers to a wide variety of methods that allow 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 data and assets to be transmitted across different blockchain networks using decentralized cross-chain bridges.
Interoperability is not something that most blockchains have because each of them is built with different standards and code bases. Since most blockchains are naturally incompatible, all transactions must take place within a single blockchain, no matter how many features 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 with each other effectively Layer 1 protocols like Ethereum or Cosmos have smart contracts built into their fabric, which only allow secure data exchange within their own ecosystems. Transfers of digital assets leaving the network raise a question: How can one blockchain trust the validity of another blockchain’s state?”
Harmann continued: “The consensus mechanisms of each blockchain decide 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 viewed in the specific native language of the blockchain. Interoperability between two or more blockchains means that one or both chains can understand and process the history of the other chain, thus allowing, for example, the exchange of assets between different layer 1 networks.”
Although it seems obvious that public blockchain projects should be designed with interoperability in mind from the start, this is not always the case. However, heOrganizations are increasingly demanding interoperability due to the benefits of sharing information and working together.
Why is interoperability important?
In order to harness the full potential of decentralization, it is beneficial for people participating in multiple blockchains to be linked through a single protocol. This reduces friction for the user as they can access different decentralized applications (DApps) without having to switch networks.
Because blockchains operate independently of each other, it is difficult for users to take advantage of the advantages that each network offers. To do this, they need to hold tokens backed by each blockchain to participate in their network protocols.
Interoperability can solve this problem by allowing users to use one token across multiple blockchains. Also, By allowing blockchains to communicate with each other, a user can access the protocols of multiple blockchains more easily. Thanks to this, there is more chance that the value of the industry will continue to grow.
Fabrice Cheng, co-founder and CEO of Quadrata — a Web3 passport network — told Cointelegraph:
“Interoperability is crucial because it is one of the key benefits of blockchain technology. Decentralized open source technology enables the creation of products that are interoperable across chains, allowing more users, businesses, and institutions to stay interconnected.”
Cheng continued: “People who use blockchain technology want to make sure that people are screened, KYC verified, and have good credit standing. DeFi users can access trading options or have access to real-time prices. . Interoperability is an efficient way to remove the middleman for users and allows companies 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 opportunity to the sector. For example, multi-chain yield farming allows investors to generate multiple returns as passive income on many blockchains from owning a single asset.
The investor would only have 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 as it will be easier for users to move their funds across different chains.
Interoperability is not just about connectivity between blockchains. Protocols and smart contracts are also interoperable. For example, t3rn, a smart contract hosting platform, allows smart contracts to operate on multiple blockchains. To do this, the smart contract is hosted on the smart contract platform and deployed and executed on different blockchain networks. Interoperable smart contracts make it easy for developers to build cross-chain applications and for users to execute cross-chain transfers.
Interoperable smart contracts will make it easier for users to access multiple decentralized applications as they will not have to switch 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 through smart contracts. Decentralized oracle platforms like QED can connect oracles to multiple blockchain networks, making it possible for real-world data to be shared between blockchains.. Additionally, oracles can take data from an API or a sensor and send it to a smart contract to be activated once certain conditions are met.
For example, a supply chain has multiple organizations that use different blockchain networks. Once a supply chain component reaches its destination, the oracle can send data to the smart contract confirming its delivery. Once delivery is confirmed through an oracle, the smart contract releases a payment. Since the oracle is linked to multiple blockchains, each provider 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 to do this is by using 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 sector, as users can participate in DeFi without buying a platform’s native token, which can be more volatile than stablecoins or top-tier coins like BTC or Ether (ETH).
Being able to easily move assets between blockchain networks is one of the main advantages of interoperability. Anthony Georgiades, co-founder of Pastel Network—a non-fungible token (NFT) and Web3 infrastructure and security project—told Cointelegraph:
“Interoperability is of paramount importance to the blockchain industry due to the diversity of data and assets found within the cryptocurrency ecosystem. Decentralized cross-chain bridges are necessary to facilitate transfers between different types 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. Thus, interoperability between blockchains is crucial as it lowers the barrier to entry for users who want to participate in multi-network protocols.
Interoperability between blockchains will improve productivity throughout the cryptocurrency sector. Users can quickly move data and assets between blockchains, increasing flexibility for everyone involved. Instead of being tied to a single blockchain, smart contracts can work across multiple networks and oracles will present real-world data across different platforms. When combined with the advantages of decentralized public blockchains, interoperability should provide the foundation for widespread blockchain adoption and utilization.
Georgiades continued: “Interoperability therefore allows users to transmit cryptocurrencies from one blockchain to another and allows users to post tokens or NFTs as collateral for other assets. An interoperable world on Web3 is a vision we are working tirelessly on. A multi-chain ecosystem facilitated by seamless cross-bridges will get us there and make that vision a reality.”
Clarification: the information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.