In this article, we dive deep into the importance of blockchain interoperability. We look at what it means for the industry to be interoperable and how it can enhance users’ overall experience. Also, we explore how blockchain interoperability plays a critical role in the innovative expansion and mass adoption of the technology. Finally, we cover some of the industry-leading projects working towards an interoperable future.
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Blockchain Fundamentals Overview
A blockchain network is a global community of computers (nodes) that collaborate on managing, validating, and storing financial and data transactions. Moreover, as a decentralized network without a single point of failure, blockchains confirm transactions 24/7. Also, each public blockchain is fully transparent, with immutable transactions available for public viewing anytime. Unlike traditional payment networks that are slow, inefficient, and expensive, blockchains are quick, cheap, and substantially more secure.
Legacy financial infrastructures involve numerous intermediaries and third-party authorities using a database vulnerable to manipulation and malpractice. Conversely, blockchains operate using cryptography and computer science to mathematically verify each transaction is valid. Further, blockchains can achieve this in seconds, not days, as with traditional payment networks.
Each blockchain network operates with its own consensus model; an algorithm or mechanism each node uses to agree a transaction is valid. Plus, each network has its own governance structure, native asset, and utility. As such, although the emergence of blockchain was a counter to the centralization of networks, the industry has grown in siloed environments. This means each network uses its own programming language, development framework, and communications protocols that don’t interoperate with other blockchains. As a result, many developers are working to resolve this challenge by focusing on creating blockchain interoperability projects. To learn more about how some of the leading blockchain networks operate, save our “Solana vs. NEAR” article or our “Rust & Solana” article for later!
In short, “blockchain interoperability” or “cross-chain” technology refers to the ability of two or more siloed blockchain networks to communicate. For example, this means Alice on blockchain A can send data to Bob on blockchain B, who can read and respond accordingly to Alice with zero friction. However, this is not the case for the two leading blockchains in the industry, Bitcoin and Ethereum. Resultantly, innovative protocols are beginning to emerge with a focus on blockchain interoperability. This eliminates the need to rely on a third-party or centralized entity to communicate transactions between networks. Ergo, blockchain interoperability is critical to the ethos of decentralization in the Web3 industry.
Blockchain interoperability can refer to the communication of data, payments, or assets. Moreover, there are various types of protocols that enable blockchain interoperability. This includes sidechains, oracles, and bridges. In short, sidechains operate as layer-2 solutions that enable interoperability between the main chain and other ecosystems. Sidechains have their own consensus model, running as a layer-2 network on top of a host blockchain. Plus, many sidechains work as a platform for users to transition between the native host chain and external blockchain ecosystems.
Why is Blockchain Interoperability Important?
So, now we understand what blockchain interoperability is, let’s take a look at why it’s important. Firstly, introducing interoperable protocols between blockchains allows for the sharing of value across networks. In turn, this increases the likelihood of growing the overall value of the industry. Secondly, interoperability is foundational to the mass adoption of blockchain in a two-prong approach. Expanding the pathways for crypto traders to use assets across multiple blockchain networks presents novel opportunities within decentralized finance. For example, multi-chain yield farming allows investors to earn numerous returns as passive income on different blockchains for holding a single asset.
Additionally, the expansion of development surrounding blockchain interoperability will be advantageous toward the enterprise adoption of blockchain. Blockchain interoperability will be a gateway for businesses to transact across numerous networks. Thus, interoperability can aid in the expansion of compatible blockchain clientele and partnerships.
Blockchain interoperability-specific protocols relieve certain pressures from developers of other chains. Each blockchain network can operate with a unique purpose-built design specific to its target users, or unique selling point (USP). For example, VeChain’s design caters to supply chain management whereas Flow uses a blockchain design especially for non-fungible tokens (NFT) and gaming applications. As such, integrating elements of blockchain interoperability allows developers to focus on the main project design. Also, blockchain interoperability protocols allow for minimal friction when expanding a chain’s compatibility and community.
In turn, blockchain interoperability plays a significant part in the innovation and creativity that comes with new network designs. Overall, the goal of true blockchain interoperability requires an industry-wide compatible protocol that allows effortless transfers of data and assets between all chains. Although such a protocol is yet to exist, there is an increasing number of projects focusing on blockchain interoperability to assist in the expansion and utility of the blockchain industry.
An area of blockchain interoperability in great demand is the ability to send one asset across multiple networks with ease. As each blockchain network has its own framework, so too do the token standards available for developers to deploy tokens. Token standards are akin to following a recipe. They provide a basic customizable framework that allows developers to create assets on a blockchain that will be compatible with existing applications, wallets, and exchanges on the network. There are several existing projects that facilitate interoperable transactions. However, there isn’t a single universally-interoperable token standard at the time of writing.
Another token-based aspect of blockchain interoperability is multi-token transactions. Recent industry developments enabled the creation of multi-token wallet systems. This allows users to store tokens from different blockchains in one convenient Web3 wallet. Nevertheless, users are unable to send multi-token transactions. In the future, we can expect to see blockchain interoperability developments allow for users to send numerous multi-chain assets simultaneously in a single transaction.
To learn more about the most popular token standards in the industry see our Ethereum Fundamentals course! Learn about the difference between ERC-20 and ERC-721 token standards today at the world-leading Web3 development education suite, Moralis Academy!
Side chains and bridges are two types of protocols that assist in the industry’s demand for blockchain interoperability. Plus, these particular protocols typically offer a novel development playground for programmers. As such, deploying new interoperability networks presents creative opportunities for developers to design decentralized interoperability-centric applications. Thus, exponentially increasing the chances of industry-wide interoperability. Moreover, an expanding scope for interoperable development is likely to yield novel ways for on-boarding new users. Users unfamiliar with cryptocurrencies and blockchain will likely find interoperable applications to be less intimidating than manually adding networks to Web3 wallets.
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A cornerstone element of blockchain interoperability is generating opportunities for inter-network or multi-chain collaboration. Introducing blockchain interoperability-based protocols facilitates the communication and collaboration between different decentralized applications (dapps). Further, this can extend to blockchain networks, brands, and communities seamlessly coming together.
As a result, the collaborative effect of a multi-blockchain project can improve the strength and security of a single or multiple networks. Additionally, if a brand is hoping to expand its presence and utility across numerous blockchains, interoperability will be critical to self-sustainable governance. This means that multi-chain projects can continuously operate through a decentralized autonomous organization (DAO) structure, preventing a single-point-of-failure. Therefore, one could argue blockchain interoperability is essential to ensuring decentralization throughout the industry.
Decentralization is one of the main strands of the Web3 ethos. Also, the Web3 industry strongly favors inclusion, community, and borderless and permissionless access to decentralized finance (DeFi) applications. In turn, blockchain interoperability plays a vital role in the integrity and expansion of decentralized governance, in line with the Web3 ethos. Furthermore, most interoperable protocols operate with the underlying Web3 goal of on-boarding new users into the crypto industry.
Projects Focusing on Blockchain Interoperability
So, we understand the basics of blockchain interoperability, its use cases, and benefits. Now, let’s explore some of the top projects focusing on interoperability across the industry!
Cosmos is a leading blockchain project as one of the first networks to emerge specifically targeting interoperability in the industry. Moreover, Cosmos addresses challenges of interoperability and scalability by providing developers with a unique software development kit (SDK). The Cosmos blockchain ecosystem operates with a central ‘Hub’ connecting varying sovereign blockchains called ‘Zones’. Plus, Cosmos is responsible for introducing the industry’s first inter-blockchain communication (IBC) protocol.
Cosmos uses Tendermint Core with a Practical Byzantine Fault Tolerance (PBFT)-based consensus model powering each Zone. Resultantly, users can send assets between Zones without friction. Further, this allows the transfer of data and payment transactions between blockchain networks without the reliance of a third-party service. This is largely due to the economically-incentivized operations of the project’s native asset, ATOM. Also, Cosmos’ inter-blockchain communication (IBC) protocol allows for harmonious interoperability between public and private blockchain networks.
Another top project focusing on improving blockchain interoperability is Polkadot, created by Dr. Gavin Wood, co-founder of leading smart contract chain, Ethereum. Unlike the single-chain Ethereum project, the Polkadot ecosystem comprises several blockchain networks seamlessly intertwining to facilitate communications with external ecosystems. Primarily, this is through enhancing the smart contract data to facilitate connections with public and private networks. Also, Polkadot enables interoperable development with permissionless application programming interfaces (APIs) and decentralized oracles. Plus, the Polkadot ecosystem achieves this without compromising on security while heavily focusing on governance frameworks.
The center of the Polkadot ecosystem is the Relay Chain responsible for securing a selection of parachains and parathreads. Parachains are sovereign individual blockchains with customizable parameters including native assets, governance, and tokenomic designs. Parachains are in connection with the Relay Chain 24/7 whereas parathreads only interact with the Relay Chain on an as-needed basis. Parathreads are similar to parachains but with less flexibility around the design. Moreover, parathreads offer an excellent pay-as-you go model for emerging developers on a low budget. Between the parachains and the parathreads are the Polkadot bridges. The bridges are smaller protocols that facilitate inter-parachain communication. Additionally, bridges enable communications with external blockchain ecosystems, such as Ethereum, Avalanche, and Binance Smart Chain (BSC).
Wanchain (the Wide Area Network chain) is a Proof-of-Stake (PoS) network creating a familiar environment for Ethereum developers using influences from the Cardano blockchain. Also, Wanchain doubles as a decentralized blockchain interoperability solution, steadily increasing its list of compatible networks. The Ethereum-like environment allows developers to design, deploy, and manage decentralized applications (dapps) on a more energy-efficient and specialized blockchain. As the product of world-class academics and researchers, Wanchain uses an adaptation of Cardano’s Ouroboros consensus mechanism, called Galaxy Consensus. In turn, this enhances various cryptographic schemes including block production mechanisms and random number generation.
Wanchain is a popular blockchain interoperability protocol for developers thanks to its non-custodial bridges. Wanchain bridges eliminate the need for centralized intermediaries to connect Ethereum Virtual Machine (EVM) and non-EVM compatible networks. The project uses a combination of Shamir’s Secret Sharing and Secure Multiparty Computation (sMPC) to securely transfer assets between cross-chain networks. According to the project’s Medium blog, Wanchain operates with a minimum of 25 active Bridge nodes at any one time. This includes interoperability with networks such as Fantom, Bitcoin, Arbitrum, Polygon, Moonbeam, and many more.
Exploring Blockchain Interoperability Summary
Blockchain interoperability or cross-chain technologies refers to the ability for users to seamlessly transfer data or value between networks. Plus, it refers to the ease of which users can switch between layer-1 chains and their layer-2 networks. There are many different types of projects focusing on interoperability. Primarily, this includes bridges, sidechains, and oracles. However, there is an increasing amount of innovations emerging hoping to address the industry-wide interoperable challenge.
There are many benefits to increasing interoperability in the blockchain industry. For example, this allows developers to focus on creating niche blockchain designs tailored to target users. Also, interoperable protocols could allow for the collaboration of network strength, security, alongside growth in a project’s community. In short, the concept of blockchain interoperability is reflective of the Web3 ethos, encouraging community collaboration, inclusivity, and growth.
For the best place to widen your existing blockchain knowledge, check out our free Moralis Blog. For example, discover why market fluctuations are healthy with our “Understanding Crypto Crashes” article. Or, to learn how to navigate stormy market conditions, read our “How to Invest During a Crypto Bear Market” article next!